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Renewable energy: Inconsistent weather ‘creates a problem around resiliency,’ Generac CEO says

Generac Power Systems CEO Aaron Jagdfeld joins Yahoo Finance Live to discuss the driving demand for residential energy following bouts of extreme weather and COVID lockdowns.

Video transcript

[RINGING]

- Generac shares falling-- you can see it on your screen-- off just about 6 and 1/2% despite beating the Street's estimates on both the top and bottom lines. Net sales up 40% to a record. We want to bring in Aaron Jagdfeld, Generac's CEO here for a little bit more about the quarter, and also what we could expect to see ahead.

Aaron, it's great to see you. So you posted record sales here, up 40%, residential product sales up nearly 50% from a year ago, reaffirmed your guidance, yet we're seeing this 6 and 1/2% drop in your shares today. What's the market getting wrong?

AARON JAGDFELD: Well, I think there's, obviously, a pretty significant focus on our residential home standby business. And our lead times have been compressing. They were far too extended over the last several quarters. We've been ramping our production rates. We've got our production levels up.

And now we're bringing our lead times down. I think there's some underlying concern that maybe that means the end market demand isn't there. But as we said on the call, our leading indicators, which are sales leads, are very strong. So we continue to see really good end market demand. And we think the market's probably just maybe looking past that and, unfortunately, focusing a little bit too much maybe on the lead times.

- And focusing on that 49% residential increase in sales, things that are normally headwinds, are they, in fact, tailwinds for you guys? You talk about an increase in storms, COVID lockdowns, and working from home. Have those things boosted residential sales?

AARON JAGDFELD: They have. I mean, obviously, we're all a lot more dependent on a continuous source of power than we've ever been, right? So everything we do in our lives today and, frankly, everything in the future, as we electrify even more parts of our lives, even transportation, is going to be far more dependent on a continuous source of power. So having a backup strategy, whether that be a generator, whether it be a battery storage system, I think you have a lot of people that are concerned about this.

And certainly this summer alone, we've gotten a number of warnings from a lot of grid operators and utility companies that are struggling to supply enough power with some of the extreme temperatures we've been seeing, the heat waves, the cold snap that we saw in Texas back in February of 2021. These events have played out in that demand far exceeds supply. And so that is a major concern for a lot of people and a main reason why we're seeing such increased demand in the residential side of our business.

- Hey, Aaron, you mentioned the fact that ramping up production, that backlog does seem to be improving. What does the backlog look like now? Are we talking a few months, six months? What's your best guess?

AARON JAGDFELD: Yeah, on average, it's about 8 to 10 weeks for the whole cohort of products in our residential side. So we have some parts of the country where you can get a product faster than others. But what we're also dealing with is the installation bandwidth. So out in the field, finding contractors to do the installations-- obviously, if you've done any work with a contractor over the last two years, you know those timelines for any kind of home improvement project have become very extended. So that's also becoming a bit of a problem, right?

So as we ramp up our production and are able to get more product into the market, if the market can't install that product fast enough, that creates a potential headwind to the business. So I think there's some concern around that. But again, we look at the sales leads we're seeing and the end market raw demand for the product is really strong.

- No one better to answer this question, because you've been there more than 20 years, what are you seeing from a shifting consumer from a macro perspective in terms of the health and the spending of the consumer?

AARON JAGDFELD: Yeah, it is interesting. That's another potential concern, right, I mean, around what people might view as a big-ticket discretionary item, like a like a whole-home generator tied to residential investment even, right? But what we've seen and what I've personally seen over almost 30 years in my career here is the category tends to decouple from the broader macroeconomic trends. And it definitely follows more about outage, power outages, about power security, those types of concerns. And that doesn't necessarily follow the same trends as the broader economy.

So in my career, almost every time the economy goes one direction, we tend to go the other way, because, again, outages will still happen. Hurricanes are still going to occur. Ice storms are going to happen. We've had these power safety shut-offs out West with California for the megadrought that they're experiencing out there.

You've got cyber attacks and other concerns around the stability of the grid in those forms as well. So, again, we see just the macro themes here are very much intact around the need for a continuous source of power. And that only is going to amplify as we bring more and more things that are electrically powered into our lives.

- And I want to ask you about the power grid, because specifically in Texas, some of the issues down there, if people are spending more and more on their own generators, that could put the power grid at more risk. Are you seeing any reflection of that? And I guess, what does that mean for your business?

AARON JAGDFELD: Yeah, so what we've seen-- and Texas is a great example, right? You've got a market in Texas that went through a really difficult outage back in February of 2021. And I think it highlighted the vulnerability, the vulnerabilities of the ERCOT system that is in Texas.

And so that grid system is-- and this is really every grid system is going to go through this process, right? The grid operators need to decarbonize their sources. So they're starting to rely more heavily on wind and solar, which is great, right? And the cost for those forms of energy have really come down dramatically over the years to be almost on parity with traditional sources, gas plants or coal plants or some other forms.

But what's happening is those sources of solar and wind, of course, are more intermittent. So there are periods of time where the sun's not shining or the wind's not blowing. And that creates a problem around resiliency.

And that's exactly what you saw in Texas. The cold weather created huge demand for heating. Most of the heat is electrical down there. And so you have this spike in demand.

You had a number of plants offline during that period back in February of 2021. And then you have a high dependency on wind power as well. And the wind wasn't blowing as strongly.

So this setup of supply and demand imbalance is what a lot of grid operators are facing today. And so Texas is just a microcosm. People have to, they basically have said, look, I've got to fix this problem myself. So I'm going to go out and I'm going to find a way to do that. And our products are a great way for people to protect their homes and their families, their businesses, their livelihoods with a continuous source of power.