Earnings Call Transcript - GNRC Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Full Year 2020 Earnings Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now like to hand the conference to Mike Harris, Vice President and Corporate Development of Investor Relations. Thank you. Please go ahead, sir.

Mike Harris, Vice President, Corporate Development of Investor Relations

Good morning and welcome to our Fourth Quarter and Full Year 2020 Earnings Call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer, and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation, as well as other information provided from time to time to Generac or its employees, may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable US GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Aaron Jagdfeld, President and CEO

Thanks, Mike. Good morning everyone and thank you for joining us today. The fourth quarter was a tremendous finish to 2020 for Generac with all-time record performance for both the quarter and full year net sales, adjusted EBITDA, adjusted EPS, and free cash flow. Fourth quarter shipments, margins, and profitability were all well ahead of our previous expectations. The revenue outperformance was primarily due to higher shipments of home standby generators from better than expected production output. We're also pleased that shipments of PWRcell energy storage systems met our aggressive expectations during the quarter. The ongoing elevated level of power outages, combined with the emerging Home as a Sanctuary trend, continued to drive unprecedented levels of demand for home standby generators across the entire US. We continue to aggressively ramp production levels for home standby throughout the fourth quarter to all-time record daily build rates. Despite this expanding production, the ongoing robust demand created a substantial backlog for these products at the end of the year, far exceeding anything previously experienced in the history of the product category. Year-over-year, overall net sales increased approximately 28% on a core growth basis as compared to the prior year quarter. This growth was primarily driven by the dramatic increase in sales of home standby generators, followed by the continued ramp of PWRcell energy storage systems. In addition, the higher power outage activity also drove elevated shipments of portable generators and aftermarket service parts, and chore products also improved at a strong rate as compared to the prior year. Partially offsetting this significant strength was the decline in shipments of C&I products, given the ongoing impacts of the COVID-19 pandemic. Gross margin expanded 180 basis points compared to the prior year, and adjusted EBITDA margin increased 380 basis points over the prior year to an impressive 25.7%, which was the highest margin reported since the fourth quarter of 2013. Before discussing fourth quarter results in more detail, I wanted to provide some full year 2020 financial highlights, as well as share some key accomplishments that we achieved during the year. First and foremost, I want to highlight the company's response to the COVID-19 pandemic as I'm extremely proud of our team's efforts in responding to the crisis as we focused on maintaining our operations to the fullest extent possible. This was particularly important considering that our products and services are both essential and critical to help keep a variety of networks and infrastructure up and running, including hospitals, healthcare clinics, 911 call centers, and wireless networks. Equally as important, we accomplished this while at the same time implementing a wide range of preventive measures to address the health, safety, and well-being of our employees, customers, suppliers, and the communities across the world where we operate and do business. Through the tireless execution of our nearly 7,000 employees globally during 2020, Generac achieved another year of record financial results across the board, and several metrics far exceeded the previous record levels seen for the full year 2019. Revenue grew 13% for the full year with adjusted EBITDA coming in at $584 million, an expansion of 290 basis points to 23.5%. And we generated $427 million of free cash flow during the year. Our ability to execute on the step function increase in demand for residential products that has emerged from the new Home as a Sanctuary megatrend was an important accomplishment during 2020. In addition, the building out of our clean energy market opportunity with a significant ramp in shipments of PWRcell energy storage systems was a key highlight. We also expanded our product and services portfolio with the acquisitions of Energy Systems, our industrial distributor located in Northern California, and Mean Green, a leading manufacturer of an innovative line of battery powered turf care products. We also made the very strategic acquisition of Enbala Power Networks, which enables our entrance into the developing market for grid services. We launched important new products during the year with the introduction of the 24-kilowatt home standby generator, the market's most powerful air cooled unit with built-in energy monitoring. We also introduced the industry's largest rich burn industrial natural gas generator set at 1.1 megawatts of output, allowing us to target new market opportunities. All of these key accomplishments, as well as our execution on a number of other strategic initiatives, enabled us to make important progress on our continuing evolution to an energy technology solutions company. Our prior year accomplishments provide us with tremendous momentum as we head into 2021. The guidance we are initiating this morning calls for significant revenue growth of between 25% to 30%, highlighted by unprecedented home standby demand, continued expansion of the clean energy markets, and recovering C&I markets. Adjusted EBITDA margin is expected to expand to 24% to 25% for the full year 2021, despite near-term supply chain concerns related to capacity constraints, increasing cost pressures, and logistics delays across the business as we enter the New Year. York will provide more details on our 2021 guidance in the outlook portion of our prepared remarks today.

York Ragen, Chief Financial Officer

Thanks, Aaron. Looking at fourth quarter and full year 2020 results in more detail. Net sales increased 28.8% to $761.1 million during the fourth quarter of 2020, an all-time record as compared to $590.9 million in the prior year fourth quarter. The combination of contributions from the Energy Systems, Mean Green, and Enbala acquisitions and the favorable impact of foreign currency had an approximate 1% impact on revenue growth during the quarter. Net sales for the full year 2020 increased 12.7% to approximately $2.5 billion, also an all-time record for the company. Briefly looking at consolidated net sales for the fourth quarter by product class, residential product sales during the fourth quarter increased 54.6% to $498.7 million as compared to $322.5 million in the prior year. As Aaron already discussed in detail, home standby generator sales continue to experience robust year-over-year growth, which accelerated to over 40% during the fourth quarter as we made further progress increasing production levels for these products. In addition to this strength, shipments of PWRcell energy storage systems continued to significantly ramp during the quarter as the solar plus storage market expands at a rapid pace in the US and we continue to build out our capability selling into the clean energy space. Also contributing to the growth were a large increase in shipments of portable generators during the quarter, which benefited from the much higher power outage activity as compared to the prior year. Lastly, shipments of chore products were also much higher during the quarter as the Home as a Sanctuary trend positively impacted demand for outdoor power equipment. Commercial industrial product net sales for the fourth quarter of 2020 declined 8.5% to $198.6 million as compared to $217.1 million in the prior year quarter. The weakness in shipments of C&I products was experienced both domestically and internationally in the following areas. Domestically, the negative impact of the COVID-19 pandemic continues to result in our national rental account customers to defer capital spending for our mobile products, and shipments to our industrial distributors also declined against a particularly strong prior year comparison. Partially offsetting these declines was a significant increase in shipments to national telecom account customers due to the capital spending outlook improving for these customers. Internationally, C&I products declined due to the continued weakness in demand across the majority of regions around the world as a result of the pandemic. As mentioned, while still experiencing a year-over-year sales decline during the fourth quarter, the rate of decline for C&I products continued to moderate at certain end markets begin to recover. Net sales for the other products and services category, primarily made up of aftermarket service products, product accessories, extended warranty revenue, remote monitoring subscription revenue, and other service offerings increased 24.4% to $63.8 million as compared to $51.3 million in the fourth quarter of 2019. There was an approximate 7% benefit to net sales during the quarter from the impacts of the Energy Systems and Enbala acquisitions and favorable foreign currency. In addition, we experienced very strong growth in aftermarket service parts as a result of the higher level of power outage activity during the second half of the year. A larger and growing installed base of our products also contributed to the increase versus the prior year. Gross profit margin improved 180 basis points to 39.4% compared to 37.6% in the prior year fourth quarter. Operating expenses increased $11.4 million or 9.7% as compared to the fourth quarter of 2019, but declined 270 basis points as a percentage of revenue, excluding intangible amortization. As a result, adjusted EBITDA, before deducting for non-controlling interests as defined in our earnings release, was $195.8 million or a very strong 25.7% of net sales as compared to $129.1 million or 21.9% of net sales in the prior year. This 380 basis point improvement in EBITDA margin was driven by the significant gross margin expansion during the quarter, primarily due to the favorable sales mix, coupled with improved leverage of fixed operating expenses on the much higher sales volumes and tight cost control. For the full year 2020, adjusted EBITDA, before deducting for non-controlling interests, came in at an all-time record of $584 million resulting in an attractive 23.5% margin or a 290 basis point increase compared to the prior year.

Mike Harris, Vice President, Corporate Development of Investor Relations

I will now briefly discuss financial results for our two reporting segments.

York Ragen, Chief Financial Officer

Domestic segment sales increased 37.2% to $645.1 million as compared to $470.1 million in the prior year quarter. Adjusted EBITDA for the segment during the quarter was $188 million or 29.1% of net sales as compared to $122.9 million in the prior year or 26.1% of net sales. For the full year 2020, domestic segment sales increased 19.8% over the prior year to $2.1 billion. Adjusted EBITDA margins for the segment were 27%, representing a 240 basis point increase compared to the prior year. International segment sales, which consist primarily of C&I products, declined 4.1% to $116 million as compared to $120.9 million in the prior year quarter. Foreign currency had a net favorable impact of approximately 140 basis points on revenue growth during the quarter. Adjusted EBITDA for the segment during the quarter, before deducting for non-controlling interest, was $7.8 million or 6.8% of net sales as compared to $6.2 million or 5.2% of net sales in the prior year. For the full year 2020, International segment sales declined 14.1% over the prior year to $396 million. Adjusted EBITDA margins for the segment, before deducting for non-controlling interest, were 5.1% of net sales during the 2020 compared to 5.5% of net sales in the prior year. Now, switching back to our financial performance for the fourth quarter of 2020 on a consolidated basis. As disclosed in our earnings release, GAAP net income attributable to the company in the quarter was $125 million as compared to $69.6 million for the fourth quarter of 2019. GAAP income taxes during the current year fourth quarter were $39 million or an effective tax rate of 23.8% as compared to $13.4 million or an effective tax rate of 16.1% for the prior year. The increase in effective tax rate was primarily due to the significant increase in pre-tax income in the current year, while the prior-year quarter was impacted by more favorable discrete tax items, including a year-end revaluation adjustment related to a reduction in the blended state income tax rate. For the full year, the effective tax rate for 2020 was 22.2% compared to 21.1% in the prior year. Diluted net income per share for the company on a GAAP basis was $1.97 in the fourth quarter of 2020 compared to $1.12 in the prior year. Adjusted net income for the company, as defined in our earnings release was $135.7 million in the current year quarter or $2.12 per share, which was also an all-time record. This compares to adjusted net income of $96.5 million in the prior year or $1.53 per share. Cash income taxes for the fourth quarter of 2020 were $34.9 million as compared to $8.2 million in the prior year quarter. The current year now reflects a cash income tax rate of 17.9% for the full year 2020, which is an increase from the approximately 16% rate previously expected for 2020. This also compares to the prior year rate of 15%. The increase in the current year cash tax rate versus the prior year was primarily due to higher pre-tax income, which is taxed at the higher domestic statutory rate. Cash flow from operations was robust at $218.2 million as compared to $175.1 million in the prior year fourth quarter. And free cash flow, as defined in our earnings release, was $190.7 million as compared to $160.3 million in the same quarter last year. The increase was primarily due to higher net income in the current year quarter, partially offset by the lower monetization of working capital and higher capital expenditures relative to the prior year. Before discussing our guidance initiation for 2021, I want to make a few comments regarding our healthy balance sheet and liquidity position at the end of the fourth quarter of 2020, which allows us to confidently operate our business and accelerate our strategy. As of December 31, 2020, we had nearly $1 billion of liquidity, comprised of $655 million of cash on hand and $300 million of availability on our ABL revolving credit facility, which matures in June 2023. Also, total debt outstanding at the end of the fourth quarter was $885 million, net of unamortized original issue discount and deferred financing costs. Our gross debt leverage ratio at the end of the fourth quarter was only 1.5 times on an as reported basis. In addition, our term loan doesn't mature until December 2026. We do not have any required principal payments on this facility until the maturity date, and it has a low cost of debt of LIBOR plus 175 basis points. We also have interest rate swap arrangements that fix our interest rate exposure on approximately $500 million of this debt through the maturity date of December 2026. Further enhancing our overall liquidity is our strong cash flow profile. And for the full year 2020, free cash flow was easily an all-time record of $427 million as compared to $251 million in 2019, which was our previous record. Uses of cash during 2020 included $69 million for acquisitions, $62 million for capital expenditures, and $25 million for the net repayment of debt. Lastly, given our strong balance sheet and free cash flow generation, we have significant resources to drive further shareholder value as we execute on our long-term strategic priorities. With that, I will now provide further comments on our new outlook for 2021. Key demand metrics for home standby generators, including home consultations and orders, continue to trend much higher during the fourth quarter relative to prior year levels, and this strength has continued thus far in the first quarter. Due to this ongoing unprecedented demand, which has extended lead times for these products, there was a substantial backlog for home standby generators at the end of 2020, which has further increased thus far in the first quarter. As we expand manufacturing capacity during 2021 with a new facility coming online, we expect to further ramp production levels for home standby generators, helping to alleviate this backlog. In addition, the solar plus storage market is expected to experience significant year-over-year growth during 2021 as storage attachment rates continue to climb, leading to the expectation of substantial growth in shipments of PWRcell energy storage systems as we continue to build out our presence in this market. Although demand for C&I products during 2020 was negatively impacted by the onset of the COVID-19 pandemic, the year-over-year revenue declines continue to moderate, and shipments for these products are expected to return to growth during 2021 across a number of key end markets and geographies. As a result of this positive top-line outlook, we are initiating guidance for 2021 that anticipates significant revenue growth as compared to the prior year. Net sales are expected to increase between 25% to 30% as compared to the prior year on an as-reported basis, which includes only approximately 2% of favorable impact from acquisitions and foreign currency. This revenue outlook assumes shipments of residential products increase at a very robust rate during 2021, a rate that is similar to the year-over-year growth rate experienced in 2020. Revenue for C&I products is expected to rebound at a strong rate as compared to the softer prior-year comparisons, a rate approximately in the mid-teens range. Importantly, this guidance assumes a level of power outages during the year in line with the long-term baseline average. However, consistent with our historical approach, this outlook does not assume the benefit of a major power outage event during the year, such as a category 3 or higher landed hurricane. Given current capacity constraints for home standby, the upside of a major power outage event would be more limited to incremental portable generator shipments during 2021, meaning any extra lift for home standby generators from a major power outage event would most likely spill over into 2022. Due to the significant home standby backlog at the end of 2020, we are expecting the quarterly seasonality in 2021 to be more level loaded relative to normal historical patterns, with sales in the first half being approximately 48% weighted and sales in the second half being approximately 52% weighted. As a result, total year-over-year growth is forecasted to be approximately 50% for each of the first and second quarters of the year. Looking at the margin profile as we enter 2021, there are near-term cost pressures, ongoing logistics delays, and various capacity constraints in several areas across the supply chain which are resulting in higher input costs, including rising commodities, foreign currency headwinds, increased logistics costs, additional tariffs, and higher wages. We expect these inflationary cost pressures, together with new facility start-up costs, to be largely offset by favorable sales mix, pricing, and cost reduction initiatives across the organization through our Profit Enhancement Program. As a result, we expect gross margins for the full year 2021 to be similar to the second half of 2020 run rate. In addition, we continue to make operating expense investments to scale the business, support innovation, and drive future revenue growth into new and existing markets. As a result of these factors, adjusted EBITDA margins before deducting for non-controlling interests are expected to be approximately 24% to 25%, which is an increase from the 23.5% reported for the full year 2020. We expect adjusted EBITDA margins during the first half of the year to be moderately lower, between 50 basis points to 100 basis points, relative to the second half of 2021, given the full realization benefit from pricing and cost reduction issues in the back half of the year. As is our normal practice, we are providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for 2021. For 2021, our GAAP effective tax rate is expected to increase to between 23.5% to 24.5% as compared to the 22.2% full year rate for 2020. This increase was driven by higher pre-tax income and a higher mix of domestic pre-tax income relative to the prior year. Based on our guidance provided for 2021, our cash income tax expense for the year is expected to be approximately $135 million to $140 million, which translates into an anticipated full year 2021 cash income tax rate of between 20.5% to 21.5% as compared to the 17.9% rate for the full year 2020. As a reminder, our approximate $30 million per year tax shield, that originated from the LVO transaction in 2006, fully expires at the end of this year. In 2021, we expect interest expense to be approximately $34 million, assuming no additional principal payments during the year and flat LIBOR rates throughout 2021. Our capital expenditures for 2021 reflect continued investments in expanding capacity and are projected to be between 2.5% to 3% of our forecasted net sales for the year. This CapEx guidance includes the new Trenton, South Carolina facility and related equipment that we expect to bring online during the second half of 2021. Depreciation expense is forecasted to be approximately $40 million in 2021, given our assumed capital spending guidance. GAAP intangible amortization expense in 2021 is expected to be approximately $34 million to $35 million during the year. Stock compensation expense is expected to be between $20 million to $24 million for the year. For our full-year 2021 operating and free cash flow generation is once again expected to be strong and follow historical seasonality, benefiting from the solid conversion of adjusted net income to free cash flow expected to be approximately 90% for the year. Finally, our full-year diluted share count is expected to increase and be approximately 64 to 65.5 million shares. This compares to 63.7 million shares in 2020. This 2021 outlook does not reflect potential business acquisitions or stock buybacks. This concludes our prepared remarks. At this time, I'd like to open up the call for questions.

Operator, Operator

First question, Philip Shen from ROTH Capital.

Philip Shen, Analyst

Hey guys, congrats on the strong results.

York Ragen, Chief Financial Officer

Hey, Phil.

Philip Shen, Analyst

It seems like you are operating at full capacity, working around the clock, and with your strong guidance, it appears that any disruptions may only allow for limited growth, particularly in portable products, since you're maxed out. When do you anticipate being able to catch up and get ahead? The facility announcement is a promising start, and it appears you could achieve double the output, potentially exceeding your mention of 75% increased capacity. From our observation of the facility, it looks like you might be able to reach double that figure. At one point, Aaron mentioned the possibility of expanding up to 5 times that 75%, so I'm curious if this location offers that potential. Thank you.

Aaron Jagdfeld, President and CEO

Yes, we are currently operating at full capacity, and we are experiencing capacity pressures even in our commercial and industrial (C&I) sector. Fortunately, we have a new plant in Mexico that we launched last year. Although we haven’t discussed it much, it’s an impressive facility primarily aimed at serving the Latin American market, consolidating some of our previous operations in Mexico City. However, we can also use this facility for other purposes, including producing items for the US and Canada, especially as we face capacity challenges in smaller C&I ranges for telecom. The telecom sector is looking promising with strong demand. On the home standby side, the new facility in Trenton is set to provide a significant boost. The 75% capacity increase we mentioned is based on limitations we had before 2020, and we have since adjusted those figures throughout the year. With the new plant coming online, we will be able to increase capacity, and this site can be expanded by about 2 to 2.5 times its current size if necessary. In response to your question about when we'll catch up, we plan to work diligently throughout the year. We have also established temporary production in one of our other facilities in Wisconsin. Initially, we intended to phase that out as we ramped up the Trenton facility over the summer, but if demand stays strong—which it appears it will—we may keep that temporary capacity in operation. This would provide an additional boost beyond what we would have with just the Whitewater and Trenton facilities. Given the way we’ve configured the equipment at the Trenton site, we anticipate ramping up production throughout the year with the goal of reaching maximum output by year-end.

Philip Shen, Analyst

Okay. Thanks, Aaron. And then embedded in your guidance.

Operator, Operator

Next question, Tommy Moll from Stephens.

Tommy Moll, Analyst

Good morning, and thanks for taking my questions.

Aaron Jagdfeld, President and CEO

No problem, Tommy, apologies to Phil.

York Ragen, Chief Financial Officer

We'll follow up.

Tommy Moll, Analyst

It happened to me last quarter, so I guess it's where we are these days. There is a lot of interest in the call, and I'll get to the questions here. I wanted to discuss some of the demand dynamics you've observed around the Home as a Sanctuary theme. Have you noticed anything different regarding the demographics or anything you've picked up on the types of customers whose leads you're qualifying or from channel conversations? You've mentioned a much broader increase in demand geographically, with many more states involved, so it's clear that there's been a change. I wonder whether you've seen any shifts in the demographics of the people interested in your products as part of this trend.

Aaron Jagdfeld, President and CEO

Yes, it's a great question, Tommy. We do a lot of research on the demographics of the customer bases that purchase those products over the years. As the leader in that category, we needed to develop the market, which involved understanding who the buyer was and identifying opportunities. Importantly, we also learned about who wasn't buying the products and the reasons behind that. For instance, we analyzed who went through the sales process but ultimately did not make a purchase. These considerations are all crucial. To answer your question, historically, the product category has typically skewed older, with about 70% of customers being over the age of 50. This trend aligns with home ownership patterns. During the early months of the pandemic, we observed some shifts. It’s a bit complex, particularly when considering geographic expansions. For example, Florida was a hot market for us last year, and it usually has an older demographic. We noted that, overall, our demographic skewed older, but when excluding Florida, we saw a younger demographic in other states, which is quite interesting. This trend likely reflects the influx of younger families moving out of urban areas and into homes, especially as many are now working from home. They are not commuting back to the city for work and may experience their first power outages in their new homes, realizing how vulnerable they are. This has led to an increased interest in power security—ensuring a continuous power source to protect their homes, families, and livelihoods. This concept is particularly resonating with those who are transitioning to remote work and online learning.

Tommy Moll, Analyst

That's very helpful context and much appreciated. I want to ask a follow-up on a different theme regarding the potential to develop some virtual power plants now that you have Enbala in your portfolio. Specifically, you mentioned the potential to include natural gas generators, whether for residential or commercial purposes, in that kind of platform. What does the potential ramp-up look like in North America? Given your strong market share in the residential sector, few others have discussed this concept, but it seems you have some product innovation in the pipeline that might enable it. I'm curious about the opportunities available.

Aaron Jagdfeld, President and CEO

Yes, the acquisition of Enbala was based on our ability to leverage our existing products as distributed energy resources. We currently have $2 million home standby generators in place and hundreds of megawatts of commercial and industrial products entering the market annually. When you look at the overall potential, we believe we are in a very unique position because of the scale we can achieve with our current assets. Combining these assets with Enbala's technology, particularly the Concerto platform, will allow us to use them more effectively for the benefit of end-users, grid operators, utility companies, and ourselves at Generac. We haven’t provided detailed long-term guidance on this yet since we are still exploring the various business models available to us, which are numerous. I mentioned some in my opening remarks, but there are many different ways we could approach this. The opportunity really begins when we connect our products to the Enbala network, which is our current focus. We just finalized the acquisition at the start of the fourth quarter in October, and we are actively developing our plans to ensure that our existing residential generators, commercial generators, and our PWRcell storage devices, along with our newer load management products, are all prepared for the Enbala network. By doing this, we can enhance the value proposition for users well beyond just providing emergency standby power, especially for our older products. I'm not providing a direct answer to your question because we are still figuring out how to approach this and understand its potential and profitability. However, we are confident that we will be able to sell more assets. Currently, most of our sales are based on the premise of emergency backup. If we can deploy these assets as part of a virtual power plant or distributed grid, they will have much greater utility and value. This means a home standby generator, which typically does not offer a payback to homeowners, could potentially provide financial benefits if activated by the Enbala network or a grid operator multiple times a year to help reduce costs when there are supply-demand imbalances on the grid. This is an exciting opportunity for us, and we look forward to sharing more developments, emphasizing our unique position in providing grid services.

Operator, Operator

Next question, Philip Shen from ROTH Capital.

Philip Shen, Analyst

Okay. Thanks for taking me back. Yes, so I'll just ask one more and pass it on. But as it relates to the guidance, and I think you guys in terms of clean energy last year, you did $115 million in revenue for clean energy. And I think you said that you expect that to be 50% to 75% higher in '21. So just wanted to make sure that roughly $185 million to $190 million of revenue at a midpoint for clean energy in '21. And then, as a kind of another topic there, maybe finish that up, and I'll come back and follow-up on clean energy. Sorry.

York Ragen, Chief Financial Officer

Yes, I understand. Essentially, you have confirmed what we stated in our prepared remarks. We experienced a significant increase in the fourth quarter, rising 75% compared to the third quarter, and we expect that momentum to carry into this year. With the positive trends we are observing, we are anticipating a 50% to 75% increase in 2021 compared to 2020.

Philip Shen, Analyst

Great. And we've heard some logistical issues on the storage side as you guys are ramping up and growing this business. Some of it has to do with ports and congestion and maybe certain installers when they getting their goods. I mean maybe they get the battery, but they don't get the Optimizer, they don't get the SnapRS or something. So can you talk about when you expect to resolve that friction if you will, and is that maybe limiting some of the growth? And in fact once you solve that, do you think the growth could perhaps even accelerate?

Aaron Jagdfeld, President and CEO

Yes, Phil. We believe that those issues are mostly resolved now. As you pointed out, we faced some constraints, particularly with logistics. At one point, we were airlifting components due to delays at West Coast ports. We currently have a complete inventory and everything necessary. We anticipate that this will provide a strong start for 2021 and is crucial for reaching our growth expectations of 50% to 75% next year. However, supply chain challenges remain a concern. Like many companies, we encounter daily difficulties in securing components and ensuring they reach our warehouses and customers. Fortunately, the specific issues you mentioned are now behind us.

Operator, Operator

Next question, Ross Gilardi from Bank of America.

Ross Gilardi, Analyst

Good morning, guys. We're running out of superlatives for Generac on your performance. Congratulations.

Aaron Jagdfeld, President and CEO

Thanks.

Ross Gilardi, Analyst

Can you speak at all to the size of the backlog for us or if you don't want to say the absolute number, just some sense of like how it compares to when you were exiting 2012 on the back of Sandy? And I'm just trying to get a better sense of the production versus the retail trends in home standby as they unfold in 2020. It's hard to believe that as strong as the category has been with you guys running above capacity that you've actually underproduced demand so materially, but just trying to understand those dynamics a little better.

Aaron Jagdfeld, President and CEO

Yes, I agree with you, Ross. We have been making significant investments in our Whitewater facility, which is the main hub for manufacturing those products. These investments total several tens of millions of dollars and are spread out over multiple years to increase production there. We had implemented a lot of automation in that facility early this year, well before the pandemic began. We believed we were in a good position. However, the demand has surpassed our expectations, and it's challenging to find the right words to convey the extent of what we are experiencing. We try to use different terms in our prepared remarks to describe the situation, but it continues to be remarkable. While we won’t provide an exact figure, I can tell you that at the end of the year, we mentioned in the Q3 call that our lead times for home standby generators were between 16 to 20 weeks. If you take the average, that puts us at around 18 weeks for orders. Currently, that lead time has increased to about 20 weeks, which is not ideal. We are setting daily production records at our facility, but we are still waiting for the Trenton facility to become operational. I wish we had better news for our customers, who have been quite patient. Thankfully, since this is a home improvement project, people generally expect such projects to take time. There are permits and inspections involved, making it more complicated than simply ordering a product and having it delivered. This process includes contractors and various regulatory authorities. I think we have some cover for the longer lead times, which are accepted to some degree. While lead times are long, we don't see many cancellations, resulting in a very sticky backlog. To address your question about our situation compared to the transition from 2012 to 2013 after Sandy, the current backlog is orders of magnitude higher, in the hundreds of millions. It's a significant figure. If you evaluate our HSB pacing in Q4 and consider our typical lead times of one to two weeks, with an 18-week backlog at the end of the year and then an increase of another two weeks, you can estimate the backlog. Although it's not an English word, we could use "ginormous" to describe it.

Ross Gilardi, Analyst

All right. Good enough. And then can you talk a little bit more about the profitability in your clean energy business and with PWRcell? You mentioned that you were profitable. I think that was an EBITDA comment, but I wanted to clarify that. And can you talk about the gross margins for your clean energy business, where roughly will they be by the end of 2021 in comparison to your overall gross margin? And just how should we think of it more on a two to three-year basis as you continue to ramp?

York Ragen, Chief Financial Officer

Yes, Ross. It's York. We are making significant progress on optimizing gross margins, focusing a lot on the bill of materials and supply chain. By the end of 2020, in Q4, we became profitable, which was a key milestone for our start-up business. Throughout 2021, we expect to increase our gross margins to the mid-30% range. In 2020, our gross margin was close to 40%, in the high 30s, so we aim to align with the company average by the end of 2021. Additionally, we will be increasing our operating expenses to aggressively pursue this market. We expect EBITDA margins to grow throughout the year as well, potentially reaching double digits by the end of the year.

Operator, Operator

Next question, Mike Halloran from Baird.

Mike Halloran, Analyst

Good morning everyone. Let's focus on the clean energy sector and provide an update on distributor penetration. Aaron, you mentioned some points in the prepared comments, but I would like to hear your thoughts on the competitive landscape and how your product is being received in the market compared to others. There is certainly strong overall demand, so I'm interested in how you perceive your position relative to your expectations.

Aaron Jagdfeld, President and CEO

Yes, Mike. We are making significant progress in distribution. In our prepared remarks, we mentioned that we've trained over 4,200 energy contractors. Our sales take place through various channels, including electrical wholesalers and direct sales to large national partners like Sunnova, who is an excellent partner for us. We also cater to several larger independent clean energy companies directly. Overall, we’ve seen substantial advancement. From our experience with the home standby business, we understand the importance of having many access points, especially in a growing and less penetrated market. The storage market today resembles the early days of home standby 20 years ago, with low penetration rates, limited awareness, high costs, and challenges in product availability. We have a clear strategy in mind to address these issues, and we are heavily focused on implementing it. I believe our sales and marketing initiatives, particularly in establishing sales processes for our channel partners and generating leads for them, are crucial. One of the obstacles to growth we have faced has been the costs associated with customer acquisition, but we are now providing our channel partners with leads at no charge. While we are investing significantly in advertising to generate these leads, we are passing them on to our channel partners to ensure their success. Our success is intertwined with theirs; it’s a mutually beneficial relationship. I may not have fully addressed your question, but we are dedicated to expanding that distribution network.

Operator, Operator

Next question, Christopher Glynn from Oppenheimer.

Christopher Glynn, Analyst

Hey, good morning guys. Most of questions have been asked. Just wanted to kind of go into the splits first half, second half, 48, 52. How should we think about the residential and the C&I relative to that 48, 52? Do they both kind of track that? And part of the impetus for the question is you've talked about Trenton hitting kind of max capacity later in the year in the second half. It sounded like you were talking about actual utilization, not just its ability to be online.

York Ragen, Chief Financial Officer

Yes. And I think that the first part of your question is, I would say that both Resi, C&I would probably follow similar trends in that 48-52. And I don't know if your second question was around that the 75% increase in capacity. That's a capacity number, it doesn't necessarily mean that's where we'll be at in the building by the end of the year. But we haven't given that number out.

Aaron Jagdfeld, President and CEO

Well, we hope to have the capability to be at full utilization by the end of the year should we need it.

York Ragen, Chief Financial Officer

Yes, that's a good point.

Operator, Operator

Next question, Jed Dorsheimer from Canaccord Genuity.

Jed Dorsheimer, Analyst

Thank you, everyone. Great job all around. Aaron, when I consider resiliency and efficiency, I realize that while both are positives, many people and investors may not understand that they are often at odds with each other. As you assess the business and consider increasing efficiency, it's important to also acknowledge the inherent resilience that comes with it. If we think about Home as a Sanctuary, it feels like we're currently in a situation where an event like a rolling blackout or a storm has occurred, prompting us to enhance our home's resilience to prevent future incidents. However, if we look at the larger picture, especially away from coastal areas, the policies being implemented for decarbonization suggest there is a much broader conversation happening regarding the relationship between resiliency and efficiency. The impressive outcomes we've seen might only be the beginning. I'm interested in your thoughts on this.

Aaron Jagdfeld, President and CEO

Certainly, Jed. If we examine our legacy business, which we've been focused on for more than 60 years, it primarily revolves around emergency backup systems. In this context, cost is the main concern, particularly the initial cost of the system and its output capability. Efficiency often doesn’t factor into a homeowner's or business owner’s decision-making. Their primary questions are about the cost of the system, potential losses during outages, and how long they can rely on it. Therefore, efficiency has not been a priority. However, we are indeed attentive to that aspect. For instance, one reason we successfully expanded our air-cooled solution, like our 24 KW air-cooled unit, is due to our focus on efficiency. We examined the internal mechanics of the engine and alternator, implementing design changes that enhanced our output efficiency, allowing us to offer one of the industry's leading product lines. Looking ahead, as we consider a distributed energy network or the evolution of the grid, we recognize that the new energy landscape emphasizes decarbonization, digitization, and decentralization. Efficiency will become increasingly important in this context. Moreover, we see the potential to utilize systems that were traditionally viewed solely for emergency purposes in more frequent applications, particularly during peak demand times. This shift presents a significant advantage, as machines designed solely for backup use typically operate for a limited time over their lifespan, despite being capable of much more. Unless they are needed, they remain idle. However, with the Enbala platform and an expanded range of grid services, we can activate these systems in new ways. We are still at the early stages of this transformation, and it's fascinating to observe the current dynamics within our business. The demand for home standby systems is primarily about ensuring resiliency. Most consumers seeking these systems may not yet realize their potential for alternative uses, so we will focus on educating them about these possibilities. This approach can unlock more opportunities within our existing legacy product categories. We believe that the enhanced value proposition of these products will lead to increased sales. As we consider the future of our unique position as asset manufacturers, it’s noteworthy that many competitors are approaching this from software or clean energy perspectives. Our strategy centers around maximizing the capabilities of the assets we produce, recognizing their potential. Importantly, most of these assets are natural gas-fired, which greatly minimizes the overall carbon footprint. We view this as an advantageous foundation for growth.

Operator, Operator

Last question, Jerry Revich from Goldman Sachs.

Jerry Revich, Analyst

Yes, hi, good morning everyone. Aaron, I'm wondering if you could talk about the backwards compatible nature of the Wi-Fi connected assets that you have in the field now. So going forward into this future vision of the grid that you folks laid out, will you be able to take the gen sets that are being installed today, that are Wi-Fi connected and connect them to the Enbala network? Could you talk about that? And separately, I'm wondering if you can talk about the pipeline that you have in sign-ups of new points of light, if you will, for your PWRcell distribution? Can you just quantify what that pipeline looks like for you? How many points of light do you think you're adding per month at this point?

Aaron Jagdfeld, President and CEO

Yes, we are discussing Power partners, and since we are often selling through a two-step process, we sell to the contractors who then sell to clean energy. To answer your question, Jerry, I believe we are currently at 700, and we have several more in the pipeline as well.

York Ragen, Chief Financial Officer

They're using our CE lead-gen system.

Aaron Jagdfeld, President and CEO

Correct. Regarding your question about connectability, we currently have 2 million home standbys in the field, focusing on residential for simplicity. Over the past 20 to 25 years, we have deployed these products, starting from 2008 with devices that are connectable through our Wi-Fi solutions. Beginning in 2018, new products came standard with Wi-Fi connectability. However, for the previous generation from 2008, you can purchase an accessory to make those devices connectable, which accounts for about 1.5 million of the total. The remaining 500,000 machines from before 2008 can still connect, but it's more complex due to older hardware and software. These machines have a lifecycle of 15 to 20 years. Currently, we have around 250,000 machines actively communicating with us daily, which is significant considering they have been out since 2018. We haven’t highlighted this before, but it’s a key data point that is rapidly growing. We offer subscription revenues from various services, including fleet subscriptions sold through channel partners and some direct consumer subscriptions, contributing to a thriving business. Importantly, these 250,000 machines mainly require just software updates. Since 2018, machines have supported over-the-air updates for firmware and software, allowing us to send new features like the Enbala platform directly to the equipment. This capability is crucial, and we planned for it in our technology roadmap. In summary, we are witnessing active growth, with many machines providing data that can be integrated into our platforms. Looking ahead, we aim to make Enbala standard in the same way we established Wi-Fi connectable technology as standard in 2018. We expect that by the end of this year, all home standby units will be Enbala-ready, including our storage devices.

Operator, Operator

There are no further questions. Mike Harris, do you have any closing comments?

Mike Harris, Vice President, Corporate Development of Investor Relations

We want to thank everyone for joining us this morning. We look forward to discussing our first quarter 2021 earnings results with you in late April. Thank you again, and goodbye.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect. Have a good day.