Operator:

Good day and thank you for standing by. Welcome to the Second Quarter 2024 Generac Holdings Inc. Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kris Rosemann. Please go ahead.

Aaron Jagdfeld:

Thanks, Kris. Good morning everyone, and thank you for joining us today. Our second quarter results were ahead of previous expectations for adjusted EBITDA and adjusted EPS driven by lower input costs and operating expenses relative to our prior forecast. We are raising our 2024 full-year outlook this morning as a result of the recent increase in power outage activity, including the impact of Hurricane Beryl. Year-over-year, overall net sales in the second quarter were nearly flat compared to the prior year at $998 million. Residential product sales increased 8% from the prior year due to strong growth in home standby generator shipments. Global C&I product sales decreased 10% from a strong prior-year second quarter as softness in the telecom and rental markets was partially offset by an increase in shipments to our industrial distributor customers. Additionally, gross and adjusted EBITDA margins expanded significantly from the second quarter of 2023 as a result of favorable sales mix and the realization of lower input costs. Home standby shipments were in line with our prior expectations during the quarter, increasing at a mid-teens rate from the softer prior-year period that included a meaningful headwind from excess field inventory levels. Power outage activity during the second quarter was above the long-term baseline average primarily due to strong storms in May that impacted multiple markets in Texas. Early in the third quarter, Hurricane Beryl made landfall in the Houston area, driving year-to-date power outage activity well above the long-term baseline average and increasing demand for home standby and portable generators. After a slow start to the year, home consultations in the second quarter increased modestly over the prior year and grew at a strong rate on a sequential basis. More importantly, home consultation activity increased significantly during the month of July due to Hurricane Beryl. Additionally, close rates have improved during the first-half of 2024 as we continue to execute initiatives to improve sales lead conversion, including data-driven lead optimization practices, sales tool enhancements, and improved lead nurturing practices. Although we expect close rates to improve over time, they have historically moderated immediately following a major outage event in the affected region. We remain focused on making further investments to bring new and broader demographic categories into the home standby generator market and increase engagement with our end customers, particularly in regions that have not experienced material outage activity in recent periods. We ended the second quarter with our residential dealer count at approximately 8,900, an increase of 200 dealers from the end of 2023. We also continue to strengthen our relationships with non-dealer contractors as we further grew our Aligned Contractor Program, an effort that helps us expand our installation bandwidth while allowing contractors to purchase product through their preferred channel. We view our dealer and aligned contractor networks as an important competitive advantage for our business. And we continue to invest heavily in these relationships with a focus on further developing tools and resources to optimize the selling, service, and installation capabilities of our distribution partners. Activations or installations of home standby generators were down modestly during the first-half of 2024, reflecting the lower power outage environment from late 2023 through the first quarter of 2024. However, activations have returned to strong year-over-year growth in the month of July, and we expect continued growth in installations as we move through the seasonally stronger second-half and impacted by the recent increase in outage activity. As the clear leader in residential backup power, we are uniquely positioned to respond to major outage events such as Hurricane Beryl. Our ability to leverage our strong financial position to invest inventory for storm response combined with our logistics capabilities allow us to rapidly deploy product into outage-impacted areas. Our industry-leading distribution network and our scalable call centers provide 24-7 consumer support and service in our customers' time of need. We are also increasing our advertising spend in the aftermath of the storm to leverage our expertise in marketing to drive awareness for our products and generate sales leads for our distribution partners, not only in the impacted region but also more broadly across the nation. Simultaneously, we are ramping up our efforts to increase sales and installation bandwidth by adding more dealers and aligned contractors to our distribution network. Finally, we are increasing our production rates for home standby generators to respond to increases in demand for these products as we have built our supply chain and operating footprint capacities to allow for the rapid expansion of output to respond quickly to market changes. As a result, we are raising our overall 2024 outlook due to anticipated higher demand for home standby and portable generators following the recent increase in power outage activity. The effect of Hurricane Beryl is also expected to drive higher levels of awareness for backup power longer-term as home and business owners seek protection from future power outages. With only approximately 6% penetration of the addressable market of homes in the U.S., we believe there are significant opportunities to further grow the residential standby generator market. Now moving to our residential energy technology products and solutions, the overall market for residential solar and storage continues to be negatively impacted from structural changes to California's net metering program as well as higher borrowing costs which will continue to weigh on 2024's results for these products. Although market conditions are challenging in the near-term, we recently announced the execution of the previously awarded grant from the U.S. Department of Energy to provide energy storage systems to Puerto Rico with funding from the Puerto Rico Energy Resilience Fund. The grant provides for up to $200 million in project funding over a five-year term, which is an increase from the $100 million initially awarded when we announced our participation in the program in the fourth quarter of last year. The first shipments of energy storage systems for this program are expected to begin later this year, with the bulk of program installations occurring in 2025 and 2026. Ecobee continues to execute well, gaining market share and driving robust margin improvement over the prior year. Ecobee's connected homes count is now approaching four million, and services attach rates continue to increase with strong growth in both energy services and home monitoring services. Importantly, we are leveraging ecobee's expertise in developing hardware and software experiences that are intelligent and intuitive as their development teams are leading our efforts around building the common platform that will serve as the heart of the Generac residential energy ecosystem. As disclosed in our press release this morning, we also agreed to make an incremental $35 million minority investment in Wallbox, allowing for the expansion of our commercial agreement globally to include both residential and commercial EV charging solutions across our distribution networks. Additionally, we have aligned on a software development approach that will deepen the integration of Wallbox EV chargers with our dealer and customer platforms. We believe that the ability to manage EV charging as part of our residential and C&I energy technology ecosystems will become increasingly important as growing electric vehicle penetration and the resulting increased demand for electricity have a rising impact on home and business owners as well as grid operators around the world. As we continue to build out our energy technology solutions, we believe that the combination of our internal initiatives, strategic investments and core competencies will allow us to effectively compete in these large and growing markets. As we bring increasingly competitive solutions to market over the coming quarters, starting with our next-generation energy storage system later this year, we will accelerate our efforts in expanding and engaging our distribution network. This will allow us to gain market share by further leveraging our expertise in providing superior channel and customer support, as well as our proficiency in delivering qualified sales leads to distribution partners and our brand strength. We believe our unique and comprehensive approach to residential energy management will provide further differentiation as we develop the smart energy home of the future. Switching now to our C&I product category. As previously expected, global C&I product sales declined 10% from the prior year, driven by a decrease in shipments to both domestic telecom and rental customers. This decline was partially offset by continued growth with our North American industrial distributors, as shipments to this channel again grew at a robust rate in the second quarter and quoting activity remained resilient. We continue to expand our market share, primarily due to our ongoing focus on operational execution, leading to reduced product lead times and further optimization of our domestic distributor channel. This includes additional investment in certain territories where we believe we have a potential to improve our share regionally through M&A or further development of our independent distribution partners. As expected, shipments to National Telecom and rental equipment customers declined in the quarter from the strong prior year period, and we continue to believe these end markets will remain soft for the balance of the year. However, we see long-term growth opportunities in both markets despite the near term cyclical weakness. We believe the critical need for future infrastructure projects provide substantial runway for growth in the rental channel. In the market for backup power for telecom applications, our long-term growth expectations are supported by the secular trend of growing global tower and network hub counts and the increasingly critical nature of wireless communications and services that require significantly greater power reliability. As previously announced in late June, we acquired the C&I Battery Energy Storage System product offering from SunGrid Solutions located in Cambridge, Canada. This small, but strategic acquisition brings us engineering and manufacturing expertise to better serve the growing market for behind the meter energy storage solutions for commercial and industrial applications, including where it is deployed as a critical component in multi-asset micro grids. We have an expanding pipeline of commercial projects in which we expect to provide stationary battery storage alongside our traditional generator product offerings. And additionally, we're seeing a number of projects in which EV charging equipment is also included. We believe our commercial agreement with Wallbox is important to helping expand our opportunity to win these and other similar projects. As we leverage our leading position in natural gas generators and our newly acquired capabilities in energy storage with the SunGrid acquisition, we believe we are uniquely positioned to deliver comprehensive solutions for the developing microgrid market, which is focused on providing C&I customers with important energy resiliency as well as lower overall energy costs. Internationally, total sales were lower year-over-year, primarily related to declines in intercompany shipments from our Mexican operations to the telecom market in the U.S. as well as lower shipments in Europe, most notably for portable generators. Increases in shipments to other key regions, such as Latin America and India, partially offset the softness. As previously discussed, our expanded agreement with Wallbox also includes incremental collaboration in international end markets. This is another example of our longer term international growth strategy, as we bring a broad portfolio of solutions to more markets around the world, building on the strong track record of growth and margin expansion in our international segment over the past several years. In closing, this morning, our second quarter margin outperformance and increased 2024 outlook highlight the fundamental momentum occurring within our business. Significant year-over-year margin expansion and robust free cash flow generation in the first-half of 2024 have supported our continued investments in accelerating our Powering a Smarter World Enterprise strategy, while also enhancing shareholder value through continued share repurchases. Once again, Hurricane Beryl highlighted the vulnerability of the electrical grid and the need for resiliency. Beryl became the earliest Category 5 hurricane to form in the Atlantic on record, providing further evidence that the changing weather patterns continue to threaten the continuity of power that we are increasingly dependent on. Additionally, the rapid adoption of intermittent generation sources and growing demand from electrification trends, as well as the adoption of artificial intelligence are providing additional stresses on our nation's aging power grid. These secular trends will continue to manifest in lower power quality and higher power prices for all rate payers in the decades to come. By expanding on Generac's core resiliency value proposition and helping optimize for efficiency, consumption, cost, and comfort, we remain confident that our products and solutions are uniquely capable of helping home and business owners solve the challenges around resiliency and rising utility cost. I'll now turn the call to York to provide additional details on our second quarter results and our increased outlook for 2024. York?

Operator:

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] First question comes from Tommy Moll with Stephens, Inc. Go ahead. Your line is open.

Aaron Jagdfeld:

Good morning, Tommy.

Aaron Jagdfeld:

Yes. So, maybe, Tommy, I'll take the second part of that question first. Yes, on the first part of the question, obviously, we have been talking about a $300 million impact from the field inventory situation last year. And so, obviously, part of the increased guide here I would say this. The guidance we had originally proposed considered the destocking, so the increase in guidance from the mid-teens to the higher number would be really the delta that's storm related.

Aaron Jagdfeld:

So that's all incremental. I'd have to do the math to give you a more precise answer than that. But that's how I would answer it, is that the original guidance did contemplate that. The destocking occurred in Q1 and we don't -- that hasn't been a problem as we'd expect it, here in Q2, and it won't be a problem in the balance of the year. As far as the activation and shipment trends from Q2, as we said, activations in the first-half of the year were modestly down. That really is related to the lower power outage activity that we saw last year. And in the beginning we kind of started off the year a little bit slow. Here in 2024, Q1's outage hours were below the baseline average, but they've obviously picked here in Q2. And we anticipate those activation rates to grow through the balance of the year here. And in fact, as we noted in the prepared remarks this morning, July, we're already seeing -- from a trend standpoint we're seeing that pick up. So, shipments were, I would say, ahead of activations if you're look just at Q2, but that's seasonally to be expected. That's how -- yes, and it was only slightly, it wasn't a big number. But that's how the business paces in terms of preparing for the season. We want our channel partners to have that product ready to go. But again as we've said previously as we exited Q1, we feel like those field inventory levels are at normal, right? So, this is all part of the normal seasonal trend at this point.

George Gianarikas:

Hi, good morning everyone, and thank you for taking my questions.

George Gianarikas:

I'd like to focus on what you've seen or what you say in July that led to the guidance increase. Clearly there has been an impact from the hurricane, but can you just isolate the pockets of increased interest and in home consultation and activations? Was it strictly in the areas that were impacted by the hurricane or were there reverberations throughout Texas where you saw increased activity and interest outside of those regions? And to the extent you could share this data, to the extent you have it, what are the high penetration rates -- the highest penetration rates that you're seeing in parts of Texas, and how much further can we go in penetration in your opinion over the long-term? Thank you.

Operator:

[Operator Instructions] The next question comes from Michael Halloran with Baird. Go ahead. Your line is open.

Aaron Jagdfeld:

Hey, Mike.

Michael Halloran:

So, a question then on the clean energy side of things and the margin trajectory for the common in the prepared remarks, that ecobee's margins started to tranche better, maybe what's the driver behind that? And when you think more broadly about the current headwind associated with all the investments and then the timing of the new product launched and when you could really start getting revenue associated with that, has the timeline changed at all from your perspective as far as that profitability improvement curve might look like in those businesses?

Aaron Jagdfeld:

Yes. And I think some of that too is the fact that when we acquired ecobee at the depths of the pandemic, so I think the cost curves there were inflated, maybe even artificially surcharges --

Aaron Jagdfeld:

Especially on our electronic components, and that has obviously relaxed as well. So, that's part of it. Not to discredit or take away anything from the teams in terms of their efforts, which have been great, but some of that is market forces. And then I think, Mike, to answer the question on timing, I would say this on timing. That nothing has really changed in the timing of our new product introductions, right? So, we're still targeting the end of this year for our next-generation storage device, first-half of next year for our microinverter products, those are all still intact. I think what -- and we may have mentioned this on the call, what may have changed is just the sour mood around solar plus storage, that market, right? The market trends there have been muted, have been relatively negative this year and have kind of persisted through this year with higher rate environment and still kind of absorbing the impact of net metering 3.0 in California. But that, I would say, for us, again, it's not much of an impact this year, but I think some of that might get offset if the market remains a little bit weak. We talked about this Department of Energy grant that we were awarded. That grant was -- we generally thought that, that would impact us to the tune of about $100 million when we announced it last -- late last year, and that was going to be over -- it's a five-year term. That was upsized significantly here through our discussions and negotiations with the DOE and the other partners on the island, and now we think that impact is $200 million, and the bulk of those installs are going to happen in 2025 and 2026. So, that's an element that we didn't have necessarily in our -- a project win of that magnitude. We didn't have that in our original kind of pacing, so I think that helps to offset any market weakness that may persist into 2025. So, I guess, a long-winded way, as I generally do, of saying, we're really not changing the timing on this. I think it's -- the puts and takes there might be a little bit different than what we had originally contemplated, but I think the timing is intact.

Jeff Hammond:

Hey. Good morning, guys.

Jeff Hammond:

Hey. Two more questions. I guess one, input cost tailwinds, do you think they'll continue into the second-half? And then just -- I guess we're in a unique period where we've had kind of these elevated IHCs and maybe more tire kickers around grid instability, and I'm wondering with this storm activity, if maybe and this nurturing initiative, if maybe the uptake from some of those warm leads can drive some incremental uptake versus normal?

Aaron Jagdfeld:

Yes. And then, Jeff, I think, with the IHCs and kind of the "tire kickers," we have seen an increase in, the -- I'll call it the broadening of the top end of our funnel. We've talked about our efforts in outreach to engage new demographics and trying to broaden the consumer appeal for these products more broadly, and that has produced, I think, the effect it's had is it's -- we've got a lot more people shopping the category. There's obviously the -- I would also talk about, the broader mentions of potential power outages from some of the structural things that are going on with the grid. We talk about the electrification trends. We talk about the decarbonization trends. We talk about power quality, being impacted negatively in the future here, today and in the future, and also power prices are expected to continue to rise, and that the media -- I think mainstream media has picked up these narratives, and, I think that also is leading to people coming into the funnel and exploring their options around resiliency and trying to manage their own power and independence and efficiency. That said, when you get an event like Beryl and you get the increased outage activity that we have, it's obviously an opportunity for us to engage clearly on the resiliency story with those people who may have received an IHC and for whatever reason didn't -- we didn't get to closure on a project. I think it's important to note, close rates have improved throughout this year, and they're up nicely from the end of last year, but what typically happens -- historically what we see is when you get a large-scale event like Beryl, you'll see a weakening in the close rate kind of temporarily in the affected markets because you get such an influx of leads. You get a lot of people into the funnel at once. Now, that could be somewhat offset by some of these warm leads being -- if we're able to nurture those to closure as a result of the event. So, I think that'll all kind of work out, in the future here as we look at what the close rate does, but we do expect the close rate to kind of step back here temporarily, but we have a lot more leads. So, and that's, again, a combination of all those elements is what goes into our calculus around raising guidance today. So, and once those leads are in our system, we can nurture them later too even if they don't get to closure today. We have, I think, much better nurturing techniques and capabilities today than we've ever had, and so the opportunity to work those leads in the future either on the back of future outage events or, certain promotions or new financing opportunities, things like that, we've been pretty bullish about the opportunities that as our growing house file, if you will, of sales leads, the ability to mine that file to the benefit of driving more sales.

Brian Drab:

Hi. Good morning. Thanks for taking my question.

Brian Drab:

I'd just like to -- good morning. I'd just like to see if I could ask you to put a finer point on the revenue -- excuse me, revenue guidance update. So, if we're increasing revenue growth by 1%, that's about $40 million, obviously, in incremental revenue. You had storm activity that we've talked about in May and then the Hurricane Beryl, and that's driven some portables. You gave us -- you said we're going from mid-teens to high teens and home standby, and that's $50 million, like 5-0, plus or minus 5 maybe, in that move from mid-teens to high teens. I'm just wondering if you could put a finer point on this so I can understand why we're not being conservative, especially given the outage hours related to this Hurricane Beryl were very close to the outage hours associated with the ice storm of '21, which at the time categorizes the top five all-time weather outage events.

Operator:

Standby for the next question. Next question comes from Jerry Revich with Goldman Sachs. Go ahead. Your line is open.

York Ragen:

Hi, Jerry.

York Ragen:

Yes, Jerry. No. I mean, gross margins were up almost 5% year-over-year. We've been seeing that for a number of quarters here as price costs, improvements have been reading through. And then now we're starting to see as home standby field inventory becomes normalized and we're seeing that year-over-year growth in our home standby shipments, we're definitely getting the mixed improvement there. So, in the second quarter, I would say of that roughly 5% improvement in gross margins, I'd say maybe 3% of that 5% was mixed related. The other 2% was price cost. Again, we've been seeing that for a number of quarters. And as I mentioned, I think when Jeff Hammond asked the question, as we jump from first-half to second halves, we do expect sequential improvement. In gross margins, again, some further -- mostly due to the just continued mixed improvements with a higher mix of home standby in the second-half of the year relative to the first-half. But we do expect some price cost improvements. And as a result, you would continue to see year-over-year price cost improvements as a result of all that. So, at least in the second-half of the year, so yes, no, well, again, gross margins are getting healthy as the mix of home standby normalizes and price cost normalizes and improves.

Kashy Harrison:

Good morning, and thanks for taking the questions. So, just a few for me, how much does Texas contribute annually to revenue demand in a normal year on the revenues side? And then, on the C&I side, I was just curious if you've had any updates from your telecom rental customers on how they're thinking about the duration of the downturn. And then, also, I was wondering if you could just speak to the sustainability of some of the strength you're seeing in the industrial distribution business in light of, some of the weaker macro that we saw in 2Q. Thank you.

Operator:

One moment for our next question. Next question comes from Stephen Gengaro with Stifel. Please go ahead. Your line is open.

Aaron Jagdfeld:

Good morning.

Aaron Jagdfeld:

Yes, Stephen. It's a great question. I can tell you that historically, whenever you get a widespread outage, it makes people think, right? So, as an example, in Texas, you get a hurricane hitting Texas early in the season, first cat five ever on record in the Atlantic that early. And people in Florida are watching. And so, Florida IHCs, there is a reverberation there that's positive, that gets people to action quicker. We advertise on a national basis so that advertising resonates better when in the background you have outages taking place. So, we have historical reference points for that. And we certainly have seen some of that here as well. Again, the only cautionary point I would put on that is that for whatever reason, the Hurricane Beryl Texas event was maybe less covered nationally. It was really quite a significant event relative to just the raw hours and the duration of the outages. And yet, nationally, the media just, I don't think covered it quite as well maybe as they might have if that had happened perhaps somewhere on the East Coast or somewhere on the West Coast. And that happens. But nonetheless, that's a reality of some of the way those cycles work. But we are seeing definitely, especially the Gulf Coast states, when you get into hurricane season and somebody sees, when people see a storm of that magnitude, something that gets to that magnitude that quickly this early in the season, and in particular where we've got a very strong season still predicted. So, I think that's another important element here is that that hasn't gone away, right? Nothing's changed there. Yes, it's gone quiet here for a little bit, but normally it would be in July and August or July in particular is usually a quiet month for events. But we'll see how it turns out the rest of the year.

Jordan Levy:

Appreciate you all squeezing me in here. I just wanted to get your thoughts quickly on the on standby. I don't think I heard you brought it up unless I missed it. I know it's kind of a quiet period for that, but just any thoughts on any traction in that segment?

Operator:

One moment for our next question. The next question comes from Donovan Schafer with Northland Capital Markets. Go ahead. Your line is open.

Aaron Jagdfeld:

Yes, thanks, Donovan. And no, India is a -- it's a growing market for us. We through our Pramac subsidiary in Europe, we acquired an Indian manufacturer a number of years ago and expanded that relationship through our ownership of that in its entirety, built a new factory there for that market. And that our positioning there is different than other Indian genset manufacturers in that, and again, it's a little bit like a page out of the domestic playbook here. We're really focused on natural gas, and most traditional solutions for backup power in the C&I markets globally are diesel solutions. And we do offer a diesel product line, but where we're getting the most traction is actually with our gas products. So, those are products that are actually designed here in the U.S., built in India with our engines and our fuel systems and ignition systems, and then they're deployed in the Indian market. We're bullish on that because the Indian market is converting the natural gas. We see a lot of pipeline projects on the drawing board as part of the burgeoning infrastructure build out in India. I think if you just step back, India is poised very well to be the, I think, the chief beneficiary of some of the geopolitical tensions that have been rising between the U.S. and China. India is in a very good position to see the growth in their economy come at, probably at the detriment to China as a lot of manufacturers shift production away from China and move to places like India and other markets. And India, for all that it is -- there's still a lot of opportunity there. It hasn't grown as fast as China historically. A lot of that is just based on the infrastructure within the country is still not mature, has a ways to go, but there has been progress. I think the political environment in India has been more receptive to business here as of late, the last several years, which is also a positive. And again, I think we're bullish on India longer term. It's not a small business for us and you can just -- we put it altogether. But, it's a growing business, got nice growth rates. And again, we separate ourselves there by focusing on gas where other manufacturers are still focused on diesel.

Keith Housum:

Great, thanks. I appreciate the opportunity. Just focusing more back on taxes just real quick, in terms of historically when major storms have gone through, how long has that tailwind been towards sales there? Has it been just a quarter or two, or has it been lasting longer?

Aaron Jagdfeld:

Anniversary of --

Aaron Jagdfeld:

And then, to clarify like these events the way it works is that while you'll get a surge in demand and then that after go last for a while for number of quarters. Then, it levels off at a new and higher base line and where it was previously. So, that's why these major events and the broad awareness created by them, you tend to increase distribution that props up that are actively in market now ongoing -- on an ongoing basis to continue to satisfy demand. And you hold up that new prop up that's new in our baseline going forward.

Operator:

One moment for our next question. Next question comes from Chip Moore with ROTH. Go ahead. Your line is open.

York Ragen:

No, I mean we're not necessarily seeing that in terms of --

York Ragen:

Exactly. In terms of change from our prior guidance, for the most part, the guidance increase the impact of Beryl particularly in Texas. But maybe some around the edges broader awareness around the nation and -- but, we are not necessarily seeing a softening of the consumer that's offsetting that.

York Ragen:

Beyond -- [multiple speakers]

York Ragen:

For instance, close rates are hanging in there. Now maybe with the large increase in IHCs from Texas maybe those won't all close at the same rate. So, maybe you will see a temporary moderation in close rates. But for the most part, close rates are hanging in there around the nation.

Kris Rosemann:

We want to thank everyone for joining us this morning. We look forward to discussing our third quarter 2024 earnings results with you in late October. Thank you again, and goodbye.

Operator:

Thank you for standing by, and welcome to the Generac Holdings First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, today's program is being recorded.

Kris Rosemann:

Good morning, and welcome to our first quarter 2024 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.

Aaron P. Jagdfeld:

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our first quarter results were ahead of our prior expectations due to higher-than-expected C&I shipments, favorable input costs and strong operational execution. We are reiterating our overall 2024 outlook this morning for net sales, adjusted EBITDA margin and free cash flow conversion, which York will discuss more in detail later in the call.

York Ragen:

Thanks, Aaron. Looking at first quarter 2024 results in more detail. Net sales increased to $889 million during the first quarter of 2024 as compared to $888 million in the prior year first quarter. The combination of contributions from acquisitions and the favorable impact from foreign currency had an approximate 1% positive impact on revenue growth during the quarter.

Thomas Moll:

Aaron, starting off on home standby, wanted to see if you could reconcile for us. I think I heard you say shipments are up mid-teens year-over-year, activations are down year-over-year. Can you just help us understand the two of those in context?

York Ragen:

And Q1 over the last year...

York Ragen:

The field inventory drag was a bigger drag last year than it was this year's...

York Ragen:

Quarter, and that allowed for the year-over-year increase in shipments.

Operator:

And our next question comes from the line of George Gianarikas from Canaccord Genuity.

Aaron P. Jagdfeld:

Yes. Thanks, George. So our product range is typically underneath the range of products that are being used for -- purely for backup for the data center market. And that's a market that, they use very large blocks of power, and that's dominated on a direct basis by the large diesel engine manufacturers that are out there. There's a handful of them in the world, and they sell all the major data centers on a direct basis.

Michael Halloran:

So just digging a little deeper on the C&I side of things. It sounds like a pretty similar outlook for the rental and telecom channels. Maybe talk to 2 things here. One, how you're thinking about the seasonality for the businesses in the areas where the outlook has improved? And then also the confidence in the sustainability of the run rate. And so more of the distribution side, some of the other areas? And any kind of evidence you would point to for the sustainability piece and why you think that might have some nice legs here relative to what you were thinking a couple of months back?

York Ragen:

Quoting is hanging in there...

Operator:

And our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

Aaron P. Jagdfeld:

Yes. Yes. Thanks, Jeff. So yes, from a destocking perspective, again, we exited the quarter, February and March, activations and shipments were pretty much in line. So we felt like -- and again, based on all the data we have and based on the extended period here of destocking that we've been experiencing really since the third quarter of 2022, we feel like we're finally through that. And so that's in line with our prior expectations. And that largely is behind, I think, the -- again, as we -- as I mentioned previously, the ability to kind of post those mid-teens increases year-over-year in home standby shipments. So we don't have that field inventory headwind now that that's primarily gone.

Aaron P. Jagdfeld:

So I mean we don't...

Aaron P. Jagdfeld:

Personally, we don't tend to put a lot of stock in those forecasts because they -- I have a hard time believing that if you can't tell me what the weather is going to be next Saturday, how can you tell me what it's going to be in September. But again, I think we're looking at longer-term trends around air temperatures, water temperatures, the relaxing of the El Nino events. I think those are things that are important to how forecasters think about the long-term, the bigger cycles around things like hurricanes. So that's coming as well.

Aaron P. Jagdfeld:

Yes.

Aaron P. Jagdfeld:

Definitely.

Operator:

And our next question comes from the line of Brian Drab from William Blair.

Aaron P. Jagdfeld:

Yes. Thanks, Brian. So I mean, obviously, we gave those guidance points last fall. And we're not in a position today to update the next couple of years. But I -- we can talk specifically to Energy Tech and how we're thinking about that. Obviously, the market for solar plus storage, the market for EV charging, the market for some of the products that are within that complex. I would say are weaker today. The near-term market dynamics are clearly more negative coming off of, the pull ahead from NEM 3.0 in California and then just higher interest rates. I think the impact of that's having on those markets and the demand for those products. So that's the negative news.

Operator:

And our next question comes from the line of Jerry Revich from Goldman Sachs.

York Ragen:

Yes. Absolutely, yes. No, we were pleased with the gross margin performance that did beat expectation. It was well over 1% increase there versus expectation. And the reality is we guided that input costs would improve throughout the year in 2024. The reality is we just saw the realization of that improvement sooner than we expected here in Q1. So that's great. So the fact that, that came in ahead of sooner than expected. So we got to beat in Q1. And then I guess what that does is just derisks that assumption in the second half, that gross margin improvement that we expect in -- from first half to second half, we're seeing it now. So it derisks that assumption. So that's what's going on behind the gross margin beat.

Stephen Gengaro:

So my question, I guess, it's two parts. And one is, has there been any change to the competitive landscape given that I think your biggest competitor has kind of been taken private? And then maybe if you can kind of blend into that answer, just sort of the margin mix question. I imagined the strength in home standby relative to other residential products is a margin positive for the balance of this year? And any way to sort of quantify or think about that?

York Ragen:

I mean gross margins were up 5% year-over-year in Q1. I'd say half of that was a better mix as home standby grew mid-teens.

Aaron P. Jagdfeld:

6.25% [ Kris ]. So I think there are -- for us, when you think of every 1% of penetration being kind of a $2.5 billion to $3 billion market opportunity, there's a ton of runway left here, and it's worth the -- it's worth being, I think, being a net investor here, if you will, in the category.

Donovan Schafer:

I want to dig in and kind of unpack in industrial distributor channel a little bit because that was a positive development this quarter offsetting some of the other C&I kind of subsectors or channels or however you want to call it. So -- and Aaron, you provided some good information about like this is something you guys have kind of been building for better part of the last decade. But it doesn't get a lot of discussion in terms of like the mechanics and the kind of, I don't know, origin story or whatever. And so it'd be good -- I want to try and get a handle on kind of significance in some things.

Aaron P. Jagdfeld:

Yes. I mean that's a significant portion of our total domestic C&I sales. So again, it's -- I think when you kind of step back, it's close to 70% of the total for domestic C&I. So it's 70%, 75% of the total, with the balance being, again, the mobile products and telecom products, and again, those are down largely here. So as we documented, they go in cycles. We're a big player in those markets in rental and in telecom. But when those large customers are not spending CapEx there. They -- that disproportionately impacts us because we supply a lot of equipment into those areas.

Kashy Harrison:

So Aaron, I think you indicated that HSB activations were down modestly year-over-year. Can you just help us quantify that? What does modestly mean? And then you also indicated HSB shipments and activations were aligned in February and March. And so I was just wondering if, York, you could just help us think through 2Q residential revenues. I'm just trying to understand how we get from being up 2% in 1Q to being up low double digits for the full year.

Jonathan Windham:

I'll keep it quick as we're running a bit long. Just any sort of comments around you mentioned some weakness in the non HSB residential market. But one of the really strong markets right now is storage deployments. Residential storage deployments are up 200% year-on-year in California. Just some comments about the competitive landscape and your ability to compete in that market. I appreciate all the insights to that.

Operator:

And our next question comes from the line of Jordan Levy from Truist.

York Ragen:

Yes. No, I think it's a number of things in terms of -- well, steel is probably our largest input and we've really -- those steel costs, I guess, over the longer term have come down. And as we've been turning through our higher cost inventory, we're just seeing those lower steel costs come through, again, maybe a little bit faster than we originally anticipated. So steel is an important factor. Obviously, logistics, freight costs, while those came down throughout last year and again, we're starting to turn through that inventory and the realization of those lower freight costs, we're starting to see, that's part of the improvement, just better plant efficiencies. I think that's better plant absorption. We're seeing that as well in terms of strong execution there.

Aaron P. Jagdfeld:

And there's lags. I mean...

Operator:

And our next question comes from the line of Vikram Bagri from Citi.

York Ragen:

Yes. This is -- on the last part on the OpEx guidance, I did -- in our prepared comments, we did mention that the outperformance in Q1 on the gross margin would get roughly offset by a little bit higher OpEx, again, as we continue to invest in those strategic initiatives. It's early. So we basically held the EBITDA margin guide where we had it from last quarter with the offset -- the gross margin outperformance slightly offset by the OpEx side.

Kris Rosemann:

We want to thank everyone for joining us this morning. We look forward to discussing our second quarter 2024 earnings results with you in late July. Thank you again, and goodbye.

Operator:

Good day, and welcome to Generac Holdings Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Kris Rosemann, Senior Manager, Corporate Development and Investor Relations. Please go ahead.

Aaron Jagdfeld:

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Happy Valentine's Day. I think I can say that. Our fourth quarter results reflect continued improvement in operating performance as shipments of home standby generators returned to strong year-over-year growth in the quarter, despite a softer-than-expected power outage environment. We also experienced significant margin expansion in the quarter, driven by favorable mix and price cost tailwinds on both a year-over-year and sequential basis. In addition, we generated record free cash flow in the quarter on the continued reduction of our inventory levels. Year-over-year, overall net sales increased 1% to $1.06 billion, and core sales were approximately flat during the quarter. Residential product sales increased 1% from the prior year as growth in home standby generator shipments offset lower portable generator sales in the quarter. C&I product sales were approximately in line with the strong prior year fourth quarter, as softness in the domestic telecom and rental channels was offset by continued strength in broader C&I end markets. Before discussing our fourth quarter results in more detail, I want to provide some highlights for the full year 2023. Global C&I product sales in 2023 reached an all-time record of approximately $1.5 billion, our third consecutive year of strong double-digit growth in the category, resulting in a nearly 30% sales, compounded annual sales growth rate over those three years. This included record full year performance in our International segment for both net sales and adjusted EBITDA. The strength in our C&I products has helped to offset the headwinds in our residential product categories related to elevated levels of home standby generator field inventory in 2023 and a strong comparable period that included the benefit of excess backlog reduction. Although our shipments to the market were impacted by these factors during the year, home consultations or sales leads increased for the full year despite not having the benefit of a major outage event during 2023. Additionally, our return to improving margin performance in the second half of the year, together with the continued reduction in our inventory levels, helped drive cash flow from operations to an all-time record for full year 2023. This robust cash flow generation provided additional flexibility with respect to our capital deployment as we completed $252 million of share repurchases, while also continuing to invest in advancing our products and solutions road maps during the year. We continue to make significant investments in our engineering and manufacturing capabilities in 2023, as we opened an engineering center of excellence in Reno, Nevada, and broke ground on a new manufacturing facility in Wisconsin to increase capacity for C&I stationary products. We also continue to launch compelling new products during the year, including the introduction of stationary C&I energy storage solutions for the domestic market to help decentralize, digitize and decarbonize the future electrical grid with advanced microgrid applications. In addition, the ecobee team launched a smart doorbell camera product line, helping to drive engagement to their platform. We also made important progress towards our vision of building a common platform and user interface for our suite of residential solutions through the integration of our home standby generators and propane tank monitoring devices using ecobee as the central hub to manage our products and solutions. Additionally, we introduced our new -- it's a power move advertising campaign to help drive incremental consumer awareness of the home standby generator category to a broader demographic range. We made further strategic investments in 2023 that help to accelerate our powering of Smarter World Enterprise Strategy, as we acquired REFU Storage Systems, a provider of stationary C&I energy storage solutions for European markets and made a minority investment in Wallbox, a leading provider of EV charging solutions for both residential and commercial applications. Our investment in Wallbox is expected to result in global commercial collaboration as well as the addition of a Generac seed on the Wallbox Board of Directors. We're excited to partner with an innovative technology leader in the EV charging industry and look forward to integrating Wallbox's solutions with our broader energy technology portfolio to further expand the value proposition of the energy ecosystem that we are building for homes and businesses. Importantly, throughout 2023, the megatrends that we believe will drive our longer-term growth were on full display as increasingly severe weather, coupled with the continued evolution of the energy grid in the U.S. further demonstrated the important role that our products and solutions can provide to the market. Although, the U.S. did not experience any major power outage events during 2023 and despite the fourth quarter being the lowest fourth quarter for outage hours since 2015, there were numerous smaller scale severe weather events that did occur throughout the year across a number of regions in North America, which drove monthly power outage activity above the long-term average baseline. In addition to the increasingly frequent and higher magnitude weather-related power disruptions, legislative and regulatory reactions to climate change are also impacting the power grid as well. On the supply side, utility scale, solar and wind power are being incentivized relative to traditional base-load thermal sources, but they are intermittent in nature and continue to face growing siting and permitting challenges. At the same time, demand is increasing as electrification trends are accelerating around heating, cooking and transportation and power-hungry data center and telecom infrastructure continues to rapidly build out. These changes are creating significant challenges as utilities and grid operators are struggling to reliably match supply and demand, particularly during periods of extreme heat during the summer and cold during the winter. In its 2023 long-term reliability assessment, the North American Electric Reliability Corporation, or NERC, continued to warn of the elevated risk of resource shortfalls across the majority of the U.S. and Canada. As key forecasts around supply availability and future electricity peak demand are creating a higher risk of imbalance, leading to potential outages more so than any time in recent history. As a result of these factors, we expect there will continue to be significant opportunities for our portfolio of power resiliency and energy efficiency solutions well into the future. Specifically for the home standby generator category, we believe a massive penetration opportunity still remains. As only 6.25% of the addressable market of single-family unattached homes greater than $150,000 in value in the U.S. had a home standby generator installed at the end of 2023. Furthermore, every 1% of incremental penetration is worth approximately $3 billion of market value. And with a market share greater than 70%, we believe Generac is incredibly well positioned to continue to lead the commercialization of this important product category. These same mega trends create significant opportunities for our global C&I products and solutions as businesses are also concerned about navigating power reliability issues and volatile energy prices. Near-term, we are focused on further executing on our strategic vision, which we believe puts Generac in a unique position to help home and business owners solve for the energy-related challenges that lie ahead. Now, discussing our results in more detail. Fourth quarter home standby shipments increased approximately 10% from the prior year despite continued field inventory de-stocking and a softer-than-expected power outage activity, which also weighed on home consultations during the quarter. However, in early 2024, severe winter storms pushed outage activity to record levels for the month of January. Power conservation notices sent to homeowners in select markets, driven by unseasonably cold temperatures and the related spike in power demand also contributed to consumer awareness of the vulnerability of the electrical grid. As a result of these factors, home consultations in January of this year were an all-time record for the month. Our residential dealer count ended the fourth quarter at approximately 8,700 in line with the prior year count. Dealer productivity trends further improved in the quarter, and we continued to execute on our initiatives to train non-dealer contractors, helping to increase overall installation capacity. Notably, close rates improved moderately during the fourth quarter, helping to offset the impact of lower power outage activity and softer home consultations. More importantly, activations, which are a proxy for installations, were at an all-time quarterly record in the fourth quarter, increasing slightly from the previous record of the fourth quarter of 2022, providing further support for our belief that the home standby category is holding a new and higher level baseline level of demand. The record activations in the fourth quarter helped to further reduce the number of home standby generators in our distribution channels as we continue to under ship end market demand in the quarter. As certain regions and channels of the home standby market have returned to normal ordering patterns, the gap between shipments and activations further narrowed as we exited 2023, and we continue to expect overall shipments and activations to align later in the first quarter of this year. For 2024, we expect home standby sales to increase at a rate approximately in line with the mid-teens residential sales growth guidance disclosed in our press release this morning. Additionally, we expect home standby generator sales to increase on a year-over-year basis in each quarter throughout the year, assuming that power outage activity is in line with the historical baseline average. In addition to home standby generator shipments returning to growth, Sales of our residential energy Technology Products and Solutions also increased during the fourth quarter as compared to the prior year, led by continued growth at Ecobee as our team there continued to gain share in the smart thermostat market by driving momentum with professional contractors and further expanding their presence with key retail partners. The fourth quarter launch of Ecobee smart doorbell camera was well received by consumers and industry experts and continued to showcase their expertise in delivering consistently positive customer experiences. Ecobee finished 2023 with more than 3.5 million connected homes, giving us a large installed base of satisfied customers that we can cross-sell our products and service capabilities to as we work towards rolling out our residential energy technology ecosystem. We experienced another important event during the fourth quarter as we were awarded grants from the Department of Energy to utilize our residential energy technology solutions for resiliency focused programs in Puerto Rico and Massachusetts over the next several years. The program in Puerto Rico is expected to utilize our energy storage systems to provide clean energy independence for residents. The program in Massachusetts is expected to include our energy storage systems, Ecobee Smart Thermostats and grid services capabilities, demonstrating our ability to integrate multiple technologies to support our home's energy needs while also providing additional value for grid operators by aggregating and managing these distributed energy resources in a virtual power plant setting. As previously mentioned, we made an important minority investment in Wallbox during the fourth quarter, which provides for a future seat on the Wallbox Board of Directors and creates the opportunity for global commercial collaboration across our residential and C&I distribution networks. The partnership also brings future access to industry-leading bidirectional charging development, which we believe will play an increasingly critical role in our emerging residential energy technology ecosystem as the penetration of electric vehicles increases in the future. For 2024, we expect gross sales for residential energy technology products and services, including energy storage, energy management devices and services, connectivity and home EV charging solutions to be in a range of $325 million to $350 million, a year-over-year growth rate of approximately 25%. We continue to make meaningful investments in building out our residential energy ecosystem, including our next-generation energy storage system, which is expected to be commercially available later in the second half of this year. I would now like to provide some commentary on our commercial and industrial products. Global C&I product sales were approximately flat on a year-over-year basis in the fourth quarter and increased 19% for the full year 2023, to approximately $1.5 billion. Domestic C&I product sales declined modestly during the fourth quarter as softness in shipments to the telecom and rental channels offset continued strength in sales to our industrial distributors and other direct customers for beyond standby applications. Shipments of C&I generators through our North American distributor channel again grew at a robust rate in the fourth quarter. Although order patterns in the second half of the year were impacted by extended product time lines, quoting activity remained resilient despite being off the peak levels experienced earlier in 2023. Shipments of natural gas generators used in applications beyond traditional standby projects increased at a very strong rate during the fourth quarter. As the leading provider of natural gas generators, we continue to pioneer new market opportunities for beyond standby generator applications and other energy technology solutions in C&I end markets. We are working to facilitate the development of our increasingly comprehensive products and solutions in multi-asset applications, such as pairing our smart grid ready natural gas generators with our emerging C&I storage, connectivity, advanced controls and grid services platforms. While we believe this is an important long-term growth opportunity, today's higher interest rates are putting pressure on project time lines. And as a result, we expect shipments of products for beyond standby related applications to be negatively impacted in 2024. Sales to our national and independent rental equipment customers in the fourth quarter declined from the prior year as order patterns remained weaker than the stronger prior year comparisons. Despite the normal cyclical softness in this vertical that is impacting our overall 2024 expectations, we continue to believe that this end market has substantial runway for growth given the critical need for future infrastructure related projects that leverage our products sold into the rental equipment channels. As expected, shipments to national telecom customers declined again during the quarter, particularly when compared to the very strong prior year fourth quarter level as these customers further reduced capital expenditures. Given our current visibility, we expect shipments to telecom national accounts will remain soft in the coming quarters, weighing on our overall 2024 outlook. However, we have experienced these CapEx spending cycles over the 40 years we have been serving this market, and we believe the near-term cyclicality will not change the longer-term secular trend of increasing global tower and network hub counts and the increasingly critical nature of wireless communications and related services that are requiring significantly greater power reliability. Internationally, total sales were pressured by lower inter-segment sales, primarily related to declines in inter-company shipments from our Mexican operations to the domestic telecom market, as well as lower shipments of portable generators in Europe, as energy security concerns resulting from the Russia-Ukraine war continue to abate. Helping to offset this weakness, international net sales in other emerging markets such as India, the Middle East and East Asia grew at a strong rate during the quarter. International growth remains an important strategic focus for us moving forward with significant opportunities and continued geographic expansion and further penetration of underserved markets as we implement the generic playbook across a growing global footprint. As disclosed in our press release this morning, we expect global C&I product sales to decline by approximately 10% for full year 2024, as weakness in shipments to certain direct telecom, rental and beyond standby customers is expected to more than offset growth in other regions and channels. In closing this morning, we believe our fourth quarter results reflect a return to positive momentum in our overall business as our residential product sales began to grow again, which should help to offset cyclical softness in certain C&I customers and end markets. We believe we are nearing the end of the excess field inventory overhang for home standby generators and expect to realize strong year-over-year growth in shipments of these products in 2024. This momentum gives us confidence in continuing to focus on building out our longer-term vision for both residential and C&I energy technology ecosystems. Our record cash flow performance in the fourth quarter is continued evidence of the earnings power of our business and gives us flexibility to prioritize further organic investments, execute on strategic acquisitions and opportunistically return capital to shareholders. Most importantly of all, the mega trends that support our longer-term opportunities remain firmly intact and our conviction in our powering a Smarter World enterprise strategy is as strong as ever. I'll now turn the call over to York to provide further details on our fourth quarter and full year 2023 results and our outlook for 2024. York?

Operator:

Thank you. We'll conduct the question-and-answer session. [Operator Instructions] Our first question comes from George Gianarikas with Canaccord Genuity. Your line is open.

Aaron Jagdfeld:

Hey, George.

York Ragen:

Yes. George, I mean, we're not expecting a decline. I mean, obviously, in the current environment with a softer consumer tied to big-ticket discretionary. We didn't want to take an aggressive assumption on the activation rate assumptions. Obviously, what we said in the prepared remarks, home standby, we expect to grow somewhere in that mid-teens range year-over-year, similar to the overall residential category that we guided that way. Again, a lot of that is the fact that the destock of field inventory in 2023, while some of that is going to continue here in Q1, that will abate here in Q2 and for the rest of the year. So, a good chunk of that year-over-year growth is the fact that we don't have that that overhang on the field inventory but we aren't assuming that the home standby market is declining, some modest growth.

Operator:

Our next question comes from Michael Halloran with Baird. Your line is open.

Aaron Jagdfeld:

Hi Mike.

Aaron Jagdfeld:

Yes. Thanks Mike. I mean a lot of the new products that we talked about. I mean we're in development right now and have been for the better part of 2023, actually, because we're going to make sure we get it right, and these are the products that are going to be at the top of the market, if not market leading, both for the energy storage products, which our next-generation energy storage devices, which should hit the market here later this year kind of as we exit Q3 and get into Q4. So, we really only have a very modest amount of topline allocated to that launch. We think it will get more traction. We have a lot of work to do, obviously, you call it rebranding, building out the distribution, regaining the confidence of the market with those installers in particular. We've been doing a lot of work there, and I think we're making headway, but we need to get the new products in the market. And so, there's not a ton of growth on that side. Ecobee, we do see continued growth there. They continue to take share. That has been just a fantastic asset for us, not only in just its growth curve, but also just the technology and the competencies that they bring to us relative to what we're trying to achieve with the user experience, right? So, we want everything we're calling it kind of single pane of glass is kind of our reference to it. But putting everything on the same platform, we've got -- we've acquired and/or have a lot of technologies organically that we've got products and solutions around, but bringing it all together to work seamlessly and synchronously, that is a lot of work. And so behind the scenes, as we introduce each new product, so this next-generation storage device, when we get to the micro inverter products, which will hit the market early next year in 2025, those products will all be -- they will all operate within the single pane of glass platform. You've seen some evidence how we've started to weave pieces together already this year. We've got home standby generators now visible. If a homeowner has an Ecobee thermostat, you can see the status of your home standby generator. If that generator happens to be running on propane, you can see the status of your propane fuel level, if you have a tank utility monitoring device. So all of these pieces are starting to get woven together and integrated. We're going to do the same with the Wallbox products as those roll into the market. So again, building all that out, I think Ecobee has been just a tremendous -- they have a great team, very adept at what they do. And on top of the top-notch products that they're in market with, with the smart thermostats and their doorbell camera, they're able to help kind of integrate this ecosystem and really bring it to life.

David Tarantino:

This is David Tarantino on for Jeff.

David Tarantino:

Could you maybe give us a little bit more color on where you see the home standby channel inventories versus the normal levels? It sounds like there's some lingering destocking into the first quarter. So maybe how much do we have left? And maybe on that, could you give us an update on the $300 million tailwind from the absence of destocking? Do we get all of that this upcoming year?

York Ragen:

We definitely saw it come down in Q4, and we're watching to come down here to date in Q1, and we're seeing it be in a good spot by the end of the quarter. And then I think your second part was about the $300 million, effectively undershipping the market in 2023. That was the estimate we gave at our Investor Day. That number is actually holding as we finish the year. So that's what we undershipped the market in 2023 for home standby. Now obviously, we won't get all that back in 2024 as a tailwind, given that Q1, we're still working things down here. But you'll get a chunk of that as a tailwind to growth. And again, we talked about that, I think, on the first question.

Brian Drab:

Hey, good morning. Thanks for taking my questions. I was wondering if you could…

Brian Drab:

Good morning. Can you give any more color or quantification around what's happening with the IHCs year-over-year sequentially?

Operator:

One moment for our next question. Our next question comes from Christopher Glynn with Oppenheimer & Co. Your line is open.

Aaron Jagdfeld:

Yes, that's correct.

Aaron Jagdfeld:

Yeah. Thanks, Chris. I don't have the pacing each month for the quarter, to be honest. I just all add -- you're correct, we did say on the Q3 call that October, we saw some improvement. It was -- it's pretty -- it was modest, but we like that it was improving, not going the other way. For the quarter, it was up again modestly. So I think you can assume that it was -- it didn't drop off because that would have set us negative for the quarter. So again, I don't have the pacing, apologize for each month of the quarter. But the assumption to your question, the assumption for 2024, we are assuming close rates kind of continue on that modest improvement pace. We've got a long way to go to get back to the kind of pre-pandemic or that kind of pandemic-induced high, if you will. We kind of hit that. I think the peak, Chris, was, we say, Q3 of 2020 is where we kind of peaked out. And then we saw things really fall off as our lead times extended and now we've been in that recovery mode. The good news is, we're seeing that recovery. I do think kind of pursuant to my answer to the previous question, about -- or the additional color from the previous question about we've got more people coming into the sales funnel that maybe aren't experiencing outages, but they're concerned about outages and they're hearing more about it. Either because of media reports or other things or maybe notifications from their local utility that they could be at risk of an outage with cold temperatures if there -- if they don't immediately turn off or reduce their power consumption. Those are scary things. When you're a homeowner and you get that text message, and it's zero degrees outside, you need to reduce your energy consumption immediately or you could be facing blackouts. I mean that's -- those things send people on a hunt for solutions. And that's when we see and we are seeing evidence that people are coming into the sales funnel. I will say that, it's going to be a longer conversion cycle for those homeowners if they haven't experienced an outage. So we're aware of that. And we think that, that could lead to some -- could take a little bit longer than for close rates to really truly recover to that level as a result of just more people coming into the sales funnel and investigating the category. We don't necessarily think that's a bad thing. We just think that it means that it's even more important that our nurturing efforts and our efforts to continue to engage homeowners who have interest in the product category that we remain very diligent in our efforts there. So again, close rates, the assumption, kind of a modest improvement over the course of 2024.

Jerry Revich:

Yes. Hi. Good morning, everyone. Arne, can you just talk about the margin outlook. So you had 20% margins in the fourth quarter. And seasonally, that's a 19% annual equivalent rate and we're looking at guidance of 17%. So what's the 200 basis point margin degradation beyond normal seasonality that you folks are guiding to R&D or other areas? Can you just expand on the drivers compared to the -- ?

Aaron Jagdfeld:

Yes. I think, Jerry, just -- just one last comment on that. We have been investing heavily for the future here. We think those investments are both necessary and I think improve our odds of being successful as the market continues to change. There is just a ream of evidence around the fact that the grid is changing. I talked about it in my prepared remarks. We talked to a lot of utility and grid operators. They are -- there is a significant challenge ahead, as we continue to retire traditional thermal assets on the supply side in favor of renewables, which is -- I think we all agree, we want to decarbonize the grid as much as we can. The challenge, of course, is those renewables are intermittent in nature. And storage costs are still high. And large-format utility storage is difficult to balance out with the cost of building those renewable plants. You couple that with this -- what we're now seeing, which is an increase on the demand side, which we haven't seen in decades. The demand side has been relatively muted. Retail electric sales have been relatively muted over the last couple of decades as maybe some of the growth has been offset, some of the either population growth or just growth in some of the power usage devices has been offset by efficiency gains, but that's changing. And we're seeing the electrification trends again, around cooking around cleaning around heating and cooling, certainly around transportation, super early innings there. But it's creating these incredible opportunities for mismatch of supply and demand. And in particular, as more severe weather and volatile weather patterns pick up, that is putting dramatic stress on the grid. And so I don't -- again, we couldn't be in a better place at a better time with the products and solutions that we've assembled here. We have a lot of work to do, obviously, to deploy those to great effect, to build out these ecosystems for homeowners and business owners. We're working very hard on that. And the work is the investment level we're talking about here, and that is what York was referring to, certainly in the -- throughout the year, 350 to 400 basis points dilution to EBITDA margin.

Aaron Jagdfeld:

For Energy Technologies.

Aaron Jagdfeld:

Yes. Good point.

Stephen Gengaro:

Thanks. Good morning gentlemen.

Stephen Gengaro:

So two things for me. The first -- and I'm not sure if you're able to comment, but when you talk about that margin drag from the new energy technology side, and you sort of painted this picture at your Analyst Day, but should we expect that to start to dissipate in 2025?

York Ragen:

2026 is what we would.

Operator:

One moment for our next question. The next question comes from Mark Strouse with JPMorgan. Your line is open.

Aaron Jagdfeld:

Yes. So, let me unpack that. So it was mostly portable gens in Q4, again, with a really soft power outage environment and no major events.

Aaron Jagdfeld:

And a tough comp last year.

Aaron Jagdfeld:

Correct. Yes. And the European side of that as well, to York's point, the Russia-Ukraine war, they just they haven't really -- some of the energy concerns, security concerns haven't come to a pass there. And as a result, we saw -- we've seen portable gens really come off and also tour products were soft. We said -- we called this out throughout the year last year, we had a tough year with our tour products business. So, that was also soft. But that was offset by 10% growth in HSP and some growth also in the clean energy business. On the margin question, I'll just -- I'll touch on the price piece of that real quick, and then York can kind of round out the discussion. But it's small. I mean we got a little bit of price in there this year, just to cover some of the additional costs that we've seen around the investments that we've had to make as we scale the business, but they were quite modest, I would say, in terms of price. There's no big price. So the rest of it--

Operator:

Our next question comes from Donovan Schafer with Northland Capital Markets. Your line is open.

Aaron Jagdfeld:

Yes. Thanks, Donovan. So yes, I think it would be good to maybe spend a few minutes on the C&I side. We -- that business has been on an absolute tear over the last three years, CAGR close to 30%. It's a $1.5 billion asset for us today globally. It is a truly global business. And in fact, we have a lot of long-term conviction there. As evidenced by we broke ground on a new plant here in Wisconsin just here in the fourth quarter because we see the long-term need for additional capacity as the market grows. Specifically, we have always seen certain cycles in the C&I markets. We've been serving the -- I'll start with telecom kind of work my way through the walk here on kind of the three different areas we called out specifically in the prepared remarks. But I'll start with telecom. It's been an important vertical for us. Historically, around 10% of C&I. We had a really strong year -- a really strong year in 2022, with telecom, we started to see that soften up in the back half of this year. We called that earlier this year. So it kind of fell in line with what we saw. But I think we were more hopeful that it would rebound more quickly here in 2024, and right now, all evidence based on kind of -- you can look at any of the transcripts for many of the major wireless carriers. We're a Tier 1 supplier to all of them. They've all kind of cut their CapEx guide year-over-year by roughly 10%, call it. So I think that's kind of a proxy for what we're seeing to some degree in telecom. But we've seen this movie before. We've been serving that market for 40 years. And they tend to cycle on and off of CapEx. Some of it is the pacing of the build-out of the network. Some of it is they're balancing other capital priorities, sometimes M&A, sometimes other things. So we've seen that before. That will come back, absolutely. And we feel like that's just a cycle we're going to get through here in 2024. The other one is the rental accounts, the national rental accounts in particular. Again, we're a major supplier to all of them. And you've seen a couple of the rental customers come out, rental accounts come out and say that their CapEx is going to be lower year-over-year. So we're kind of -- we're kind of working off of that, those types of guidances. And in particular, there's been a pretty heavy refleeting cycle over the last few years in the categories that we supply, in particular, in Power & Light. So where you've got temporary power or temporary lighting, those are the products we manufacture and put into those channels. They've gone through a heavy refi leading cycle. And now they've got to wait for the utilization rates to kind of get to where they need them to be before they start kind of purchasing new equipment. So again, we've seen that cycle about three times in our ownership and our participation in that market over the last decade plus years. So that's just cycle. And then the last one is beyond standby. That is an area that's been very interesting. It's grown very quickly. We have customers like in channel rock [ph] in there. They're not the only ones. We've got others that we sell a lot of these generators and in particular, on the gas side, where we would sell a typical gas generator for emergency backup, customers are finding that there's additional utility and value that they can deploy that generator in perhaps a grid support type program, right? So time of use program or some other kind of demand response type program, and they can help monetize the asset in a way that they couldn't before. They had to think of it purely as a kind of a -- it was really a disaster response type purchase before, kind of an insurance policy. And so not something that would necessarily create a return year after year, right? I mean it obviously would give you a return, if you experience an outage, that's infrequent use. This is a way now to -- as natural gas prices have stayed low, electricity prices continue to rise, that has been a very interesting growth opportunity. I still relatively small in the context of everything we do, but it's been growing very quickly, and we've called it out over the last couple of years. Underpinned by Generac as an important customer there. But also data centers, these are smaller gas gens, so they're used more in edge data centers, not necessarily hyperscale. Hyperscale data centers are still going to be using very large diesel gens that are manufactured by our competitors. We're not in that business today. So we're really serving more of the edge data center markets or those data center operators that want to use those assets in a monetized fashion. You wouldn't be able to do that economically with diesel. You can do it economically with gas, but it takes a lot more gens to get to the same level of protection, because the density, the power density of each generator for gas is lower than it is for diesel. That's just a -- that's a physics thing. You can't get around that. But that's -- it's still a great market opportunity. We just -- what we called out this morning in the prepared remarks there, is with a higher interest rate environment, we're just seeing those projects get pushed out the time lines, right? So we think it's temporary. We think it will return when interest rates kind of return to a more normal level. Do we know when that is? No. I think you listened to economists and we see a lot of them and hear a lot of them, it's anywhere between zero rate cuts and 12 this year. I don't know. Take your -- pick your number, but we're watching that. We're seeing kind of what goes on in that environment, but we do think that as rates come down, that obviously changes, I think, the -- not only the economics around those projects, but shouldn't bring some of those projects that have been delayed back into the mix.

Kashy Harrison:

Hi. Good morning, all, and thanks for taking the question. So maybe just sticking with C&I since we're talking about it. Aaron, as you pointed out, you guys have been serving telecom for, I think, you said 40 years and rental companies for a really long time. So how long does it typically take for the spending to recover on average? Is this something where it drops and stays down for a year, two years, three years? Just maybe help us think about that. And then similarly, following up on this topic of interest rates, can you walk us through the level of rates that drove weakness in that segment? Was it when we got the 5% on the benchmark. Was it another level -- just trying to think -- and just trying to think through if we get to 3%, is that when the segment is back? Is it 4% is at 2%? Just some thought around the level of rates and how it impacts the beyond standby business. Thank you.

York Ragen:

I'm going to say because we sell direct, you tend to see it quickly too. Like do they turn it, they can turn it off fast or if they can turn it on fast.

Operator:

One moment for our question. Our next question comes from Joseph Osha with Guggenheim. Your line is open.

Aaron Jagdfeld:

Yes. Thanks, Joe. Good questions, all of those. I think -- so on the DC generator question, that was a very small product that we launched a couple of years ago. We didn't see a ton of receptivity to it. It really was aimed at people who truly wanted to be unplugged from the grid, be isolated, independent from the grid. And it's a small host of customers. What we actually think is probably a better opportunity going forward is to take our existing AC product, AC generator products in an AC-coupled environment and allow the generator to act as a as a battery charger through an AC coupling as opposed to a DC. So, it's just -- it's a little bit -- it's not quite as efficient, but it allows us to leverage the AC generator platform, which in terms of our cost structure, is, frankly, just -- it's just better because we just -- we have scale there, we can offer better value to customers, even though we might be taking away a little bit of value in terms of the AC generators are a little bit louder. They maybe use a little -- consume a little more fuel, but not materially. So, that kind of direction we're headed strategically there is kind of moving away from the DC generator product to the AC generators, but it's a really small part of our product line. The broader question, and you're asking kind of an AC coupling, we have AC coupling capabilities today with the Pika system. We can take the battery as a stand-alone with the Pika inverter, we can AC couple it to competitors' inverters. That's not the most efficient architecture, so as we introduce new products later this year, the next-generation storage products, we're going to improve the capability for AC coupling and make that a more, I'll call it, a better experience, a more sophisticated experience, a lower cost experience going forward. And then of course, that sets us up nicely as we go forward with the microinverter products into 2025. And we're going to continue to offer the Pika products. I mean there are -- if you're doing a clean sheet implementation, we still believe that DC coupling is the most efficient -- round trip efficient way to do that. And so we think there's a place in the architecture for that system, at least for now. But as we roll micro-inverters out and as we continue to build out our strategy and have success, I think the market will tell us directionally where we need to go. I think you, in particular, pointed out trying to support both architectures going forward is a heavy load to do, and we would probably tend to agree with you on that. But again, we've got a long way to go before we're kind of proficient in the AC coupled solutions with the micro inverter solutions. There's some very capable products in market today, and it's taken us a long time to get to market because we are going to have a product that we're proud to put our name on, and that will stand the test of time from a reliability standpoint for our customers. And we're working through that. It's part of the big investment that we've been talking about, this 350 to 400 basis point drag. It's a piece of that on EBITDA margins, but we're committed to it. We think that there's a huge opportunity for us to be successful in that going forward.

Unidentified Analyst:

[indiscernible] on for Jordan. Thanks for taking my question. As it relates to the dealer count, I think you closed the year with 8,700 and we have talked about the desire to bring that number closer to 10,000 over the coming years. So, can you maybe talk to the work you're doing there and some of the sticking points that makes it more challenging to bring that number up? Thank you.

Operator:

One moment for our next question. Our next question comes from Chip Moore with ROTH MKM. Your line is open.

Aaron Jagdfeld:

Yes, it's a great question. I think in terms of infrastructure, obviously, anything that moves the needle there will certainly help shorten the cycle, kind of off cycle for the rental equipment for sure. The telecom cycle, I think, is going to play out. Some of that is it's kind of the installation bandwidth that those network kind of operators have to build out, like the speed at which they can build out their networks. There is some -- we ran into some headwinds there with some specific customers just being able to kind of keep pace with installations according to their schedules that they had originally set for themselves. We were giving them product according to the schedules. You could probably say, okay, maybe there's some field inventory there as a result. We're not really calling it that way because it's not really a business we talk about inventory being carried for, but that's somewhat the issue there with maybe one or two of those customers, but I think that cycle -- I don't know if there's much we can do or that we would see to point to kind of that cycle accelerating. I think it's just going to have to play out the way that it plays out. But I think, again, the C&I cycles we've seen this movie before. So it doesn't really worry us. The visibility question is a good one. We -- unfortunately, because these are big customers that kind of in our world, they wheel big pencils, right? They've got -- that's probably a dated term now, but they can write big, big people. They can write big POs or they can stop writing big POs and we get forecasts from them and we listen to the same things that others listen to in terms of their CapEx guidance because that obviously is the best proxy that we can use and we have as much dialogue with them as we can about what are their build-out plans for networks and what are their build-out plans for fleet when it comes to the rental customers. And we know, we have some visibility in the pipeline for beyond standby projects as we're quoting them. But unfortunately, visibility, it's probably the weakest area of visibility for us in terms of our C&I business. When you look at the strength we called out in C&I which is offsetting some of this weakness and won't offset all of it, obviously, because we're saying C&I is going to be down for the year 10%. But offsetting that, our -- we call it our IDC, our independent distribution network is we continue to see growth there. In fact, in some of the distribution partners, we actually have acquired a number of them over the last several years. And that's given us really clear insight and really good visibility actually into some local markets. And that is much more of a quotation business. And so we have, I think, much better visibility in that part of the business on C&I, but not as much, unfortunately, in some of these national account customers that can be I think, a lot more volatile in their order patterns.

Aaron Jagdfeld:

They have put a cycle in the LRP exactly.

Operator:

One moment for our next question. Our next question comes from Keith Housum with Northcoast Research. Your line is open.

Aaron Jagdfeld:

Yes. Thanks, Keith. And sorry to get you in here at the end. I made you wait, 1.5 hours. But yes, the interest rate, actually, we've said this a couple of times, I think as we talk through this, I don't know if we've talked about it publicly as much, but it's not a high -- the home standby category, in particular, is not a highly interest rate-sensitive category specifically. Now obviously, the impacts, the higher rates have on the macroeconomic environment be the job security issues for people or kind of other challenges with maybe around the way they feel about the way people feel about spending money on large ticket purchases that does have an impact kind of on the margins, but...

Aaron Jagdfeld:

It's not a highly financed purchase, oddly enough. Now that said, we do have a third-party financing program through Synchrony, which has been a great program. It grew like almost 50% last year. So we are seeing more evidence of people using finance. But then when you peel the onion back, the number one thing that we see people using is the 18-month same as cash. So -- we don't think that -- we think that that's not necessarily evidence they're just deferring their payment

Aaron Jagdfeld:

That doesn't cost me I think they're going to use somebody else's money for that 1.5 years. So I don't think that all indications are that -- and you look at the kind of demographic that we sell into primarily there. And these are people that are -- there are older Americans who -- they have got their home paid for in a lot of cases, they're probably retired in cases. So for them, it's more about the -- protecting their home, protecting their safety protecting their families. And I think that it's -- frankly, it's more about that than it is maybe about where interest rates are at any point in time.

Kris Rosemann:

We want to thank everyone for joining us this morning. We look forward to discussing our first quarter 2024 earnings results with you in early May. Thank you again, and goodbye.

Operator:

Good day and thank you for standing by. Welcome to the Third Quarter 2023 Generac Holdings Inc. Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Kris Rosemann, Senior Manager, Corporate Development and Investor Relations. Please go ahead.

Aaron Jagdfeld:

Thanks, Kris. Good morning, everyone and thank you for joining us today. Our third quarter results reflect improving operating performance led primarily by continued strength in C&I product shipments and sequential growth in home standby generator shipments. Year-over-year, overall net sales decreased 2% to $1.07 billion with core sales declining 4% during the quarter. Residential product sales decreased 15% as compared to the prior year, representing a significant improvement in sales decline from the prior two quarters as field inventory levels of home standby generators continued to decline during the quarter and portable generator sales decreased from a strong prior year comparison that included the impact of Hurricane Ian. Global C&I product sales increased approximately 24% to an all-time quarterly record with growth across nearly all regions. We returned to year-over-year margin expansion for gross and adjusted EBITDA margins in the quarter, driven by lower input costs and continued production efficiencies. In addition, we generated significant free cash flow during the quarter, allowing us to complete approximately $100 million of share repurchases. Third quarter home standby shipments grew at a strong sequential rate, but declined on a year-over-year basis as we continued our efforts to reduce field inventory levels. Power outage activity in the U.S. was well above the long-term baseline average during the quarter despite not having the benefit of a major outage event, which we had experienced in the third quarter of each of the 3 previous years. Against a strong comparable period, the higher outage activity combined with well-publicized grid stability issues drove home consultations in the quarter meaningfully higher from the prior year and marked the second highest quarter on record behind only the third quarter of 2021, which included the impact of Hurricane Ida and was only months after the Texas deep-freeze major event in February of 2021. Our residential dealer count was approximately 8,700 at the end of the quarter, an increase of 200 from the prior year and over 2,000 from pre-COVID levels. Additionally, we continue to make good progress in training non-dealer contractors as our initiatives to grow installation capacity maintained positive momentum in the third quarter. Activations which are a proxy for installations improved at a solid sequential rate in the quarter, but declined from a strong comparable period in 2022 that marked an all-time high for a third quarter. Activations in the month of October continued this strong sequential improvement, providing further confidence that the home standby market has formed and is holding a new and higher baseline level of demand. The number of home standby generators in our distribution channels declined further in the quarter as we continue to make progress in reducing field inventories. As previously disclosed, certain regions and channels are at healthier levels of field inventory than others and field inventory levels of certain models are declining more quickly than others. Although we continue to undership end market demand during the third quarter, the gap between shipments and activations narrowed meaningfully as compared to the first half of the year. These factors, together with the continued strength in leading indicators of demand during the third quarter support our projection for home standby generator sales, returning to growth in the fourth quarter of 2023 while still working to reduce field inventory to more sustainable levels. In addition to the positive near-term momentum that is building within the home standby market, we remain confident in the long-term outlook we shared at our recent Investor Day in September. The megatrends that are driving awareness for backup power remain as compelling as ever. As electrification trends drive demand forward and the adoption of intermittent renewable power generation accelerates, we expect that consumers will become even more reliant on an electrical grid that is increasingly susceptible to power outages caused by the combined threats of more severe and volatile weather and deteriorating supply-demand dynamics. We believe home standby generators will remain the most effective and economical solution for whole home resiliency for many years to come as homeowners look for peace of mind to address the impact of increasingly frequent and longer duration power outages. In addition to the stronger-than-expected home standby shipments, our Residential Energy Technology Products and Solutions returned to year-over-year sales growth in the third quarter as continued strength in Ecobee sales more than offset weakness in shipments of our power cell energy storage systems as broader market conditions for residential solar and energy storage deteriorated further in the quarter. As a result of these softer end market conditions, we now expect full year 2023 gross sales for residential energy technology to be approximately 10% below our prior guidance of $300 million. Ecobee continues to take market share with strategic retail partners in the smart thermostat market and the team successfully launched our new smart doorbell camera in the month of October. In addition to providing increased levels of homeowner engagement with our home energy management platform, the smart doorbell camera showcases Ecobee’s ability to drive innovation and differentiated product development. Ecobee’s strong product development capabilities, combined with their focus on creating an exceptional user experience are central to the continued build-out of our home energy ecosystem. Also during the third quarter, we announced the opening of a new engineering center of excellence in Reno, Nevada. This facility will house the development and testing of batteries, switches, power electronics and other clean energy solutions as we continue to invest in the R&D infrastructure and world-class talent that is required to develop and test the innovative residential energy technology solutions we are bringing to the market in the years ahead. Additionally, our grid services team was awarded a $50 million grant from the Department of Energy in the month of October as part of the grid resilience and innovation partnerships program to pursue a project demonstrating the efficient building electrification can be achieved while minimizing system overload, reliability issues and the need for infrastructure upgrades. We’re proud to receive this validation of our vision to utilize multiple energy technologies to support homeowners while providing valuable products and services that benefit both the grid and homeowners. I now want to provide commentary on our C&I products, which continue to outperform our expectations in the quarter. Domestic C&I product sales grew at a robust rate compared to the prior year as strength in shipments to customers for beyond standby applications and industrial distributors more than offset weaknesses in the telecom channel during the quarter. Shipments of natural gas generators used in applications beyond traditional emergency standby projects again grew at an exceptional rate during the third quarter. We believe we are in the very early innings of this compelling new market opportunity as ongoing grid stability concerns and volatile energy markets drive interest in these solutions. These emerging applications are just one of the many ways that we’re leveraging our position as the leading provider of natural gas generators to support increased adoption of energy technology solutions in C&I end markets. We also continue to build an increasingly comprehensive solution set to enable the deployment of our products in multi-asset applications, such as pairing our smart grid ready generators with our emerging C&I storage, connectivity, advanced controls and grid services platforms. Shipments of C&I generators through our North American distributor channel also grew again at a strong rate. Quoting activity remained resilient in the quarter, growing on a year-over-year basis and supporting our expectations for continued growth in this important channel that serves a wide range of end markets. As previously disclosed, order patterns from rental companies have moderated after several quarters of exceptional performance. And third quarter sales to our national and independent rental equipment customers were approximately flat from the prior year. Despite the expected near-term softness, we continue to expect that this historically cyclical end market has a substantially long-term runway for growth given the critical need for future infrastructure-related projects that leverage our products sold to this channel. As expected, sales to national telecom customers declined during the third quarter as compared to a strong prior year comparison. While we continue to expect shipment and order trends for these products to be softer in the coming quarters, we believe investment in telecom infrastructure remains a secular trend as global tower and network hub counts further expand and the increasingly critical nature of wireless communications requires backup power for resiliency. While we are seeing near-term softness in the telecom and rental channels as previously expected, the longer term growth opportunity for backup power and energy technology solutions in C&I end markets remain significant. To help serve the expected future demand growth, we recently announced an expansion project in Beaver Dam, Wisconsin, which is scheduled to be complete in early 2025, and will expand our manufacturing capabilities and capacity for a range of C&I stationary products for the North American market. Total sales for our International segment increased 14% year-over-year during the third quarter with the combined impact of acquisitions and favorable foreign currency effects contributing approximately 11% sales growth. Core total sales growth was driven by strength in important long-term growth markets such as India, Latin America, Australia and the Middle East, partially offset by lower portable generator sales in Europe as energy security concerns in the region have moderated from peak levels seen in prior quarters. International growth remains an important strategic focus as we replicate the Generac playbook in a growing number of regions around the world. Geographic expansion, together with the increasing breadth of our product portfolio of backup power and energy technology solutions is expected to drive continued growth in the segment. Power resiliency concerns related to increasingly severe and volatile weather and rising supply/demand imbalances are not unique to North America. And as the global energy transition accelerates amid rising geopolitical tensions, we will continue to support businesses and homeowners in solving for their energy resiliency needs. In closing this morning, our third quarter results and reiteration of our full year 2023 overall net sales and adjusted EBITDA guidance reflect improving operating performance and the hard work and strong execution by our teams. We believe we are moving closer to more sustainable levels of field inventory for home standby generators as we experienced positive momentum in key fundamental metrics during the third quarter, supporting our expectation for a return to year-over-year sales growth for these products in the fourth quarter and 2024. These sales growth expectations, together with the return to margin expansion and robust free cash flow generation, validate our commitment to a long-term focus on executing our powering a Smarter World enterprise strategy. We will continue to invest for future growth and position Generac growing residential and C&I energy ecosystems to drive value for homes and businesses around the world as detailed at our Investor Day in September. The megatrends that support the longer term demand for growth profile for backup power and energy technology solutions remain firmly intact, and we maintain our conviction that Generac is uniquely positioned to lead the evolution to a more resilient, efficient and sustainable energy future. I’ll now turn the call over to York to provide further details on our third quarter results and our remaining outlook for the year. York?

Operator:

[Operator Instructions] Our first question comes from the line of Tommy Moll with Stephens Inc. Your line is now open.

Aaron Jagdfeld:

Good morning, Tom.

Aaron Jagdfeld:

Yes. Thanks, Tom. Yes, we did say this morning that inventories continue – field inventories continue to come down. And the way we phrased it, they are reaching a more sustainable level because we’re definitely seeing areas as we noted, I think, not only at our Investor Day, but maybe even on the last call, where we have certain regions and certain models, certain channels like our dealer channel, in particular, that are or feeling like we’re kind of abnormal. And they are back to the whole question of what is normal, right? I mean we picked a pre-COVID kind of average to say what that is. And so we continue to work towards that and making good progress. We’re still undershipping the market in terms of overall end market demand. So – but it’s narrowing up. It’s not nearly what it was earlier this year. We were severely under shipping the market earlier this year. That’s why the results were what they were. And as we get closer to kind of that, I would call it, in-line shipping to market end market demand, you’re seeing the impact of that on the results, both in the gross margin level as well as EBITDA margins. We’re able to really focus on improving the efficiency in our factories because we’re taking up our production rates to get closer to that end market demand. The really good news is we continue to see end market demand remain quite strong for home standby. And that’s in spite of having it’s really kind of a light season relative to the third quarter here. outages in total were above average, the long-term average. And of course, there were a lot of well-publicized articles around potential outages with some of the demand – supply-demand challenges that remain out there. But we feel really good about where the category is at. And we feel like as we’ve been saying all along, as we finish up the year here and we get into 2024, we’re going to be much, much closer to normal at all channels. And so the other part of your question on wholesale and retail, as we’ve said in the past, if you look at all kind of the three major channels as we think about them dealer, wholesale and retail, dealer feels like it’s closer to normal. Wholesale would be next in line and then retail would be a little bit further out, but they are all approaching a more normal level.

Aaron Jagdfeld:

Hey, Mike. We need to come back to Mike.

Operator:

[Operator Instructions] Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is now open.

York Ragen:

We try the next one.

Operator:

[Operator Instructions] Next question is from Christopher Glynn with Oppenheimer. Your line is now open.

Aaron Jagdfeld:

Yes, we can hear you, Chris. Loud and clear.

Aaron Jagdfeld:

Yes. Thanks, Chris. So the majority of the sales, as we say, more than 50% go through that dealer channel. It’s a really important channel for us. Our wholesale and retail channels are important channels as well, but the dealer channel with 8,700 dealers is clearly a critical area of focus for us. And of course, the bandwidth in that dealer channel around sales and installation and service as the market grows, we’ve got over 3 million units in the field. That’s a really important area. As far as close rates, and that is the channel that we can measure close rates on because we have our PowerPlay sales system is offered through that channel. So it’s a way for them to quote and sell product. And so we get really good visibility into close rates by dealer, by product, by region. And as we said on the last call, close rates have kind of flattened out, and that’s how they have kind of played out similar to that. Actually, I mean, we’ve seen some near-term improvement here, but we’re not ready to call it a new trend up, but the month of October has been relatively good. It’s – you have to think of it in the context, this is a look back, right? So when we talk about close rates, we have a window of time, we look back because it takes time for quotes to mature to a point of – for us to make a call on whether it’s closed as a sale or not. But we are seeing some green shoots there, but we – we’re not ready to quite call it a trend yet. So we’ve still kind of forecasted things here as being somewhat flat. The consumer, obviously, as everybody is well aware, there is some uncertainty out there looming around the consumer in certain big ticket discretionary purchase categories. But as we’ve said, in our category, in particular, outages tend to help us overcome any general macro weakness in the consumer. And that has been the historical case for us. And I think that might be why we saw what we saw in the third quarter is outages were above the long-term average. And so we’ve seen the consumer perform quite well in our category of products. But we’re keeping a very close eye on it. We want to see how things play out here for the balance of the year and into 2024. But we’re encouraged by sales leads for sure. I mean October was another strong – the third quarter was another strong quarter for us, second best quarter ever for us in terms of just sales leads. And so that’s been really encouraging to see in terms of just the interest – the overall interest and awareness in the category.

Aaron Jagdfeld:

Yes.

Aaron Jagdfeld:

I have to come back to Mike again.

Operator:

[Operator Instructions] Next question is from Jeff Hammond with KeyBanc Capital Markets. Your line is now open.

Operator:

Alright. [Operator Instructions] Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

Operator:

Alright. Next question comes from the line of Mark Strouse with JPMorgan. Your line is now open.

Aaron Jagdfeld:

We can hear you, Mark. Thankfully.

York Ragen:

Yes. No, I mean I think in terms of year-over-year improvement, there price cost has been very nice tailwind really all throughout the year. And I guess the beginning part of the year, we were having, I guess, pretty, pretty significant mix headwinds at the beginning – in the first part of the year that was offsetting that. I think what we’re seeing now in the third quarter is those mix headwinds now are starting to subside as we’re starting to get closer to comping prior year. So the positive price cost that we’ve been recognizing – the vast majority of the gross margin increase is price cost with only a modest I’d say slight impact on mix year-over-year. So I think we’re pleased to see some of those mix headwinds start to subside. And then when you flash forward to Q4 then, we will obviously expect gross margins to continue to improve as we sequentially increase those home standby shipments then we will get mix positive there, and we will see significant year-over-year improvements in gross margin at that point because then you’ll get the benefit of price cost and favorable mix. So we’re pleased with the trajectory of where margins are headed and just like we had guided earlier in the year.

Brian Drab:

Can you hear me?

Brian Drab:

Okay. Well, it’s not on our end, I guess, because you couldn’t hear me at first. Okay. So I have a bunch of questions. Just, I guess, California. I’m curious, we haven’t been talking as much about California lately, but what are you seeing in terms of the longer-term opportunity there? I didn’t feel like the utilities were shutting down power as much lately. What’s the penetration rate penetration level in California today? And what’s the latest thinking on – there is a lot of rumblings around natural gas bands in different cities and counties and how has that affected demand?

Operator:

[Operator Instructions] And the next question comes from the line of George Gianarikas with Canaccord Genuity. Your line is now open.

Aaron Jagdfeld:

Yes, we can, George. I guess, George Gianarikas is always powered on, so – good to hear you, George.

Aaron Jagdfeld:

Yes. Thanks, George. It is interesting. I mean, with the – and we said it this morning in the prepared remarks, we’re seeing softness in that solar plus storage, the residential solar plus storage market. Actually, ecobees continue to just – they are posting record quarter after record quarter here, which is pretty amazing. I think new products coming out and they are killing it actually. We’re doing really well with that business, and there is a lot of great things around that. But when it comes to the storage side of the market, which we’re still bullish on long-term, given the structural nature of the grid transition and the policy tailwinds that should be there, we feel like the current environment, while negative, is kind of a, I think, more temporary than permanent. And so – but the good news for us is we have a lot of new product coming next year. So I don’t feel like we’re missing out on maybe what’s going on in the market today by having – our product offering is fine today, but our next-generation product offering is going to – is really going to be – I think set us apart from the competition. I think it’s going to establish us as the leader, we think we can be in that marketplace going forward or a leader. I think we all know we struggled with our – the acquired products initially. And I think we’ve worked very hard and will be working very hard over the next 12 months to bring the new products we have to market. We’ve got a huge team working on that. It’s why the level of investment, as we said at our Investor Day, is so heavy. And we do believe in it long-term. So I don’t think to answer your question directly, I don’t think it changes the trajectory necessarily of anything we’re doing there. But I think it probably does soften maybe the fear of missing out, if you will, the FOMO around maybe not having leading products there today. And we just getting a pause in the market here maybe is just the timing is just good for us. But we expect to be in the market in a big way later next year with our new products, and we’re pretty excited about where we’re going with that.

Donovan Schafer:

Hey, guys. Thanks for taking the questions. I want to follow-up on the – on close rates. So one of the things that came across talking to some dealers is with the kind of revamped the marketing campaign you guys launched or talked about at Investor Day and how you’re trying to increase product category awareness among the next generation people, maybe in the 30s to 40s, kind of in the middle of family formation right now. The dealers were saying they are getting more IHCs that they used to – like they used to get IHC before COVID, they get an IHC that go out there, and it was almost always someone 60-year-old or who has retired. It was really easy to schedule because the person didn’t have a day job and this retired individual would have tons of peers who have backup generators. So there was almost no education curve or anything like that. So I’m just curious if you think this increasing amount of IHCs coming from people in their 30s and 40s, where they have to actually schedule around work hours and other considerations and where they maybe don’t know the product category as well. Is that – do you think that, that’s a material factor in close rates still being a bit below where they were historically? And if so, does that mean it could be a longer process to get back to kind of historical highs? Just anything you can – any color you can provide on that would be great.

Operator:

[Operator Instructions] And your next question comes from the line of Jon Windham with UBS. Your line is now open.

Aaron Jagdfeld:

Yes. Thanks Jon. Yes, ecobee has been having a lot of success here recently. I think a lot of that was – I don’t want to be overly basic about the explanation here, but obviously, energy costs continue to rise. And as energy costs go up, I think homeowners are – I think they are in search of ways to save money. And there is a very strong payback on an ecobee smart thermostat. You can save upwards of 40% of your energy costs annually by using a smart thermostat. And this is not a product that you basically just set a regular schedule for that you can remotely check the temperature on. I mean that’s – those are basic features. There are companies out there that are offering those features and calling themselves smart thermostats. Those are not smart thermostats. The ecobee thermostat is different in that. It actually learns your patterns in terms of when you are home, when you are not. There are sensors in the home that give it context around occupancy, and it can adjust for different variables, both heating and cooling, pre-heating, pre-cooling. There are some really cool things that it does. And it looks at energy costs in your market to make some of the decisions it’s making on your behalf or with your input. And so these are, I think really strong and important considerations for why we think the smart thermostat category, in particular, is growing and why ecobee’s solution is the best offering in that category. And that’s something that when you think about, to your question about installers, I mean I think installers they do – they try to offer, I think the value prop or to extend the value prop in their sales process. But I think it really comes down to the homeowner requesting that, right. And I think what installers appreciate mostly is the ease of installation and the level of technical support that they get from ecobee. The level of support from ecobee, whether you are a homeowner or whether you are a contractor installing the product is phenomenal. And that’s what wins the day with an installer. It can win the day with a homeowner as well, but I think for installation, from an installer standpoint, time is money. So, if you’re dealing with a product that doesn’t have great support and you have challenges with that, and you are not able to get answers to the questions you need in a timely fashion, you are wasting time, you are wasting money. If you have an ecobee thermostat and you have a problem or you have a technical question, you can get a response very quickly and a high-quality response at that and so they get incredibly high marks for technical support. I think that’s why installers largely are choosing the product over other options in the marketplace.

Aaron Jagdfeld:

We will follow-up with you, Jeff.

Operator:

Moving on to the next question, your next question comes from the line of Stephen Gengaro with Stifel. Your line is now open.

Aaron Jagdfeld:

Good morning.

Kris Rosemann:

Yes. I mean obviously, you won’t have the headwinds that we have had with bringing field inventory down. We have been under-shipping that. It will be more normalized. And so just – I mean just in terms of raw shipments, we should see growth that way in that home standby business. Your question maybe is more like will activations grow, installations grow, which is our proxy for I guess sales in terms of the end market that way. We obviously are – we are evaluating market conditions, IHCs. Again, second best on record, so that obviously is a leading indicator, so we got…

Kris Rosemann:

Yes. We typically short-term guide without any major events. And as you know, those happen. So, that’s always a catalyst for growth over the longer term. So, that – those are obviously the drivers. And then all the megatrends around that we are talked about for a while that are driving the demand for the category higher, those are still intact.

Unidentified Analyst:

Hi all. Henry on for Jordan here. I was just wondering if you could dig a bit deeper into some of the different dynamics you are seeing between the U.S. and the international C&I segments in the business. And now some of the segments you are looking for 2024. Thanks.

York Ragen:

I think the IDCs have been hanging in domestic.

Operator:

And your next question comes from the line of Keith Housum with North Coast Research. Your line is now open. Keith, your line is now open. Moving on, next question is from Chip Moore with ROTH MKM. Your line is now open.

Kris Rosemann:

Yes.

Aaron Jagdfeld:

Yes. Thanks Jeff. Yes, the – obviously, there is puts and takes, I think with that, with housing. First of all, it’s really less than 20% of our sales going to new housing. So, I would say with housing starts at those slow and as they slow, not as big of an impact on us. Most of what we do is to – is retrofitting existing housing with products. And then that gets to kind of the question of, for most people, how long do you stay in your house. And if housing turnover slows down because of the higher rate environment, does that mean that people are going to start to look at projects in their house and think about that, or is there some dampening of the enthusiasm around that even because of the higher cost of money for borrowing against your house or just the concerns, overall economic concerns that consumers might have. Those things have to play out yet. I would say that again, kind of consistent with our previous remarks on this, is that when outages happen, the one thing we do know is that homeowners generally have a list in their head of like things they want to do to their house. And a generator is probably on that list somewhere for most people, depending on how many outages they have had and how long outages have lasted. But when they get an outage, that category of product tends to move up on their list. And outages tend to trump some of the other macro things that you might see around housing or the consumer as the economy cycles. And we have seen this time and time again in our history in the business is if we get the outages, people will reprioritize their spending. Maybe they won’t hold off on that kitchen remodel or putting in a pool or doing a bath remodel or taken a family vacation even in some cases, they reallocate their consumer dollars, they are spending to other categories that they deem more important. And so as outages – and again, this is the underpinning all of this is you have to have a belief that power outages are going to be on the rise, and they are going to last longer. They are going to be happening more frequently and they are going to last longer. The data bears that out, everything else that we have been talking about here would indicate that, that is going to be the case for the next several decades, just as the grid goes through a transition. And as that happens, I think that even though we may run into some economic cycles here that could put pressure on the consumer. I think as long as the outages happen, we feel pretty good about where we are going to be.

Kris Rosemann:

We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter and full year 2023 earnings results with you in mid-February. Thank you again and goodbye.

Operator:

Good day and thank you for standing by. Welcome to the Second Quarter 2023 Generac Holdings Inc. Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Harris, SVP, Corporate Development and Investor Relations. Please go ahead.

Aaron Jagdfeld:

Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our second quarter net sales were in line with our prior expectations as stronger-than-expected C&I product shipments offset residential products, which were lower than expected as a result of a softer consumer spending environment that impacted shipments of home standby generators and shore products. This had an unfavorable mix effect on gross margins, resulting in slightly lower adjusted EBITDA margins than previously expected. Year-over-year, overall net sales decreased 23% to $1 billion, and core sales declined 26% during the quarter. Residential product sales decreased 44% as compared to a strong prior year quarter that benefited from significant excess backlog reduction for home standby generators. The current year quarter continued to be impacted by elevated levels of field inventory for home standby generators as well as a decline in clean energy product shipments year-over-year. Global C&I product sales increased approximately 24% to an all-time quarterly record with broad-based growth across nearly all regions and channels. Adjusted EBITDA margins were negatively affected by the significant unfavorable sales mix as well as reduced operating leverage driven by lower home standby shipments and continued investments for future growth. Importantly, continued favorable price cost dynamics have created a meaningful margin tailwind, providing a partial offset to the unfavorable sales mix. Second quarter home standby shipments grew at a strong sequential rate, but declined significantly on a year-over-year basis as the second quarter of 2022 included the reduction of excess backlog and we continue to meaningfully under-ship end market demand in the current quarter as we focused on further reducing field inventories of home standby generators. Baseline power outage activity in the U.S. was well above the long-term average, but meaningfully weighted toward the final weeks of the quarter. Home consultations or sales leads were roughly flat from the prior year period and increased sequentially off an unseasonably strong first quarter. Additionally, home consultations during the second quarter was still more than 4x higher than the second quarter of 2019, further supporting our view that consumer interest in the product category has achieved a new and higher baseline level. Our residential dealer account returned to sequential growth in the quarter, ending at approximately 8,700, an increase of 500 dealers from the prior year. We continue to invest in growing the installation capacity of our channel partners, and we are making good progress towards our initiatives to increase dealer count, train non-dealer contractors, streamline the installation process and raise home standby category awareness across trade groups. We believe these efforts are important to the longer-term growth trajectory of the product category as the mega trends that support the demand growth outlook remain firmly intact. Activations, which are a proxy for installs, improved sequentially over the first quarter, but declined from a strong comparable period in 2022 that included the benefit of a backlog of installations in certain regions during the prior year. Activations were also below our prior expectations for the quarter, primarily due to the weaker consumer spending environment for home improvement. But despite this relative softness, activations during the quarter were more than double second quarter 2019 levels. Close rates were flat sequentially and remained meaningfully higher than the comparable period of 2022, but underperformed our expectations as a result of the shift in consumer spending patterns. The number of home standby generators in field inventory further declined in the quarter, while days of field inventory relative to historical norms also decreased sequentially. However, with close rates and activations lower than expected in the quarter, the field inventory normalization process is now expected to extend further into the second half of the year. As a result, we expect the elevated field inventory levels to further impact home standby shipments in the second half relative to our prior expectations with the return to year-over-year growth in home standby shipments now anticipated in the fourth quarter. We believe the stronger outage environment in the final weeks of the second quarter and the resulting strength in IHC support this expected return to growth later in the year. Longer term, the mega trends that are driving awareness for backup power solutions are as compelling as ever. Homeowners and business owners are becoming increasingly sensitive to the growing frequency of power outages driven by extreme weather and grid operators are struggling to solve the growing supply demand imbalances that are a byproduct of the accelerated energy transition that is underway. Importantly, these are not short-term issues as the transition to the next-generation power grid will be an uneven process and is expected to take decades to complete. We believe our unparalleled suite of solutions is well positioned to solve many of the energy-related challenges that consumers and businesses will inevitably face. I now would like to provide some commentary on our chore products, which consists of a broad lineup of outdoor specialty power equipment used for property maintenance in large residential and light commercial applications. These products, which are increasingly shifting towards battery-powered solutions experienced significant growth in recent years as homeowners have been spending more time to money on property maintenance since 2020. However, shipments in the second quarter declined from the prior year and were below our prior expectations as higher channel inventories in the industry, unfavorable weather trends and shifting consumer spending patterns impacted demand for chore products. This weaker than previously expected demand environment is expected to persist in the second half of the year, also contributing to our lower outlook for residential product sales. Now moving to our residential energy technology products and solutions. Second quarter sales were in line with our prior expectations and grew at a strong rate sequentially as shipments of our power cell energy storage systems improved and ecobee sales hit an all-time record for the quarter. Ecobee drove strong sales growth over the prior year and continue to take share in the smart thermostat market by strong positioning with professional contractors and new placement with key retailers. The ecobee team is progressing towards the launch of a smart doorbell camera in the second half of this year, which will provide for increased homeowner engagement with our home energy management platform. As the central hub of our home energy ecosystem, we firmly believe that ecobee’s feature-rich devices and significant expertise and user experience will provide to be – will prove to be key differentiators for Generac’s residential energy technology efforts. Although we are making progress in our future product roadmaps and building the confidence – and rebuilding the confidence of solar installers, the broad residential solar and storage market in the U.S. is showing signs of slowing. As a result, we now expect our suite of residential energy technology products and solutions to deliver gross sales at the low end of our previous range between $300 million and $350 million for the full year 2023 as weaker solar and storage industry demand dynamics are expected to persist throughout the balance of the year. To better compete in these large and growing market opportunities, we are continuing to invest heavily in the world-class talent and R&D infrastructure that is required to achieve next level quality while developing and commercializing innovative solutions. We believe our competitive advantages when we built around the combination of these ongoing investments, differentiated monitoring and management capabilities and a unique and seamless user experience. Combined with our core competencies around sales and marketing, lead generation, distribution, customer support and global sourcing. I’d now like to provide commentary on our C&I products, which once again outperformed our expectations. Global C&I product sales grew 24% over the prior year to an all-time quarterly record as multiple mega trends continue to support demand for backup power and mobile products around the world. Domestic C&I product sales grew at a robust rate in the second quarter, highlighted by strengthened shipments to a number of key customers for beyond standby applications, industrial distributors and national rental equipment companies. Shipments of natural gas generators used in applications beyond traditional emergency standby projects continued to see tremendous growth during the second quarter. We believe we are in the very early innings of this exciting new market opportunity as grid stability concerns and volatile energy markets are expected to further drive demand for these solutions. Leveraging our position as the leading provider of natural gas generators we are building an increasingly comprehensive solution set to enable the deployment of our products in multi-asset applications, such as pairing our smart grid ready generators with our emerging C&I storage, connectivity, advanced controls and grid services solutions. Shipments of C&I generators through our North American distributor channel grew once again at a strong rate and channel backlog also increased sequentially during the quarter. Quoting activity for C&I products remains robust, highlighting the ongoing strength in demand for backup power in this important channel that serves a wide range of end markets. In addition, we experienced another quarter of robust growth against a strong prior year comparison with our national and independent rental equipment customers as they continue to refresh and expand their fleets. While order patterns from rental companies have moderated after several quarters of exceptional performance, this end market has substantial runway for growth, supported by the critical need for future infrastructure-related investments. As the leading provider of backup power to the North American telecom market, sales to national telecom customers increased slightly during the second quarter as compared to a strong prior year comparison. Although we continue to expect shipments and order trends for these products to be uneven during the second half of the year, we believe investment in telecom infrastructure remains a secular trend as global tower and network hub counts further expand and the increasingly critical nature of wireless communications requires backup power for resiliency. Positive momentum also continued during the second quarter for our International segment as total sales increased 10% year-over-year with the combined impact of acquisitions and favorable foreign currency effects contributing approximately 4% to sales growth. Core total sales growth was driven by strength in nearly all regions as well as global sales of our controls and automation solutions from our Deep Sea and Motortech acquisitions. While energy security concerns in Europe have moderated from peak levels seen in prior quarters, we continue to see positive momentum in important long-term international growth markets, including India, the Middle East and Australia. As the global energy transition accelerates, demand for electricity around the world grows and the threat of increasingly severe and volatile weather persists, we believe that the demand we are seeing in these markets supports our view that the need for power resilience is a global issue. Accordingly, we are continuing to invest and build out our international product and distribution capabilities to serve these large and diverse growth opportunities. As disclosed in our press release this morning, we are raising our full year sales growth guidance for global C&I products to mid-teens range from prior expectations for a mid-to-high single-digit increase. In addition to the strong second quarter performance, the increased guidance is being primarily driven by continued strong backlog and operational execution for our domestic C&I products. In closing this morning, our C&I product category has continued to perform extremely well as our global teams have driven strong execution. But a softer than previously expected consumer environment impacted second quarter results and is the main driver in the reduction in our second half outlook for residential products. We view the headwinds in our residential product categories as temporary and we remain confident in the robust, longer-term outlook for our broad portfolio of backup power products and energy technology solutions. This confidence combined with our history of strong cash flow generation and healthy financial profile allows us to maintain a long-term focus on executing our powering a smarter world enterprise strategy. We will continue to make the necessary investments to capitalize on the megatrends that drive the future growth opportunities inherent in this strategy. We look forward to providing a more detailed update on our longer-term strategic vision at our upcoming Investor Day in late September. I will now turn the call over to York to provide further details on second quarter results as well as the outlook for 2023. York?

Operator:

[Operator Instructions] Our first question comes from the line of Tommy Moll with Stephens Inc. Your line is now open.

Aaron Jagdfeld:

Hey, Tommy.

Aaron Jagdfeld:

Yes, Tommy, it’s – I mean, that’s obviously the central question here and has been a topic as we’ve discussed over the last several quarters. You’re right, we said, I think somewhere in the 1.4 to 1.5 times range is where we were last time we talked in April. Today, we believe that number is closer to 1.2 to 1.3 times as we exit – as we exited the first half. And with the assumption of a softer consumer spending environment in particular around kind of residential investment, these types of projects, home improvement projects, we’re really looking at a more moderated close rate. It’s interesting because we actually are seeing a lot of inbound activity in terms of sales leads. They’re just not – the close rate on those leads is not growing at the rate that we thought it would, and that’s really the kind of the – and then it just becomes a maths [ph] problem from there. We’re just not going to drain the inventory as quickly because we’re not going to convert those leads to activations at the rate that we thought we would here in the second half and that is – that’s going to create basically a situation where that elevated field inventory is going to persist a bit longer than we had originally thought. So through – really kind of through the year here, it’ll start to taper off and there’s definitely and I think you’ve done this with channel checks, we do our own channel checks and we know what field inventory looks like really with a high degree of accuracy region to region and dealer to dealer, wholesaler to wholesaler, retailer to retailer. And so we see regions where actually there isn’t a field inventory issue anymore. And we see other regions where field inventories are still higher than normal. So it’s become more of a mixed bag, if you will around the field inventory story. Whereas I would say you wind the clock back two or three quarters, it was – two or three quarters ago, it was everywhere. So the field was full of inventory in all regions. So now we’re starting to see some of that normalization be achieved in certain regions and in fact go beyond that. We’ve got a couple of regions you get up into Canada, in the Quebec markets where in particular where they’ve had a number of outages and we can’t get them enough product, they don’t have the installation bandwidth. So we get back to that issue and that’s obviously another area we’ve been focused on. So hopefully that gets the answer to your question

Michael Halloran:

Hey, morning everyone. So following-up a little bit on that…

Aaron Jagdfeld:

We lost Mike.

Michael Halloran:

[Indiscernible] The distribution channel’s growing too. Can you hear me or no?

Michael Halloran:

Yes, no problem. There’s a lot of moving pieces here from a channel perspective and in the home standby side, we kind of take along to that inventory question, but you’ve got high inventory. You’ve taken your outlook down a little bit slower consumer conversion, but the IHCs are higher, you’re gaining distribution inventory is at least normalizing a little bit. Can you help sync from a forward commentary how you think this demand curve starts playing out? Maybe just a little behind the hood on the sellout from a channel perspective, how you think those sequentials kind of work from a sellout perspective versus what normal might look like and just kind of any context to the – what the true underlying run rate might look like if you try to normalize for these moving pieces.

York Ragen:

Yes, I think the key is, seasonally – we do expect the home standby category to pick up in the second half of the year versus the first half, especially as inventory begins to normalize towards the – throughout the second half. I think it’s to Aaron’s point though, it’s just – maybe it’s not going to improve as much as we thought relative to three months ago, because of the software consumer that we’re seeing.

Jeff Hammond:

Hey guys. Just back on this close rate dynamic, I’m just wondering if you’re getting feedback from your dealer network on kind of why the close rates are lower. Is it financing costs or the higher costs? Because I know you had been contemplating lead time or close rates getting better as lead times shortened. So that seems to be the big surprise and just looking for more feedback color.

Operator:

[Operator Instructions] And your next question comes from the line of Mark Strouse with J.P. Morgan. Your line is now open.

Aaron Jagdfeld:

Yes. Mark, thanks for the question. So I’ll take the first part which is the field, again, just kind of expanding on the field inventory, we said 1.2x to 1.3x. Our assumption is that 1.0x is “normal”. I think the key question there is, is 1.0x the right number, right? And what is 1.0x based on? And so what it is, is we went back I think it was around 2019 levels for pre-COVID, if you will levels of field inventory just to kind of pick our point of normal, right? And that’s a debatable point. Could the channel decide that their normal is lower? Potentially. Recall though that in our world, the field inventory, there’s very – there’s not a ton of field inventory at the dealer level, especially when you get in the smaller dealers. They just don’t have the financial capacity or even the physical space to put product in. So in their world, maybe normal is zero. And that would be contemplated, of course, in the 1.0x. It’s going to be the other channel players the retailers, the wholesalers that are generally more stocking channels. And then our larger dealers that regionally will also stock product just to keep a constant flow to their teams in particular their install teams just to keep product moving. And so, if we do this on a days adjusted basis, though just to be clear, because there is seasonality to this. So as we think about this, the second half of the year is seasonally our stronger period for home standby generators. So we would see velocity typically pick up in the second half of the year. A year, when you look at it on a day’s basis, that field inventory calculation will adjust accordingly. And then in the first half of the year, in particular first quarter, which typically is our seasonally low period, that’s when you’d see kind of that days of field inventory adjust to reflect lower installation pace. But the key question is not lost on us in terms of what’s normal. Is there a risk there around the fact that maybe channel partners decide that normal is something less? Potentially. I don’t think it would be long-lived. It’d be probably short-lived if that’s the case. But we’re trying to be I think balanced in how we’re viewing this. And we think that that kind of 1.0x is a good reflection point of – is reflective of a good point in the curve in terms of what’s normal. And then on margin, York?

Operator:

One moment for your next question. And the next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

York Ragen:

Yes, yes, a couple things. I know I did mention in my prepared comments that Q4 – exit rate Q4 EBITDA margins are expected to be in that, that low 20% range. So we expect, obviously, things to pick up from here, especially as home standby shipments normalize. I guess, if you think about that previous Investor Day target for 2024, I know that our Energy Technology business things are just taking a little bit longer than maybe we originally laid out back in 2021 – September of 2021 for that business. This is more of a reset year for our Clean Energy business, and it’ll grow from here. So I think we’re going to level set what those, I guess, revised expectations are going to look like on September 27 when we have our Investor Day next month – September 27 next month. And I think we’ll be able to give clear updated targets for the long-term at that point. But I guess those are some data points that you can use for now.

Kashy Harrison:

Good morning and thank you for taking the questions. So just a few quick ones here. Can you just give us a sense of the revenue gap between sales into the channel and sales out of the channel? Are you underselling this year by $100 million, $200 million, $300 million? And then on the C&I side of the business just how do you think about the repeatability into 2024? Just giving some of these cross currents surrounding construction from the infrastructure bill maybe improved the ABI, maybe ladder ends of 5G. Just how do you think about the repeatability of C&I? Thank you.

York Ragen:

And we can see field inventory coming down in all of our data, so we know we’re under shipping the market.

Operator:

And your next question comes from the line of George Gianarikas with Canaccord Genuity. Your line is now open.

Aaron Jagdfeld:

Yes. Thanks for the question, George. Actually, we do have – when we talk about price, you probably need to talk about net price, but the promotion dollars end up down in kind of operating expense in some cases. So – it’s not really just from an accounting – a technical accounting standpoint, it’s not always price. But we are using more promotion than we used maybe a year ago, certainly more than two years or three years ago.

Aaron Jagdfeld:

And that is included in the guidance. So I think to maybe put a finer point on it, those teams that we’ve unleashed here on our unclosed IHC file continue to work on different types of promotional activities. We’re doing a lot of testing around what works, what doesn’t work. We’ve run some national promos. We ran one earlier this year, and we’ll have one on our schedule here at some point later this year. So that’s – those things are certainly included in the guidance. There’s a question, of course, do we need to do more? I think at this point, we believe we’ve got the right level in there to support the close rates that we’ve built into the most recent guidance. At some level, you just – you can’t promote perhaps to your way to a consumer that if the consumer is going to be stubborn and it’s going to be painful for them to spend because they’re concerned about, obviously, a lot of things around inflation around their employment status. I mean there’s so many things that go into that. that make up why and when a consumer feels confident to do that. Certainly, power outages and historically for us, softer consumer environments, we generally have been able to break away from when you get outages. And so that still exists here as an opportunity. Our guidance contemplates kind of a normal outage environment. And we have been experiencing kind of above normal outage activity here through – at least through the – late in the second quarter, we saw that tick up and actually July in and of itself has been somewhat active as well. So continue to watch that and see what impact that will have on close rates. But we do have a level of promotion in our guidance around trying to improve close rates for the balance of the year.

Donovan Schafer:

Hey guys. Thanks for taking the questions. So I want to talk about chore and portables. So chore usually doesn’t get much attention, but this quarter, you guys actually called it out in a high level. Well, of course, some pack up, of course, that was the main driver. But do you think these smaller pieces can unfold in ways that kind of nudge things. I remember, I think, with the polar vortex in Texas. At the time, I think a lot of folks thought that’s great news, but you won’t be in that quarter, because you were supply constrained. You considering that manufacturing HSV, but you did end up beating and it came down to the portables, because you had that ready and so these can add up in ways that matter. So talking about chore products, the California ban on small sized gasoline engines under 25 horsepower that goes into the – into effect at the end of this year. I think old mowers and everything get grandfathered in. It’s not like if you own a gasoline lawnmower, you got to ditch it come January 1. But any new purchases, I believe need to be electric. So I’m curious, if – because it’s a smaller piece of the revenue mix, something like this has to almost like double or something to really become meaningful. And with portables when the polar vortex hit Texas, it’s kind of like what happened is you had this just massive surge in portables and getting shipped to that state. So in the case of something like this, I don’t think come January 1, you’re going to suddenly you get like a sudden doubling in chore products. But with Mean Green Mowers and the other clean energy chore products you have in this California lot going into effect, is that something where you see jumping to a 10%, 20% growth or a 2x, 3x over a number of years? Kind of a broader magnitude there. And then same thing on portables because you’ve launched a portable battery product a larger portable generator and a dual fuel generator, which those are all significant feature additions in those product categories. So anything on kind of the next year or so growth rate you would expect around those approximately?

Operator:

One moment for your next question. And your next question comes from the line of Praneeth Satish with Wells Fargo. Your line is now open.

Aaron Jagdfeld:

Yes. Thanks for the question. So internationally, today, it’s mainly a C&I market for us. And internationally we’ve done very well. Our Pramac subsidiary very well respected brand, very well run company covers our geographies really outside the U.S. and Canada for us. And they, I mean, they’ve been on a tear and they continue to gain market share. The EBITDA margin profile of that company has improved dramatically over the course of our ownership here which I think spans now something on the order of eight years – eight, nine years, something like that. And so we continue to make really good progress there. And we’re actually getting quite a good benefit out of our global scale with C&I products here, even domestically. So the ability to consolidate purchases on engine platforms, some of the alternator platforms, and obviously the ability to use our Deep Sea controls across our global platforms and get the gain the benefit of scale there as well. That said, that market internationally, as I said, is primarily C&I, and it’s primarily diesel. So diesel powered generators are still at least outside the U.S. and Canada, the primary kind of legacy solution for emergency backup. And those products, in fact, I would say like in the U.S., natural gas backup power represents for C&I anyway, about 40% of the market here with about 60% diesel. Outside the U.S. and Canada, it’s more like 98% diesel, 2% gas. So the opportunity that exists is to introduce gas products, of which we’re the leader globally in, introduce those gas products into new regions and into the hands of new customers that we believe could benefit from connecting those products to natural gas pipelines as opposed to reliant on diesel refueling. There are benefits there far beyond just the continuity of fuel supply but also the emissions profile of those products and gas is tends to be cleaner than that of diesel, and so you see some real benefits there. You see customers who are now focused more on that. Regionally, we’ve really focused here, I would say in the last few years on India in particular, through an acquisition of a company called Captiva. Pramac acquired Captiva several years ago, and we continued to invest heavily in that market, and we’re seeing very nice growth albeit off of a small base, but very nice growth there. That’s an area that we’re going to continue to focus on. I think we mentioned Australia, another great opportunity for us. The Middle East has been a great market in terms of growth. On the home standby side, if you look at residential sales, we actually have an interesting level of HSB that we’re shipping into all parts of the world, which is really interesting. You see this in our activation data; we can see exactly where products are being installed and it’s just overshadowed by two things

Stephen Gengaro:

Thanks and good morning everybody.

Stephen Gengaro:

Thanks for taking the question. So just one for me, the – when we look at the inventory, the HSB inventories that that everybody’s been talking about. Is there any detail you can give us on sort of location of inventory relative to recent power outages?

Operator:

[Operator Instructions] And the next question comes from the line of Blake Keating with William Blair. Your line is now open.

Aaron Jagdfeld:

Yes. Thanks Blake. We have seen the demographic over time as the category has grown. The category used to skew much older when you kind of wind the clock back. And over time, as it’s broadened out, we have seen the average age of buyers come down, but it still indexes to an older demographic people who have – and home ownership tends to skew that direction as well. And yes, they may, in fact, be somewhat more resilient if you will, to changes in the economy, but I think nonetheless they also – inflation does impact people that are on a fixed income, perhaps even more. Like you can make an argument that perhaps a portion of that segment is maybe a little more vulnerable to certainly trends in inflation. We haven’t seen – yes I wouldn’t say like from this point last year to this year, we haven’t seen any major shift in the demographic underpinning kind of the buyers of the category at this point. We’ll continue to watch that as the – as time goes on here, certainly this year and into the future. But I think right now, what we’re just – what we’re seeing is that more broadly, the consumer spending environment around home improvement is softening, right? And I think that we’re getting a little bit caught up in that. And that’s what I think is impacting. Again, close rates aren’t dropping. I think that’s an important point here. They’re just not growing back to the levels that we saw pre-pandemic. We do think they’ll get back there eventually, but they’ve kind of flattened out here. So I think the challenge is that we thought they would continue to grow, and that’s the – perhaps the new piece of information this morning.

Keith Housum:

Good morning guys. I know we’re running long so us keeps the one question here. Just in terms of the Clean Energy solution set in the redesign of the product portfolio going into 2024. If you guys just provide an update on if you guys are up to date on that or on track? And then some of the challenges that, that segment is facing right now in terms of cropping demand.

Operator:

And your next question comes from the line of Vikram Bagri from Citigroup. Your line is now open.

York Ragen:

This is York. Yes. No, the promotions that we’re talking about, again, we run promotion in the ordinary course when we’re not in backlog and just again to drive awareness of the category and help get homeowners over the tipping point to make – to go ahead and make the purchase of a home standby generator. So I wouldn’t say it’s – I would say it’s a modest impact to margins overall. Again, these are our highest margin products. So you sort of – as you sell more of these products, you mix you get a significant mix benefit, which sort of overshadow whatever promotion we may be offering. So I think that’s the key there. And what promotion we do have layered into the guidance is not a significant part of the story or a significant impact to our margins. I think when you think about the cadence of EBITDA margins over – from first half to second half, I think just mixing – getting a higher level of home standby shipments out the door, that will have a significant impact. The additional operating leverage on our fixed SG&A will have a big impact. And then we’re just going to continue to realize improved input costs as we sort of work through our inventory levels, and we’ll start seeing the realization of lower commodities and logistics costs and so – that’s really what’s going to drive the sequential improvement in EBITDA margins for first half, second half. And promotions will only have a slight drag relative to that performance.

Mike Harris:

We want to thank everyone for joining us this morning. We look forward to discussing our third quarter 2023 earnings results with you in early November as well as providing an update on our longer-term strategic vision at our upcoming Investor Day on September 27. Thank you again, and goodbye.

Operator:

Good day, and thank you for standing by. Welcome to the First Quarter 2023 Generac Holdings Inc. Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Mike Harris, Senior VP, Corporate Development and Investor Relations. Sir, please go ahead.

Aaron Jagdfeld:

Thanks, Mike. Good morning, everyone. And thank you for joining us today. Our first quarter net sales adjusted EBITDA and adjusted EPS were higher than expected, primarily due to continued strong shipments of our commercial and industrial products globally. Adjusted EBITDA margins were also better than expected due to favorable price cost dynamics. Additionally, field inventory levels of home standby generators declined at a rate consistent with our expectations in the quarter. Year-over-year, overall net sales decreased 22% to $888 million, and core sales declined 24% during the quarter. Residential product sales decreased 46% as compared to a strong prior year quarter. That includes the benefit of significant excess backlog for home standby generators, and was also impacted by elevated levels of field inventory for home standby generators as well as a decline in clean energy products. Global C&I product sales increased approximately 30% to an all-time quarterly record, with strength in most regions internationally, and all channels domestically. Adjusted EBITDA margin was negatively affected by significant unfavorable sales mix, and reduced operating leverage, driven by lower home standby shipments and continued energy technology growth investments. These margin headwinds were mostly offset by favorable price cost dynamics. Now discussing our first quarter results in more detail, while home standby shipments declined significantly in the quarter leading indicators of demand for the category were exceptionally strong during the first quarter. Baseline power outage activity in the U.S. was well above the long-term average during the quarter, with several larger localized outages in multiple regions, marking the highest level of baseline power outage activity for our first quarter since we began tracking outages in 2010. Home consultations or sales leads were up significantly over the prior year period with broad-based growth experienced in almost all states. Additionally, home consultations were approximately flat sequentially during the quarter, which is highly unusual for the seasonally softer first quarter, particularly as we're coming off of a record fourth quarter, and this strength continued in the month of April. For historical perspective, first quarter home consultations were more than four times higher than the comparable period in 2019, supporting our belief that the home standby generator category has reached a new and higher baseline level of demand. Our residential dealer count was more than 8600 at the end of the quarter, an increase of over 500 dealers from the prior year. While this is a slight decline on a sequential basis due to seasonal headwinds, we expect our dealer count to grow significantly over the coming years as we continue to focus on expanding our installation bandwidth. Activations, which are a proxy for installs were impacted by severe weather in multiple regions and declined slightly from the prior year period, which included a challenging comparison in the South Central region that saw notable strength in the prior year due to the backlog of activations related to the Texas deep freeze in 2021. The number of home standby generators and field inventory continued to decline towards more normalized levels during the first quarter, with the number of units falling meaningfully and ending the quarter approximately in line with our prior expectations. Days of field inventory relative to historical norms also decreased sequentially in the quarter but remained elevated. We expect field inventory to decline further in the second quarter, resulting in another quarter of lower home standby orders and shipments relative to the higher end market demand. Before returning to more normalized levels as we enter the second half of the year. Our initiative to increase home standby generator installation capacity remains a top priority for the company. We’ve recently launched our dealer talent network, which is showing early signs of momentum as we help our dealers find the talent needed to successfully grow their businesses. We also recently announced a partnership with the independent electrical contractor’s trade group, and this further elevating the Generac brand within the electrical contractor community and providing additional training resources in key markets, including Texas and Florida. Additionally, we have identified a number of project management improvement opportunities that we believe can help dealers optimize overall project timelines, in addition to several product related enhancements, to further simplify the installation process. These initiatives are not only focused on solving near term installation capacity challenges, but are also designed to provide sustainable solutions for tighter skilled labor markets. We believe these solutions as well as continuing to expand overall distribution could further increase Generac’s competitive advantage given our unparalleled scale, focus and expertise in the home standby market. Consistent with the comments provided on our fourth quarter earnings call in mid-February, we expected the first quarter mark the trough for home standby shipments in the current channel destocking process. We continue to anticipate a return to year-over-year sales growth in the second half of the year, as field inventory returns to more normalized levels. The above average outage environment and robust growth in home consultations thus far in 2023, further support this expectation. The range of threats that utilities and grid operators face was on full display in recent quarters, as the outage environment has been driven by severe weather, power supply shortfalls and unanticipated spikes in demand. Outage events are no longer limited to one off major storms. And as reliance on electricity continues to grow, consumers and businesses have demonstrated that they are less willing to accept the deteriorating level of power liability, and they're taking actions to improve their own resiliency. I'd now like provide some commentary on our residential energy technology products and solutions. While we're facing temporary headwinds for our residential clean energy offerings, our commitment to success in these markets has not changed. This strategically important area of our business gives us access to a number of highly attractive market opportunities that are supported by strong end demand and further reinforced by unprecedented levels of policy support. We expect this to combined serve the addressable market for residential solar MLPEs, storage, EV charging, home energy monitoring and management and grid services will grow at strong double digit CAGR through 2026, resulting in a domestic market opportunity of more than $10 billion. During the first quarter, shipments of power cell energy storage systems remained under pressure as we continue to rebuild and add to our distribution for these products, following the loss of a large customer that cease operations in the third quarter of last year. Additionally, we continue to make good progress on our SnapRS upgrade campaign in the quarter. And we remain committed to taking care of our customers and the channel partners that are participating in this program. In addition to our residential storage efforts, our energy monitoring and management capabilities remain well positioned as positive momentum and ecobee’s device sales, together with a number of product awards, that resulting in continued market share gains. And highlight the consumer appeal of our feature rich smart thermostat offerings. Ecobee’s already strong customer satisfaction scores have improved further since the 2022 release of our latest generation devices, validating ecobee’s expertise and user interface and user experience development. We're heavily leveraging that expertise in our single pane of glass initiative, which will act as the central hub of our residential energy ecosystem. It's also worth noting that customer interest in our grid services offerings remain strong with another quarter of robust sales growth off of a low prior year base. We’ve recently announced a strategic minority investment enrolling energy resources and EV load management software provider as part of our effort to be the leading solution to EV load management to utilities and consumers. We believe this innovative area of our business will help facilitate the transition to the next generation grid. And ongoing policy support remains a potential tailwind as regulators and policymakers increasingly recognize the value of flexible digital solutions to the challenges facing on evolving power grid. We continue to expect gross sales from residential energy technology products and services to deliver between $300 million and $350 million for the full year 2023. Operating expenses as a percentage of sales are expected to be elevated in 2023, as we continue to build a home energy technology foundation for growth, to position our combination of hardware and software solutions for long term success. With new leadership running this part of our business, our teams are focused on more deeply integrating the product and platform we've acquired over the past four years with an eye towards tightening our focus on the solutions, where we believe we can create the most value for the consumer as part of the residential energy ecosystem. With improved focus and execution, and by leveraging our core competencies around sales and marketing, lead generation distribution, customer support, and global sourcing and logistics, we believe we can create competitive advantages with our residential energy technology products and services that will become evident over time as we continue to develop the Smart Energy home in the future. Switching gears and I want to provide some commentary on our C&I products, which have experienced significant growth over the last few years, and once again outperformed our expectations in the quarter. Global C&I product sales grew 30% over the prior year to an all-time quarterly record. And backlog for these products also remained at record levels at the end of the quarter, as multiple megatrends support demand for backup power and mobile products around the world. Shipments for domestic C&I products grew in the first quarter highlighted by strength across all channels, including national rental equipment, industrial distributors, telecom and other direct customers for beyond standby applications. Shipments of C&I generators to our North American distributor channel grew significantly again in the first quarter. An order trends and channel backlog also increased at a strong rate. Quoting activity remains robust and close rates improve nicely on a year-over-year basis, highlighting our sustained market share gains and the ongoing strength and demand for backup power in this important channel. As a leading provider of backup power to the North American telecom market, shipments to national telecom customers also increased at a robust rate during the first quarter as compared to the prior to strong prior year comparison, as several of our larger national customers continue to deploy generators to harden their existing sites and build out their fifth generation 5g networks. While shipment in order patterns for certain customers in this channel are expected to be lumpy in the second half of the year, investment in telecom infrastructure remains a secular trend as global tower and network hub counts further expand, and the increasingly critical nature of wireless communications requires backup power for resiliency. We also experienced another quarter of tremendous growth for our national and independent rental equipment customers, as they continue to refresh and expand their fleets. This end market is supported by the secular trend of critical need for significant infrastructure investments that will require years to complete. And mobile power products and light towers will be necessary in these essential construction projects. Natural gas generators used in applications beyond traditional emergency standby projects also continue to see increased traction during the first quarter as shipments of these products once again grew at an exceptional rate. We believe we are in the very early innings of growth for this exciting new market opportunity as grid stability concerns and volatile energy markets are expected to further drive demand from these solutions. Additionally, the business models of our direct customers in this vertical are innovating the generator marketplace, by developing as-a-service offerings which dramatically reduces the need for the large initial capital outlays that have traditionally been required for businesses to add resiliency to their operations. Internationally, robust momentum continued as shipments increased 17% year over year during the first quarter, with 19% core sales growth when excluding the net impact of contributions from acquisitions, and the unfavorable impact of foreign currency. Core total sales growth was driven by strength across key regions, most notably in Europe, where power security for homes and businesses remains a top priority amid ongoing geopolitical and macroeconomic uncertainty. International segment EBITDA margins also increased meaningfully during the quarter, primarily due to favorable price cost dynamics, and improved operating leverage on higher sales volumes. Supplementing our international performance, we're also beginning to see long-term growth potential emerge in new and developing regions, such as India, where we're experiencing positive sales momentum for our backup power solutions. This rapidly growing market has unique characteristics for a developing country with the size of its population, broad electrical infrastructure coverage, and an increasing number of homes and businesses with direct natural gas connections. We are currently building out our full range of residential and C&I gas solutions to address this large market opportunity. Additionally, during the quarter, we acquired the remaining 20% minority ownership interest in Pramac, bringing our total ownership to 100%. Pramac is a leading designer and manufacturer of stationary mobile and portable generators, along with energy storage solutions sold through a broad distribution network across the world. And it has been a key driver of our successful international expansion, since we first acquired a majority interest in the company in early 2016. Through the combination of focused investment, and Pramac global presence, this has become an important strategic element of our international growth aspirations. As we've been experiencing on the residential side of our business, our global C&I product category is similarly in the very early innings of its own energy technology evolution, and we've made meaningful parts progress towards that evolution here in 2023. In addition to our advanced controls and connectivity solutions, beyond standby natural gas generators and mobile energy storage systems, we've now added stationary energy storage solutions for behind the meter applications, both domestically and internationally to our product portfolio. In February, we acquired REFU Storage Systems, a German based developer and supplier of energy storage hardware products, advanced software, and platform services for international, commercial, and industrial customers. We also recently announced our new series of Generac branded stationary energy storage systems for the North American C&I market, in partnership with a leading supplier of behind the meter storage solutions. These developments represent our initial foray into this rapidly growing market, and advancing our C&I storage capabilities will remain a key initiative for Generac in the coming years. The long-term opportunity for energy technology solutions within our C&I product categories is extremely robust. And I'm confident in our ability to leverage our existing positions of strength around the world to compete in these markets. In closing this morning, we believe our first quarter performance represents a trough in the current cycle, as we continue to focus on reducing home standby fuel inventory levels. And as we work to rebuild sales momentum for our power sell residential energy storage systems. That said, we're extremely pleased with the continued execution in our global C&I product categories that drove overall results ahead of our prior expectations. And we're encouraged by the progress we're making in addressing the near term challenges that are impacting our residential product categories. In addition, the robust level of power outage activity and resulting strength in home consultations for home standby generators so far here in 2023, provides incremental support for our expectations to return to year over year sales growth in the residential product category in the second half of the year. Importantly, we're maintaining our full year net sales and adjusted EBITDA margin guidance, as we execute on our near term initiatives, and position Generac for sustained long-term success in our mission to lead the evolution to more resilient, efficient and sustainable energy solutions. I'd now like to turn the call over to York, to provide additional details on first quarter results, and discuss our outlook for 2023. York?

Operator:

[Operator Instructions] First question will come from Tommy Moll Stephens Inc. Your line is open.

Aaron Jagdfeld:

Yes, thanks. Thanks, Tommy. We actually, were very encouraged by the sales lead volume that we saw -- as we said, in Q1, it was, in fact, it would have been a record Q1, if not for the copying, the last record Q1 was 2021, when we had Texas, the deep freeze, so if you take that out, Q1 would have been a record for consultations. Just for the baseline. Yeah. So I mean, it was it was pretty robust. And in fact, that carried through here in April as well. Close rates, interestingly enough, like, we've talked about this previous call. So we're still well off our pre pandemic, close rates, but those they have been recovering, they kind of bottomed beginning of last year, so about a year ago. So from a cost perspective, we're up nicely off those close rates from a year ago. As far as do we think will recover to pre pandemic levels by the end of this year, we've still got a ways to go, we continue to see progress. And we think that, a big part of that story, as we've mentioned previously, is just getting the lead times back down, which clearly isn't an issue anymore. So, the thing we'll watch, of course, with close rates is there’s a softening economy, potentially in the back half of the year, how does that impact close rates? You know, we are seeing as just as a side note there, we're seeing continued uptake in our financing options for homeowners. In fact, we had incredible growth on our financing program in Q1. And that's in spite of, you know, the residential category being down 46% financing was up dramatically in the quarter. So we do know that there are consumers out there that are looking at financing, as an option as a way to improve the affordability of these products, in spite of maybe their concerns around a slowdown in the economy. So, again, not giving specific guidance on the close rates, but we are continuing to see improvements there kind of sequentially, or at least over the prior year. And I don't think that we'll return quite to pre pandemic levels by this year. I don't think that that's not what our guide contemplates. So, maybe that's upside for us as we continue to recover there.

Michael Halloran :

Good morning, everyone. So, let's stick on that train of thought Aaron, because obviously there's a lot of concern and questions just around the sustainability of that home standby piece from an underlying demand perspective. And, we've certainly seen the positive or heard certainly heard the positive commentary on the IHC side. Would love to understand why the confidence level is so high that you can maintain that and also maybe put in historical perspective how you've tracked when you had kind of negative economy, but positive storms in the past, I know New York made a quick reference to it in the prepared remarks. But you know, just kind of laying out why you think things are going to be, from an underlying perspective, pretty stable, moving into the back half would be great.

Operator:

Thank you. One moment please for our next question. Our next question will come from Jeff Hammond of KeyBanc Capital Markets Inc. Your line is open.

Aaron Jagdfeld:

Yes. Thanks, Jeff. All good questions, I think on the field inventory, the way we describe, it was a meaningful decrease in the inventory numbers there. That was really the big thing to look at and we've mentioned this before the days of field inventory, right. So we mentioned, I think, in the third quarter, last year, we were about double where we thought we needed to be. That was kind of, and we made progress down to about 1.7 times, when we got to kind of the Q4 call here in February. Now we think that range is somewhere in the 1.4 to 1.5 times, kind of “normal”. There's some debate about what normal means. But we're looking at our history, in the categories, and we're making good progress. That's all in line, we also said it wasn't going to be a linear pull down here. Because of the seasonality, primarily the way Q1 works, just installs being normally seasonally lower in Q1, we just knew that it wasn't going to kind of linearly dropped from 1.7 to 1.35 to one times at the end of Q2. But we feel like we're progressing right where we want to be. And again, we're buoyed by the fact that we see the end market demand remaining very robust. So we feel like this is going to be, we're going to get to where we need to get to there, down the line. Now, I would just say the reason you kind of point out, why didn't why not take up kind of the guidance based on the outperformance in Q1. The outperformance primarily came from C&I. So our C&I business was crushing it, which is awesome, especially internationally Pramac team, we were able to acquire now we own 100% of that business, which is awesome. And they've been a significant part of our global expansion here as a company over the last seven years. But that said, one of the big kind of drivers, one of the verticals in there that we've always talked about is our telecom business. And we are seeing some lumpiness in kind of the back half of the year relative to some of our channel partners there, right, we serve all the major wireless telecom companies, as well as the co-locators in the marketplace. And a couple of those accounts for us, we've delivered a lot of products, and they've got to get that product installed now. So they're working through, they got --, so that maybe pulled some of that in is what it maybe looks like. But all indications, as we talked to them about their CapEx spending and kind of what they need to do to harden their networks going forward, as they think about the next generation technology or fifth generation 5g technologies. They're all -- this is a secular cycle right now for telecom, in terms of CapEx spending and building on networks. And so we think it's just, kind of just the lumpiness that we see from time to time. And that's really why we didn't take up the guide in the back half. It's really related to that. That's kind of a simple answer. There's some moving pieces underneath that. But that's, that's really it.

Christopher Glynn:

Thank you. Good morning, guys. I wanted to ask about the -- you mentioned the home consultations for HSP were up significantly in almost all the states. So I want you to dive into that a little bit. And then also clarify the expectation for residential growth in the second half. Does that explicitly include growth in 3Q? Or if not, are you biased in that respect to see least a bit of top line positive from resi in 3Q?

Operator:

Thank you. Our next question will come from Mark Strouse of JPMorgan. Your line is open.

York Ragen:

Yes, it's, at least for the first quarter it applied for the most across the board. On the resi side, and particularly home standby side, the last price increase that kicked in with June 1 of 2022. So we're still in the process of analyzing that price increase on the home standby side. And then on the C&I side, there were a number of price increases that came through here in the beginning of 2023. We had them in 2022. But there was another round in 2023 that should continue on so. So I'd say more of a price impact in the first half as you as we haven't analyzed the home standby side yet, but still yet some benefit in the back half on the C&I side.

Unidentified Analyst :

Hey, good morning. This is Tyler on for Brian. So I just want to kind of transition to the clean energy products. And what are you doing there to improve the distribution capabilities? And then a follow up with that, the $300 million to $350 million guide for the full year in clean -- resi, clean energy. Can you kind of give some direction to each of the products like ecobee, power cell and grid services and what their potential is for the full year?

Operator:

Our next question will come from Jerry Revich of Goldman Sachs. Your line is open.

York Ragen:

Yes. Jerry, this is York. I know we're contemplating that EBITDA margins get back to those low 20% range that we're used to by Q4, as we talked about. Specifically, we talked about at least first half, second half, that EBITDA margin should improve about 800 basis points sequentially, first half, second half with, I'd say, roughly, let's say, 3% of that 800 -- 300 of the 800 basis points just as a function of mix in that home standby as we normalize inventory and seasonally increase first half, second half. Home standby mix is going to improve dramatically relative to the first quarter and first half so you get about 3% improvement in margin just right there, first half, second half. We are anticipating about 2% improvement in just input costs with commodities, logistics, continued improvement there. We've got a number of cost reductions we're working on plant inefficiencies, its better absorption, again, sequentially first half, second half that will improve about 2% of that 800, first half, second half improvement. And then the remaining 3% is really just operating leverage on the much higher sales volumes on our -- leveraging that OpEx infrastructure. So that's really the bridge at least sequentially. Year-over-year, like I said, they'll probably be modest. Most of the pricing will have lapped on a year-over-year basis by Q4. So a lot of that is just more cost improvement and mix improvements year-over-year will drive that as well as -- that will drive most of the year-over-year improvement from Q4 last year to Q4 this year.

Joseph Osha:

Thanks very much. I wanted to return to the Residential Clean Energy business a little bit. Obviously, as you go through this reset. One of the questions, I think, that's come up is around the residential home architecture and the fact that you're advancing sort of 2 parallel inverter architectures at the same time, which drives a lot of complexity in the other parts of the system. So I'm wondering if you're able to maybe give us any clarity today or when we might have some clarity in terms of how you intend to move forward with those multiple architectures.

Operator:

Our next question will come from Kashy Harrison of Piper Sandler. Your line is open.

Aaron Jagdfeld:

It's a great question. We obviously, you would think that they might be impacted by that, but largely they're not. They pays by credit card, a lot of dealers are they like the points that they accumulate on their American Express and their different card programs. And so we tend to see credit card payments being kind of one big path to paying us. They also use our floor plan financing program very aggressively, and that's been a program that has been a very successful program for us. It allows the dealer to kind of derisk their ability to bring product in. We want to have them have some inventory level, and we have subsidized the cost out for 180 days. Exactly. They don't bear that cost. So it's really our cost for the first 180 days, they get free floor plan financing. So we kind of derisk that for them. So in terms of like their overall direct exposure, we haven't heard much in the way of them seeing any kind of compression. There is more of a project-based business and where they're probably going to see more challenges if housing were to slow down, right? And that's a real risk out there, of course, as we've talked. But in terms of like their projects flow, because they're paid kind of as they go, right, on a progress basis. So if that kind of progress flow or that project flow were to dry up, that's probably where they would feel more pain. But we haven't heard any or seen any evidence directly around that. That is our view.

George Gianarikas:

Hi, good morning. And thanks for taking my question. And believe it or not, I actually had a power outage during this call, and I'm not a Generac customer yet. So my question actually just to jump on the previous one with regards to that there's spasms that we're seeing in financial markets. How does that impact your C&I business? How much of it is project-related that we may see some sort of impact if this continues on projects related to renewables?

York Ragen:

And on the renewables side, we're not necessarily focused on utility scale or front-of-the-meter project. So any financing breakdowns with those projects wouldn't necessarily impact that.

Donovan Schafer:

Hi, guys. Thanks for taking the questions. So I had this thesis going into these results that I was thinking again following all the outage events that the geographic diversification of them in East Coast, West Coast, Canada, even Gulf Coast that could help drive down channel inventory like actually faster than you expected, kind of the logic was maybe there will be a pocket here or there where the labor -- the installation bottleneck would be weaker, and it's kind of like more roles of the dice, if you will, like probabilistically, you get more rolls, these different geographies you might find under the right characteristics. You're pretty clear in the call that the inventory drawdown was in line with your expectations, but also clear that, yes, in fact, based on your analysis, outage activity in aggregate was well above the historical average. So I'm figuring the disconnect there probably comes down to the installation bottleneck and that it is perhaps more uniform than I was thinking. But if you could just kind of like if you have the above-average activity in the first quarter, is it that continuing labor bottleneck that doesn't lead you to having more optimistic outlook for home standby back of generators going into the second or for basically the remainder of the year? If you get that since you're already assuming baseline average kind of your typical outlook, then if we already have some of this, is it just you don't -- there's not really an end in sight on the installation restriction or just kind of what's going on there? And then also just because these were geographically diverse, it'd be nice to just get an update on how they're unfolding because you probably have a clear signal, if you will, from your data. We've got a cluster of events, there's Hurricane Ian, the East Coast ice storms in Christmas, you talked about and you gave some interesting commentary there, the unique nature of it, the Midwest storms, there are the Quebec outages. Just any -- how are those unfolding? Have you seen the demand surge in -- from Hurricane Ian at this point and the installations are happening? I mean that was a long time ago at this point. So just kind of fleshing out that.

Operator:

Our next question will come from Praneeth Satish of Wells Fargo. Your line is open.

Aaron Jagdfeld:

Yes, absolutely. Great question. One of the great things we love about ecobee is the display is fantastic in that thing. In fact, with the doorbell cam, I have one in my house on a beta trial right now. If somebody pushes your doorbell, if you have -- if you're anywhere near your ecobee thermostat and you can have that thermostat anywhere in your house, you can have multiple thermostats. It actually displays the doorbell camera on the thermostat. It's cool. It's cool as hell, really. I mean, I got to be honest, it's like -- it is one of the more cool features of the ecobee device. It's one of the reasons why I think this is a really key point and I'll make it that you give me the opportunity to do that. We want to use it as the central hub for energy in the home, right? So we want to use it -- I mean, we're going to use it, obviously, for the doorbell cam. But the ability to as we just did, we integrated, if you have a Generac generator in your home and you have an ecobee thermostat, your ecobee thermostat will tell you if your generator -- it will show you on the screen, on the display. It will tell you any fault messages you may have. It will tell you when it's running in exercise mode. It will tell you when it's running during the power outage. It will show you the status of that generator. We're going to be integrating our tank utility, which is our LP tank monitoring device into that next. Then we're going to look at our water heater disconnect switches and integrate those next. Other energy devices like our storage device are on -- also on the docket to be integrated into the ecobee thermostat. Our premise here has been that people looked at us and said, well, why did you buy ecobee back in December of '21. You're going into HVAC thermostat, no, we need a hub in the home, right? Only less than 6% of homes have a home standby generator and even smaller percentage have storage solar and storage. But almost every home has HVAC, right, the nice ones anyway. And every home has a thermostat. So the opportunity, just the raw opportunity for us to enter the home with a device that's low cost and it has a tremendous amount of power inside of it. In fact, Stuart Lombard, who is the principal and the founder of that company would tell you that effectively, that's like your iPhone mounted on the wall in terms of the display quality, in terms of the processing power, the memory, they're fantastic, too. If you use that product and you use the app that is with the product, their -- the user experience is tremendous. Their user interface is intuitive, it's easy to use, and it's smart, right? Like the sensors understand where you are in the home, they can react in terms of your presence in the home, their ability to sense your presence, their ability to save you energy is well documented by installing one of these thermostats. So we just really like the product and we like the user experience. And we think that having it be the central part of our single-pane-of-glass strategy is incredibly important going forward.

Jordan Levy:

Just a quick one for me on the M&A side. I just wanted to get a sense of after closing some of these recent deals, what segments your appetite might be directed towards as we move through the year and how you view the current opportunity landscape for M&A?

Operator:

Our next question will come from [indiscernible] Credit Suisse. Your line is open.

Aaron Jagdfeld:

Yes. No, great question. And obviously, we watch -- we're watching with great interest kind of the EV penetration rates. Fundamentally, I do think that EVs, look, they're a large battery that for most people are going -- you're going to be charging at home, right? So you're going to have an EV charger in your garage or carport and you're going to want to plug that vehicle in, of course, to charge it. And as its sitting there charging, I think that the ability to control the rate of charge, the time of charge is going to be really critical. Now you can do both of those with a level two charger today and some level of integration with some home energy management type of system. By directional charging, of course, would indicate that you're going to be able to use that battery for some other purpose, either to export power to the grid or perhaps use it for resiliency purposes. I do think that at least in the medium term, the three- to five-year window, we don't see much of an impact on the EV and bidirectional charging opportunity on home standby generators. I think it's much, much longer term as EV pen rates become more ubiquitous and perhaps as homes go from having a single EV to maybe two EVs, and the reason for that, in my view, is fairly simple. I don't think that homeowners are going to be willing to trade resiliency for mobility. I just -- I think, flat out that you're going to want to have some level of stationary storage or perhaps backup power available at your home for outages -- for long-duration outages in particular, a generator is going to be the way to solve that. In fact, what we're seeing and what we may see near term and perhaps even long term, depending on how people view mobility and resiliency and how they feel about that, I think that generators actually could see some level of increased interest once you buy an EV because I think your mindset goes to, okay, if my power is out, right -- first of all, bidirectional charging by the way, is a -- it's a new technology. It is a somewhat unregulated space relative to the codes and standards around it. And there's also a fairly large open question as to whether the OEMs -- the auto OEMs, how much control will they give a third party with control of their basically their battery, right? And in terms of what does that mean for the warranty of that battery in terms of the charge cycles, the discharge cycles, charge rates, discharge rates. That is a fairly open question at this point. I do think it will get resolved over time. And so to that end, we're putting quite a bit of an effort towards EV charging beyond just the level 2 charger. We've got some organic efforts internally here with design teams that are looking at the space to understand how do we want to approach it beyond the level 2. I think that the first thing -- the first order of business for us is getting our own level 2 charging structure and infrastructure put together and then integrating that deeply into home energy management. So that what we can do there is to help the homeowner manage the charging of that vehicle. And that has benefit for not only the homeowner in terms of the cost of what it may talk -- what it may take to charge that vehicle, but also in terms of the local utility or grid operator because they are the ones who are going to struggle the most as people add EV charging capability to their homes, there's a pretty difficult upgrade cycle coming on the hard infrastructure. The lines, the poles, the transformers that serve those local neighborhoods where EV charging is being implemented. Those are very heavy draw loads. I mean, that's a pretty significant energy draw at the home. And in fact, in some cases, can double the home's electrical use just by adding an EV charger. So I think there's a lot to come on that. We're going to unpack that a little bit more when we get to the IR day in September, but great question and an area of great interest for us going forward.

Mike Harris:

We want to thank everyone for joining us this morning, and we look forward to discussing our second quarter 2023 earnings results with you in early August. Thank you, again, and goodbye.

Operator:

Good day, and thank you for standing by. And welcome to the Fourth Quarter Full Year 2022 Generac Holdings Inc. Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Mike Harris, Senior VP, Corporate Development and Investor Relations. Please go ahead.

Aaron Jagdfeld:

Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our fourth quarter results reflect continued strong momentum in our Commercial and Industrial product categories during the quarter, but softer residential product sales, resulted in consolidated net sales at the low end of our previous guidance range. Specifically, higher home standby field inventory levels continue to impact orders and shipments in the fourth quarter and clean energy product shipments were lower as we work to further improve the reliability of these products and expand our distribution capabilities. Year-over-year, overall net sales decreased 2% to $1.05 billion and core sales declined 7% during the quarter. Residential product sales decreased 19% from the prior year due to the previously mentioned home standby and clean energy products headwinds. C&I product sales increased 27% on a year-over-year basis with robust core sales growth across all channels domestically and all regions internationally. Adjusted EBITDA margins declined during the quarter as the unfavorable effect of sales mix, reduced operating leverage and the increase in recurring operating expenses from recent acquisitions were partially offset by favorable price cost dynamics. For the full year 2022, Generac achieved another year of record top line growth with total net sales increasing 22% over 2021, which marked our third consecutive year of double digit growth. While residential product shipments faced headwinds in the second half of 2022, the category still experienced strong year-over-year growth of approximately 19%. Additionally, sales of our C&I products have never been stronger, as global shipments grew 26% over the prior year, resulting in $1.26 billion in annual sales. We exited 2022 with record backlog for these products, setting our expectations for another strong year in 2023. In addition to record net sales, our international segment achieved all time highs and adjusted EBITDA and adjusted EBITDA margins for the year as we continue to benefit from increasing global demand for backup power and mobile products. Also, our strong liquidity position allowed us to opportunistically repurchase more than 2.7 million shares during the year. Before discussing fourth quarter results in more detail, I want to provide an update on the progress we made over the course of the year to advance our evolution into an energy technology solutions company and discuss the continued development of the powerful mega trends that are driving our business. Despite the softer second half of 2022 for our residential products, we continue to make important progress in building out our portfolio of energy technology related solutions during the year. Importantly, we began assembling a significantly deeper and more experienced leadership team focused on improving and advancing our clean energy product and distribution capabilities, while further integrating the multiple energy technology investments we've made in recent years. We also continue to develop and invest in numerous new technologies and capabilities, including taking a minority equity interest, investment in WATT fuel cell, acquiring Blue Pillar and launching our single pane of glass initiative. Blue Pillar's capabilities provide us with the foundation for connecting our growing portfolio of C&I focused energy technology solutions, while our single pane of glass initiative is focused on developing the end user interface or central hub of our smart home energy ecosystem and heavily leverages ecobee's platform development expertise. We also brought multiple new solutions to market during the year as we began shipping our second generation load control device called PWRmanager, launched a line of portable battery solutions called Portable Power Stations and announced new EV charging solutions for utilities and EV owners. Our grid services team also announced several additional project wins during 2022 and had a strong year across several key operating metrics. Additionally, the mega trends that drive the long term growth trajectory of our business became even more evident in 2022. Extreme weather and multiple high profile outage events further highlighted the poor reliability of the US power grid, while war and geopolitical instability in Europe forced consumers and businesses to evaluate the importance of energy security. The home is a sanctuary and aging in place trends that are helping drive demand for residential backup power solutions remain very compelling. A structural shift in consumer preferences and work habits in the US in recent years has further increased sensitivity to power outages with the percentage of individuals working from home tripling and home health referral volumes doubling since 2019. As the effects of climate change become increasingly evident, the policy backdrop for our energy technology solutions has never been more favorable. Most notably with the passage of the Inflation Reduction Act in 2022, providing additional conviction for us to maintain a long term focus with our investments in energy technology. Additionally, increased federal infrastructure spending and the ongoing upgrade of global telecom networks help support our future growth expectations for our C&I products as well. The massive changes taking place with our nation's power grid are yet another mega trend that continues to strengthen as growing demand for electricity is met with less reliable supply. According to the North American Electric Reliability Corporation, or NERC, approximately 25% of Americans are at high risk of resource adequacy shortfalls during normal seasonal peak conditions in the 2023 to 2027 period due to the growing supply demand imbalances across our power grid. With the electrification of everything trends accelerating and the growing penetration of EVs, coupled with an increasingly higher mix of supply from intermittent renewable power generation sources, we believe this megatrend will drive a significant focus on the need for power resiliency for years to come. NERC's high risk categorization comes before considering the notable increase in severe and volatile weather we've witnessed in recent years, which we believe only further magnifies the need for reliable decentralized energy technology solutions. Now discussing our fourth quarter results in more detail. Residential product sales declined at a double digit rate as compared to the prior year, primarily driven by lower home standby shipments in the quarter resulting from higher field inventory levels. However, end market conditions continued to be strong during the quarter. Baseline power outage activity in the US was above the long term average with winter storm Elliot and other larger localized outages providing yet another [Technical Difficulty] reminder of the fragility of our electrical infrastructure. The extreme temperatures over the holiday season created a surge in demand for power for residential heating and coincided with supply disruptions as the nation's largest grid operator saw nearly a quarter of its power plants fall offline, resulting in rolling blackouts. This event took place in an especially inconvenient and sensitive time for many households, further supporting the continued increase in consumer awareness of the growing need for backup power solutions. Home consultations or sales leads in the quarter remain strong, matching the record high for our fourth quarter period in the prior year. Additionally, home consultations for full year 2022 were more than 3 times 2019 levels. This strength has continued early in 2023 with home consultations growing again on a year-over-year basis and reaching record levels for the month of January following the holiday season outage activity. We remain focused on expanding our distribution network as we experienced sequential growth in our residential dealer base and ended the quarter with more than 8,700 dealer partners, a net increase of approximately 200 dealers from the third quarter. Activations, which are a proxy for installations, grew at a robust rate in the fourth quarter compared to the prior year, and also grew sequentially as a result of increased install bandwidth. In addition to this encouraging growth in activations and dealer count, we also experienced sequential improvement in close rates and dealer project lead times. Although, these two metrics are not yet back to normalize levels. The number of home standby generators and field inventory declined sequentially during the fourth quarter, and are down more than 20% from r peak levels, benefiting from reduced production rates and record activation levels in the quarter. Days of field inventory, which considers recent trends and activation rates, also declined sequentially during the fourth quarter. However, relative to historic seasonal patterns, days of field inventory are still well above normalized levels as of the end of 2022. We expect that field inventory levels will remain elevated through the first half of 2023, which will continue to weigh on orders and shipments of home standby generators during the first and second quarters. Improving the installation bandwidth for home standby generators is a key initiative for the company in 2023. We are focused on adding more dealers, providing support for dealer recruiting, training to improve installation efficiency and developing additional technical innovations to make it easier for contractors to install our products. Recent dealer count growth has been very encouraging as we added over 500 dealers in the second half of 2022. We also rolled out our dealer talent network to help channel partners recruit qualified labor and are actively engaging with trade groups, such as the independent electrical contractors to further drive awareness for the home standby generator category among contractors. Initiatives to help dealers to streamline the installation process are also progressing well, including the launch of a universal permitting package that allows dealers to pull the necessary project documentation for their specific location. In addition, we have further expanded our field training efforts and the sharing of installation best practices for dealers and non-dealer contractors. The combination of these actions is expected to result in meaningful improvement in activation rates as the year progresses. Consistent with the comments provided in our third quarter earnings call in early November, we expect home standby sales to decline for the full year 2023 due to significant weakness in first half shipments, resulting from elevated levels of field inventory with the first quarter expected to mark the trough for shipments during the current channel destocking process. We continue to anticipate more normalized fuel inventory levels in the second half of the year based on our current view of home consultations, activations and our production rates, along with the assumption of power outage activity inline with the long term baseline average. As we ramp home standby shipments sequentially into the second half of the year, we expect home standby sales to return to solid year-over-year growth in the third and fourth quarters, even when assuming no major outage events. Favorable end market demand metrics, significant growth in our dealer counts, low nationwide penetration in the mid single digits and strengthening mega trends reinforce our confidence in the long term growth trajectory for the home standby category and also support our near term expectations for a return to growth once the home standby market reaches more normalized field inventory levels. I'd now like to provide some commentary on our residential energy technology products and solutions, as sales were inline with the low end of our prior expectations during the fourth quarter, with continued softness in residential energy storage shipments offset by strong top line performances from ecobee and Generac Grid Services. Shipments of our PWRcell energy storage systems were again negatively impacted by the loss of a large customer that ceased operations in the third quarter and the overhang of the SnapRS quality related concerns. We are committed to supporting the dealers that are participating in our SnapRS warranty coverage upgrade program as well as ensuring that end customer systems are performing as intended. Channel partner response to these efforts has been favorable thus far, and we are working to build a larger and stronger network of installers and distributors, which remains a top priority for the company in 2023 as we position our residential clean energy product offering for long term success. We are investing heavily on further improving the quality and reliability of our clean energy products and view the residential storage market as a key strategic opportunity for Generac. Additionally, we are making good progress towards our next generation energy storage system and we will begin alpha testing of these products in the second quarter of this year with an anticipated launch to the market in 2024. I'd now like to provide a quick update on ecobee, which forms the core of our connected devices strategy within our residential energy ecosystem. ecobee sales continued to grow at a strong rate in the fourth quarter, despite aggressive promotional activity from competitors, which underscores the strong competitive positioning of ecobee's feature-rich solutions. In addition to their core smart thermostat product continuing to gain traction in the professional contractor channel, a number of larger utilities have been seeking out grid service partnerships with ecobee, further validating our differentiated offering. We also recently announced the integration of home standby monitoring capabilities into the ecobee platform, which allows homeowners to monitor their home standby generator and propane tank fuel levels and receive alerts directly on the ecobee platform. This marks an important first step forward in our single pane of glass initiative in developing the central user interface for our suite of residential products that will heavily leverage the ecobee platform and the development team. I also want to provide some commentary on our grid services team and their efforts as they closed out a strong year in 2022 with continued growth across key performance metrics, including connected megawatts, assets under management, number of customers and gigawatt hours of capacity delivered. The growing grid services sales pipeline is being driven by both new and existing customers as well as a wide range of connectability hardware, including the Blue Pillar acquisition, which will now provide our C&I products with connectivity capabilities to allow previously stranded C&I assets to be made available to grid services programs. In addition, grid services programs can also provide incremental economic support to the residential solar plus storage market as higher financing costs impact traditional consumer loan driven demand. Not only can these programs improve the economics for homeowners that own storage systems but we're also seeing increased opportunities to deploy grid services programs, utilizing utility and third party own systems. We believe our unique portfolio of hardware and software solutions remains a key competitive advantage within the grid services space. The long term market opportunities for residential energy storage, power conversion, energy monitoring and management services and grid services remains highly attractive and core to our strategic vision, and we will continue to target these markets and adjacent opportunities. To that end, we recently announced the launch of our new EV charger, which marks Generac's initial offering into this large and rapidly growing market. This product will be available later in 2023 through Generac’s omnichannel distribution network, including our residential dealer network, leading home improvement in hardware retailers and electrical wholesalers. We're excited to incorporate this product into our smart home energy ecosystem while continuing to pursue future EV charging innovations and capabilities. EV charging will become an increasingly important part of the energy ecosystem of the home. And as a leader in residential power, this product is a natural extension of Generac’s portfolio of energy technology solutions. Given these significant market opportunities, we continue to invest heavily in the people and processes involved in the development of these products and solutions. And this remains a key strategic area of focus for the company. We are encouraged by the progress of our new residential energy technology leadership team in integrating and improving the solutions we have acquired and developed in recent years. The investment level necessary to build a home energy technology foundation for growth will contribute to higher operating expenses as a percentage of sales for the company in 2023. But we anticipate strong returns on these investments well into the future as we position Generac as a leader in the deployment and integration of hardware and software solutions for home energy ecosystems. As a result of these initiatives and investments, we expect the combination of residential energy technology products and services to deliver gross sales between $300 million and $350 million for the full year 2023. We anticipate that these results will sequentially improve throughout the year, driven by strong growth from ecobee and grid services, alongside our expectations for continued improvement from our clean energy product and distribution efforts in the coming quarters. Switching gears, now I want to provide some commentary on a part of the business that has continued to outperform our expectations, as our C&I products experienced and outstanding quarter globally as sales grew by 27% as compared to the prior year, benefiting from very strong demand and higher production levels resulting from capacity expansion initiatives. Growth in shipments for domestic C&I products in the fourth quarter was highlighted by strength across all channels, including national rental equipment, telecom, industrial distributors and other strategic customers. We experienced continued strength in demand during the quarter as the backlog for our C&I products grew again sequentially, and ended the year at record levels, giving us excellent visibility into continued growth for the category in 2023. Shipments of C&I stationary generators through our North American distributor channel grew significantly again in the fourth quarter, and order trends indicate growth will continue in 2023 as backlog in the channel also increased again on a sequential basis. Quoting activity and closed rates remain elevated compared to the prior year levels, highlighting our sustained market share gains as well as the durability of overall demand trends for these products. Shipments to national telecom customers also increased at a robust rate during the fourth quarter as compared to the strong prior comparison, as several of our larger national customers continue to deploy generators to harden their existing sites and build out their fifth generation of 5G networks. Investment in telecom infrastructure remains one of the key megatrends that we expect to drive growth for our C&I products in the coming years, as global tower and network hub counts further expand and the increasingly critical nature of wireless communications requires backup power for resiliency. As the leading provider of backup power to the North American telecom market, we expect to benefit from this secular trend. We also experienced another quarter of tremendous growth with our international and independent rental equipment customers as they refresh and expand their fleets. We believe the demand environment for mobile products will remain robust in the quarters ahead, as evidenced by ordered growth outpacing shipment growth in the quarter and the megatrend around the critical need for infrastructure improvements continues to play out. Additionally, we're helping these customers advance their sustainability goals with solid demand for our newly introduced mobile energy storage systems, and as we delivered the first containerized hydrogen fuel cell unit to a national rental customer through our recently announced distribution agreement with EODev. Strong customer interest for natural gas generators used in applications beyond traditional emergency standby projects also continued in the quarter as shipments of these products grew at an exceptional rate. Order rates also remain strong with our quarter end backlog for these products up substantially both year-over-year and sequentially. We believe we are in the very early innings of growth for this exciting new market opportunity as grid stability concerns and volatile energy markets are expected to further drive demand for these innovative solutions. Internationally robust momentum continued as shipments increased 22% year-over-year during the fourth quarter with 28% core total sales growth when excluding the unfavorable impact of foreign currency. Core total sales growth was driven by strength across all regions, most notably in Europe and Latin America with intersegment sales again growing substantially in the quarter as our Generac Mexico facility continued to ramp production of telecom products for the North American market. International segment EBITDA margins also increased during the quarter, primarily due to improved operating leverage on the higher sales volumes. The European region has seen remarkably strong demand, most notably for C&I products and portable generators due to a heightened focus on energy independence and security. Power security concerns amid the war in Ukraine have remained and we are providing backup generators to the region through our European sales branches. Although geopolitical and macroeconomic conditions in the region remain volatile, driving less certain long term demand trends, end market awareness of the need for resiliency is undoubtedly increased across the continent. The subsequent effect of the war on Europe's energy complex has highlighted the need for reliable on site power resources for homes and businesses around the globe. We also recently announced the acquisition of REFU Storage Systems, a German developer and supplier of battery storage hardware products, advanced software and platform services for the commercial and industrial market. This acquisition represents our initial entrance into the large and rapidly growing C&I stationary energy storage market for behind the meter applications, which we view as a natural extension of our long history in the C&I backup power generation market. Given the continued momentum in the international segment, along with strong demand fundamentals and existing backlog across domestic C&I channels, we expect net sales growth for our global C&I products to be in the mid to high single digit range for 2023. In closing, this morning, we're encouraged by the initial progress and our action plans to address the near term challenges that have impacted our results over the past two quarters. We believe we have a line of sight to normalization of home standby field inventories as we rightsize our production and continue to expand our installation bandwidth. We have significantly strengthened our residential energy technology leadership team over the last six months and they are driving an increased focus on quality and innovation, while we further build out our product and distribution capabilities in this strategically important part of our business. Global interest in our C&I products and services has never been stronger, and is well positioned to continue growing in 2023. We remain confident in the long term strategic growth themes within our business, including the still significant penetration opportunity for home standby generators and the rapidly developing market for energy storage. The previously discussed megatrends that support these growth themes have never been more evident. Our refined focus on execution through our portfolio of backup power and energy technology solutions has uniquely positioned us to create value in the transition to the next generation grid. I'm extremely confident in our team's ability to continue developing innovative products and services as we execute on our mission to lead the evolution to more resilient, efficient and sustainable energy solutions. I'll now turn the call over to York to provide further details on the fourth quarter as well as full year 2022 results and our outlook for 2023. York?

Operator:

[Operator Instructions] And our first question comes from Tommy Moll from Stephens.

Aaron Jagdfeld:

Obviously, the field inventory destocking process that we're going through, there's a lot of metrics there that we have at our fingertips in terms of how much inventory is in the field, you know activation rates. You can look at them as we do on a seasonal basis, The comments, as you indicated, you were spot on, we said that from a days of field inventory standpoint, they improved sequentially from the fourth quarter, but still high. I think if you go back to our comments on the last call in November, we said we were about double. We thought field inventory levels were about double where they needed to be from a normal kind of, quote unquote, normal level. We're better than that today. So the raw numbers are, we're about 20% off the peak in terms of just raw units in field inventory, home standby units, which is great. And as that days of field inventory also coming down sequentially, the combination of those two things, reducing production rates, the activation rate was up nicely in the fourth quarter. So we continue to see installation building out. So all of those metrics are favorable. And point two, the destocking event that's going on. But as our prepared remarks indicated, still high relative to where they need to be normally. So it's not quite double. It's less than that, maybe, I don't know, 1.6 times, 1.7 times still the level in terms of just the raw numbers as we look at them, but coming down nicely. In terms of the second part of the question, there's a -- it's kind of a -- it's a multipart -- multipronged approach, if you will. The biggest of which, as we've indicated and I think you're latched on to as well, is that we have to increase the raw dealer count. And so to that end, we added over 500 dealers on a net basis in the second half of the year, which is the strongest second half of a year we've ever had in terms of new dealer ads at 8,700, we ended the year actually over 8,700 dealers and progressing very nicely there in terms of broadening our our reach, also focused on training. I think one of the things we mentioned with the pandemic over the last several years, we had very aggressive training -- face-to-face training programs. Pre-pandemic, we had to scale those back during the pandemic, we just weren't able to do that. And we're back to training now face-to-face with dealers, with contractors, and that is super helpful in terms of the engagement level with those partners. Another area is helping them find labor. One of the big things that we heard in the second half of last year was the labor constraints that our dealers have and our contractor partners have in being able to expand their installation capacity is just headcount, just people. And so we created something we call the dealer talent network and we've rolled that out here early in 2023. And we're getting good traction there in helping dealers find and hire and onboard the talent they need to increase their installation capacity. So all of those things together -- and then longer term, we have some technical solutions we're working on, obviously, trying to take labor out of the actual installation process is a big part of this as well. So all of those efforts, we think that certainly on the shorter term efforts like adding distribution, training and helping dealers find qualified headcount, we're making really good progress on those short term initiatives. And then longer term, on the innovation side, we see and have a number of really good kind of ideas around how we can continue to take labor out of the home standby installation process. So I think we're making good progress. We see the metrics reflecting that in a lower field inventory level, but we're still going to see that kind of exist here through the first half. And we own that. We know that's going to result in pressure on the first half of the year. And because of the margin profile of those products, in particular, as you heard York's remarks around the outlook, it's going to be kind of a tale of two halves. Seasonally, top line is going to be relatively similar, 44% being the first half, 56% being the back half. But I think profitability, because of the heavy mix shift, you're going to see that play out in that 800 basis point move from Q1 to Q4 in EBITDA margins that we’re -- in gross margin, that we're anticipating over the course of the year. But great question and obviously a central focus, not only for us but others as well.

Michael Halloran:

So just a follow up on that, Aaron. Maybe you can just talk about what your assumptions are for the underlying demand dynamics as you work through the back half of the year? In other words, it sounds like you think that the current strength that you're seeing in home consultations and some of those megatrends you mentioned. It sounds like you think that carries through the year into the back half of the year. Just some thoughts on what's underpinning that back half strength from an underlying demand perspective, kind of ignoring that inventory normalization side that you've talked about?

York Ragen:

And I know that there's a lot of discussion on hard landing, soft landing recession, whatever it may be. And I think to Aaron's point then as long as there's power outages, we've historically tended to decouple from that economic environment as long as it power outages. So that's -- put it back to full circle to what -- how Aaron started the answer to that question.

Jeff Hammond:

So just want to go through the -- one, just the bridge on the margins, first half to second half, and how you get there. And I guess on a full year basis, it seems like EBITDA margins are kind of flattish to slightly down. And just given the revenue decline and the mix change, given home standbys under more in pressure, just some of the moving pieces on how to kind of hold those margins flat?

Operator:

And our next question comes from Christopher Glynn from Oppenheimer. Christopher, is your line on mute, please unmute. And our next question comes from Mark Strouse from JPMorgan.

York Ragen:

So that energy technology business, which includes the Clean Energy, PWRcell energy storage business, our ecobee connected devices business and grid services business, that was around $300 million for the year. And I think in Aaron's prepared remarks, we expect that same energy technology business to be around $300 million to $350 million for 2023.

Operator:

And for our next question, we have Brian Drab with William Blair.

Aaron Jagdfeld:

We're really excited about this. We're the first generation product, I'll call it, that we're launching this year is more of a standard level two charger that we'll have in the market by later this year. We really want to get something in the hands of our distribution partners, in particular, our dealer partners who are starting to see more opportunities for EV charger implementation. The team is really focused -- longer term, we believe there's some innovation there. As you kind of indicate, the current architecture we have with our PWRcell system, the rebus architecture, as we refer to it, that we have, we think there's a great opportunity to do more with EV charging and really to separate ourselves from a technical standpoint longer term. That won't be the initial product. But the initial product is going to, again, get us in the space. We do think there's some opportunities around the initial product to help homeowners manage the different loads in their homes so that they can maybe avoid a costly upgrade of their electrical system. One of the things that many homeowners are confronting as they look at an EV charger, look at buying an EV is it's not just that they have to install the charger, which can cost $1,000, $1,500, but they also have to oftentimes upgrade their electrical system, because their panel is either deficient in the amount of power that it can supply or perhaps it's not up to code. So in fact, some of the installation partners are telling us that 60% of the time when they're installing a charger, they have to do some major electrical work around upgrading the panel. We think there's an opportunity with some of our PWRmanager technology to help homeowners manage some of the heavier loads and avoid some of those more expensive panel upgrades and electrical upgrades. So that's going to be part of our value proposition around EV charging initially here. And then longer term, we think there's some pretty exciting things perhaps around bidirectional charging. As that market matures, we think we can really add some value there for homeowners. In particular, when you think of the EV charger in the context of one component in the broader home energy ecosystem, we think that that's going to be at the very large load for the home and being able to control that load, both from an efficiency standpoint as well as a cost standpoint, it's going to be super critical to how homes manage their overall energy generation, their storage and all of their resiliency efforts as well longer term.

Jerry Revich:

Aaron, I'm wondering if you could just expand on the comments regarding 20% decline in field inventory. So in the 10-Q, you folks disclosed $220 million of dealer financing guarantees on inventories. So is that 20% applied to that $220 million? In other words, are you under shipping end demand by $40 million in the fourth quarter, or is that a subset of the overall dealer inventory picture that you look at?

Aaron Jagdfeld:

Field inventory is across all channels, right…

Aaron Jagdfeld:

e-commerce partners…

Operator:

And our next question comes from Joseph Osha from Guggenheim.

York Ragen:

Well, you definitely would need -- you will definitely see a sequential -- a larger than normal sequential increase from Q2 to Q3 in home standby, just because you won't have the field inventory overhang. And so that's an artificial reduction in the first half…

York Ragen:

Yes, you had normal seasonality…

York Ragen:

You would expect to see a sizable increase in home standby if that's what you're interpreting from our comments, yes.

Donovan Schafer:

I'd like to take a moment and just ask something a bit kind of maybe a higher level or not as maybe a near term quarter to quarter issue. But in the last couple of years with how much -- it kind of feels like the home standby market itself has changed just with how much growth there's been with the COVID demand and everything. I'm wondering if you can give us an update on kind of the competitive landscape there. Of course, rising tide lifts all boats, so everyone can be doing well. But for a long time, you've talked about having the 75% market share. I'm curious if you still -- if your sense is still that, that's kind of where you are today, about 75% market share with home standby or if there are there any changes there, is that is incrementally moving higher or lower even while everything rises? Or if you don't have that in particular, are you seeing competitors make any move saying, hey, this is getting to be a really big market, you purchase and own your own copper winding equipment because of the scale that you have, but if the whole market is growing, are you aware of like competitors making moves like that, buying their own copper lining equipment? Anything like that kind of just higher level update on the competitive dynamics in the home standby market.

Operator:

And our next question comes from Maheep Mandloi from Credit Suisse.

Aaron Jagdfeld:

So I think I'll deal with it. From a share perspective, we don't break down the channel share. But our dealer channel is our biggest channel, it's a really important channel. Obviously, they do -- obviously, the lion's share of installations in the network that's not restricted just to dealers. I mean, if you're an electrical contractor, you can do installations as well and you have access to the product through an electrical wholesale channel, if you want to buy, but maybe you don't want to commit to the level that you need to commit to, to be a dealer, right, to carry inventory, to supply service and to do the work there to be a dealer. It's a different level. Our e-commerce partners are also an important channel, though, and have been for some time. It's a great way for homeowners who -- if they find they want to project manage this on their own, right, hire their own electrical contractor or plumber to do the work, there might be a way for them to save a few dollars that way, but it's a little more work, right? A dealer provides a turnkey solution for most homeowners. And what we're finding is as the category matures, dealer share has grown faster than other channel share, because more people who get into the category really want a turnkey solution. So dealers will pull the permit, they'll do all the work that's needed to make that a seamless project for the homeowner. As far as pricing, your question on pricing, really, all we've built into the guide this year, and I think we've called this out, that's a higher level of promotion, as you would expect, as the category starts to normalize in terms to get to that new and higher level, baseline level. We would expect a higher level of promotion. There's been very little in the way of promotion over the last several years. So when you think about price on a net basis, I would say there's some of that net price built in, there's probably less price this year, a lower price this year on a net basis than prior year simply because of increased discounts.

Operator:

And our next question comes from Kashy Harrison from Piper Sandler.

Aaron Jagdfeld:

The C&I business, we said in the prepared remarks, but it continues to outperform our expectations. They had a fantastic Q4. And so the durability of the demand, that is a lead time business, right, I think we've talked about this in the past. Our residential business, in particular, the home standby business has not traditionally been a backlog business or a lead time business, even though it got to that position through the outsized demand that was happening over the last several years. But C&I has always been kind of a business, you look at book-to-bill, and we see record levels of backlog in that business as we exit 2022. And that's both domestically as well as internationally. And so that gives us confidence and, frankly, really good visibility into the year here. I would say that within the C&I business, there's a couple of big pieces of that, though, that where maybe visibility is less so and maybe kind of leads to why we're saying mid to high single-digit growth for the year. The growth cycles for telecom and for our mobile equipment, which are generally sold through the larger national rental account customers can be a bit lumpy from time to time. They can turn the CapEx spending on and off quite quickly. And so we have some visibility based on forecasts, you can listen to -- as we do when we dialog with our national rental account customers, we listen to their guides on CapEx spending for the upcoming year. And they're all, by enlarge, kind of forecasting similar levels to last year, if not greater levels based on the company. And our telecom customers are also telling us they're continuing to build out their networks, harden their networks, they're focused on building out 5G. But look, we've been down this road before and we're also -- we're cognizant of the fact that things can happen and they can turn the CapEx spending off quickly. So I think we're positioning a bit to say we have less visibility around telecom and national rental accounts versus some of our distributor business, both kind of internationally and domestically here, where we have very good backlog and very good visibility, and put all that together and we also have some tougher comps in the second half of the year. Q4 was really, really heavy. And so kind of coming up against that tougher comp in the second half of the year, we're just -- that kind of manifests itself, I think, in a lower growth rate. So I think you put all that together, I think kind of mid to high single digit growth still feels kind of appropriate right now at this kind of stage of the cycle, but we're watching it.

Praneeth Satish:

I wanted to go back to HSB and the guidance for the large increase in the second half. I guess I'm just wondering how much improvement in installation capacity would you need to see over the course of the year to achieve that growth? And could you get there based on the current pace of installation capacity growth over the last few quarters, or would you need to kind of see a more pronounced growth in installation capacity to support your revenue guidance for the second half?

Operator:

And our next question comes from George Gianarikas from Canaccord Genuity.

York Ragen:

Just even thinking about our Q4 guide, so for Q4 2023, we're guiding to get back to those low 20% range, at least for that seasonal time period. So when you think about '24 and '25, we think we're well on our way to getting back to those levels on a full year basis. And I think with some continued growth and continued leverage, in particular, on the energy technology side, where we'll continue to grow that business and go from investment mode to -- and start-up mode to growth mode and profitability mode, that will definitely help improve the overall company's profitability in '24 and '25.

Operator:

And our next question comes from Henry Roberts from Truist Securities.

Aaron Jagdfeld:

That PWRcell business is exactly what I was talking about in the previous question. And we've got -- basically, that's going to sequentially improve throughout the year. That's kind of how we're kind of viewing our expectations for the year. We're coming off of a pretty low base just in terms of where we're at because of the loss of that major customer in the third quarter last year. We've got to rebuild and build a stronger distribution network for those products and we've got to recover confidence from the market in general in those products. We're having those conversations. We're making the right improvements to the product and have been making that over the back half of this year. Now we've got to get back to selling. We've got to get back to engaging with the channel and building out and finding new distribution partners to work with on that. I think what's really exciting about that and not trying to turn it into a 2024 story. But as I mentioned in the prepared remarks, we have our next generation of our storage device that is going to alpha testing here. We'll start shipping that in Q2, and we'll hopefully expand that to beta testing throughout the back half of this year. But I've seen some prototypes of it, and our team, we've got -- again, we've got a very different technical team that's working on that product today than what was working on the original kind of what we refer to as our R1 product, the acquired product from Pika Energy, which we've worked to improve and harden. But we're looking forward to the next-generation device. And we're very excited about what that device is going to be able to do in the market. I don't want to kind of ruin the surprise for everybody at this point. But I think as we pace throughout here, throughout 2023, we'll be able to give you some more commentary around how it's going. We're going to do a lot of extended field testing, obviously, in that product to make sure it's ready for prime time when we get to it next year. But the team is very encouraged. And again, I think it fits well with my previous comments on how important we see residential energy storage being for the future. It's an incredibly important product category, especially in light of things like NEM 3.0 in California, really to make the economics work for solar in California today, you got to add a storage device. And frankly, homeowners want that anyway, because they want the resiliency, they want the ability to improve the payback on that solar investment and they're going to need storage. And so we're very focused on that. We're very focused on what the supply chain changes are going to need to be around not only the batteries, the packs and the other components here as the Inflation Reduction Act really kind of starts to take hold and you get these production tax credit opportunities for domestic manufacturing or North American manufacturing, as that becomes clearer, we'll start to also really have that reflected in our supply chain for those products. So there's a lot of work to be done there. I think it maybe goes hand-in-hand with my comments a minute ago around the investment level needed to be successful here, even though PWRcell itself we've got recovery to do there. And I think we're going to be okay as we go out throughout this year. We're still investing heavily in next generation products and where we're going for the future.

Mike Harris:

We want to thank everyone for joining us this morning. We look forward to discussing our first quarter 2023 earnings results with you in early May. Thank you again, and goodbye.

Operator:

Good day, and thank you for standing by. Welcome to the Generac Third Quarter 2022 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Mike Harris, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.

Aaron Jagdfeld:

Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our third quarter was in line with the preliminary results we announced on October 19. Momentum in the commercial and industrial product category remains strong. The residential product sales while still growing compared with the prior year were weaker than expected in the quarter driven by lower shipments of home standby generators, and clean energy products relative to our prior expectations. Year-over-year, overall net sales increased 15% to $1.09 billion, primarily driven by core sales growth of 10%, which excludes the impact of acquisitions and foreign currency. Overall residential product sales grew 9% during the quarter led by sales of home standby generators and the impact from recent acquisitions, partially offset by lower shipments of PWRcell energy storage systems. C&I product sales increased 20% led by growth across all channels domestically, strength in the European region, and the contribution from recent acquisitions. Now discussing our third quarter results in more detail, home standby generator sales grew at a mid-teens rate over the prior year. Baseline power outage activity in the U.S. during the quarter remained above the long-term baseline average and Hurricane Ian, which occurred in the last week of the quarter drove total power outage activity well above the long-term average. Home consultations or sales leads were lower in the quarter when compared to the prior year, which included Hurricane Ida. However, the third quarter of 2022 was tied for the second highest total for any given quarter since we began tracking the metrics in 2013 and we experienced to return to year-over-year growth in the month of October resulting from Hurricane Ian. We continue to focus on expanding our distribution network as we experience sequential growth in our residential dealer base and ended the quarter with nearly 8,500 dealer partners, a net increase of approximately 300 dealers sequentially. Activations, which are a proxy for installs, continued to grow in the third quarter compared to the prior year. However, as we mentioned in our preliminary announcement, installation capacity for home standby generators lagged our production output. The ability of installing contractors to fully service the demand for backup power from homeowners continues to be constrained by labor availability, permitting in utility-related delays, and shortages in certain materials needed to complete an installation. Furthermore, growth in our dealer base was constrained in prior quarters by our extended production lead times. All of this resulted in elevated levels of field inventory and lower-than expected orders from our channel partners, despite the continued strength in end-customer demand. Importantly, to address these activation challenges, we are working on a number of specific initiatives to increase home standby installation bandwidth such as providing resources to help existing dealers to expand their labor forces and additional installation training locally for non-dealer contractors. We are working to streamline home standby projects by creating universal permitting packages and replicating past successes in simplifying approval processes from certain local utilities. Other efficiency-related initiatives include dealer scheduling and quotation refinement to enhance the top of the sales funnel and optimize the allocation in sales leads within the dealer channel to favor those dealers that have capacity to install more generators. Importantly, we have also intensified efforts to further expand our overall dealer count and we expect another strong quarter of sequential growth in the fourth quarter. Our dealer count growth initiatives have recently benefited from our shorter production lead times, which have now mostly returned to normal levels as we ramped our production output of home standby generators in prior quarters. Although installation capacity constraints have resulted in lower orders from our channel partners, it is important to reiterate that underlying demand and market fundamentals of the home standby category remains strong that supported by meaningfully sequential improvements in a number of key dealer-related metrics during the third quarter. In-home consultations grew, close rates continue to rebound and while still elevated the time between contract signing and installation declined meaningfully as compared to the second quarter. Dealer productivity, as measured by activations per day per dealer improved to an all time high during the third quarter. In addition, our dealer survey data suggests approximately half of all the field inventory is allocated to an active customer contract highlighting the need to further increase the pace of installs to close the gap between strong end-customer demand and installation capacity. While the previously mentioned sequential improvements provide evidence that our channel partners are beginning to make progress in working through their elevated backlogs and field inventory, we expect home standby order headwinds to persist through the first half of 2023, as field inventory levels normalize. Even when assuming no major outage events, in the second half of 2023, we expect significant sequential sales growth from the first half of the year and only a modest decline in sales on a year-over-year basis as we maintain a new and higher baseline level of demand. Over the last 30 years, the home standby category has grown in a step function pattern as penetration rates have expanded rapidly for several years at a time driven by notable major power outage events followed by periods of flatter growth as demand normalizes. With each successive growth period comes increased awareness around home standby generators and increased distribution for these products, both which have been critical in helping the category reach new and higher levels of baseline demand. The latest growth steps that the product category has experienced was underpinned by an increase in power outage activity over the past several years with four of the top 10 major outage events since 2010 having occurred in just the last two years alone. This growth can be evidenced through a number of key market metrics in comparing the first three quarters of 2022 to the comparable period of 2019 as activations per day more than doubled, home consultations more than tripled and our dealer count increased by nearly 40% from 6,200 to 8,500. The approximate mid-teens compounded annual growth rate in the category over the past several decades can be tied to the increase in power outages over that time as the nation’s electrical grid has struggled to reliably supply power to homeowners and businesses. The ageing and underinvested grid infrastructure has become more vulnerable to the increasing severity of high impact weather-related events such as hurricanes, heat waves, ice storms and polar vortexes. Additionally, new megatrends have emerged that we believe will drive the next step of growth in the category. Grid resiliency concerns have been increasing as decarbonization trends accelerate causing a widening gap between supply and demand leaving many utilities and grid operators scrambling to avoid rolling blackouts over the past several years and we believe little has been done to rectify this situation. We also believe the home essentially where megatrend will persist as the shift to remote or hybrid work remains intact. The electrification of homes continues to grow and demographic trends are driving increased levels of aging in place. With the nationwide penetration rates still in the mid-single-digit range, and these megatrends firmly intact, we are confident that the long-term growth trajectory for the home standby category remains significant. I’d now like to discuss our residential clean energy products as shipments of PWRcell energy storage systems in the third quarter were negatively impacted by the significant liquidity challenges of a large customer that seized operations and subsequently filed for bankruptcy. Additionally, during the quarter, we continued to address certain warranty-related matters for the upgrade of a components within our PWRcell energy storage system. As part of this effort, we have engaged a number of third-party service companies to assist with the completion of these upgrades and these efforts are well underway. As a result of these items, we recorded a $55 million charge in the quarter, comprised of an $18 million bad debt reserve and a $37 million warranty charge. The challenges we experienced in our clean energy business from the third quarter were very disappointing, but we believe that the solar-plus energy storage market continues to represent an important strategic opportunity for Generac longer term. However, this quarter's results have demonstrated the need for us to further expand our distribution by focusing our efforts on partnering with high-quality, reputable sales and installation companies for these products. Importantly, we are committed to supporting the dealers that are participating in our warranty coverage upgrade program as they play a vital role in restoring our competitive in the residential clean energy space. In addition, we continue to broaden our product offering and bring new innovations to this market as we announced an update to the PWRcell energy storage system during the quarter that enables AC-coupled battery storage, as well as AC generator integration. Work also continues on our PV microinverter product called the PWRmicro, as our beta testing began late in the second quarter and will continue through the balance of this year. We anticipate a phased commercial roll out beginning in the first half of 2023 and a full commercial launch targeted for the second half of the year. I'd now like to provide a quick update on our ecobee acquisition, which we completed last December. During the initial period of our ownership, we have been focused on developing cross-selling opportunities for ecobee's hardware solutions through Generac's distribution partners and have seen positive indications of demand for smart thermostats alongside other clean energy products. Synergies between ecobee and Generac's grid services teams continues to be validated and we are identifying higher potential value creation for ecobee’s devices and demand response programs amid ongoing concerns around grid stability and rising energy prices. We have also begun leveraging the talented ecobee team to help accelerate our Connected Devices strategy, which is core to the development of our residential energy ecosystem that will ultimately be accessed and controlled by a single pane of glass user interface. I also want to provide some additional color on the efforts of our grid services team as they continue to execute on a growing and diversified sales pipeline. We have further expanded our efforts to extract synergies across our commercial teams as they work to offer an increasing mix of Generac hardware alongside our Concerto grid services software platform. Our comprehensive suite of solutions aimed at distributed energy resource management-related programs is unmatched and is proving to be a competitive differentiator for our grid services team as the number of devices and megawatts of capacity connected to the Concerto platform continues to grow. We announced a number of program wins since our second quarter call, including Software-as-a-Service contracts with Dominion Energy and U.K.-based Pearlstone Energy, as well as a performance contract with Arizona Public Service, which demonstrates Generac's unique ability to deliver end-to-end solutions in grid services programs. The long-term market opportunities for residential energy storage, microinverters, monitoring and management devices and grid services solutions remains highly attractive and core to our strategic vision. However the loss of a major customer during the quarter, along with the specific warranty-related issue, has impacted near-term demand and our outlook for the full year 2022. We now expect the combination of clean energy technology products and services to deliver sales between $300 million to $330 million for the full year 2022, as compared to our previous guidance of approximately $500 million. Our continued investment in the people and processes involved in the development of these products remains a key focal area for the company as we work to further broaden our product offering, while also improving the quality and performance of the technologies we've acquired and developed over the last three years. With that in mind, we're building a talented and focused clean energy noise management team beginning with the addition of Norm Tap in August as our new President of this organization, along with the new Chief Technology Officer, Senior Vice President of Finance, and a Senior Vice President of Policy. Norm and his team bring decades of industry leadership experience, as well as robust technical expertise that will help drive Generac's integrated clean energy technology solutions forward. Additionally, the policy backdrop for this market has never been more favorable with the Inflation Reduction Act providing the necessary visibility for long-term value-creating investments. We will continue to build out our energy technology leadership team and our suite of products and solutions as we expect to play an important role in the transition to a cleaner, more sustainable and more reliable electric grid. As a result of these investments and the strong outlook for this market, we expect clean energy technology sales to return to strong growth for the full year 2023 with sequentially improving results throughout the year. Our C&I products continue to perform exceptionally well in the quarter, as global C&I net sales increased 20% on an as-reported basis and 23% on a core sales basis, which excludes the impact from acquisitions and foreign currency as compared to the prior year. Both in-shipments for domestic C&I products in the third quarter was led by strength across national rental equipment, telecom and industrial distributor customers. We experienced continued strength in demand during the quarter as backlog for our C&I products remained at record levels and expanded further in the month of October, giving us excellent visibility that solid growth will continue in the category well into 2023. Shipments of C&I stationary generators through our North American distributor channel grew significantly again in the third quarter and order trends indicate this momentum will continue in the quarters ahead as backlog in the channel increased on a sequential basis. Quoting activity and close rates remain elevated, compared to prior year levels, highlighting our market share gains, as well as the durability of demand trends for backup power for C&I applications. Shipments to national telecom customers also increased again during the third quarter as compared to the prior year, as several of our larger national customers continue to invest in hardening their existing sites and the build-out of their fifth generation or 5G networks. These networks are increasingly considered as part of the nation's critical infrastructure and require backup power for resiliency. Upgrades to telecom infrastructure remain one of the key megatrends that we expect to drive growth for our business in the coming years as global power and network hub counts continue to expand. We also experienced another quarter of substantial growth with our national and independent rental equipment customers as they continued to invest in equipment to refresh and expand their fleets. We anticipate the demand environment for mobile products will remain robust in the quarters ahead as the megatrend around the critical need for infrastructure improvements continues to play out. Strong customer interest for our natural gas generators used in applications beyond traditional emergency standby projects also continued in the quarter with sales of these products growing at an exceptional rate. We believe we are in the very early innings of growth for this exciting new market opportunity, as grid stability concerns and volatile energy markets are expected to further drive demand for these innovative solutions. We also took a significant step forward in our C&I generator connectivity efforts shortly after quarter end with the acquisition of Blue Pillar, an industrial Internet of Things platform developer that enables distributed energy generation monitoring and control. Blue Pillar's connectivity solutions can make previously stranded C&I backup generators available for use in grid services programs by connection to the Concerto software platform and will provide a foundation for our longer-term vision of creating a single user interface for a suite of connected C&I assets. Our International segment continued to experience very strong momentum, as total sales increased 14% year-over-year during the third quarter with 22% core total sales growth when excluding the benefit of acquisitions and the unfavorable impact of foreign currency. Core total sales growth was driven by strength across all regions, most notably in Europe and Latin America with intersegment sales also growing substantially in the quarter as our Generac Mexico facility further ramps production of telecom products for the North American market. The European region has seen remarkably strong demand across product lines, most notably in C&I and portable generators due to a heightened focus on energy independence and security. Concerns over power security amid the conflict in Ukraine have continued to rise and we are providing backup generators to the region through our European sales branches. Longer-term demand trends are less certain, however, as geopolitical and macroeconomic conditions in the region remain volatile, but end market awareness of the need for resiliency has increased across the continent in recent quarters. The subsequent effect of the war on Europe's energy complex has highlighted the dependence on continuous power sources for homes and businesses around the globe. Looking into 2023 for our global C&I products, given the strong demand fundamentals and existing backlog, our preliminary view anticipates continued strong year-over-year growth throughout the entire year. In closing, this morning, we were disappointed that our third quarter results were below our prior expectations. But we believe we have action plans in place to address the underlying challenges in the business. New clean energy technology leadership has brought an increased emphasis on quality and innovation, and we remain confident in the long-term growth opportunity for this strategic area of our business. Important initiatives to help ease home standby installation bottlenecks are well underway. And as the home standby market normalizes, we are confident that the new and higher baseline of end demand for the product category will become clearer. Hurricane Ian is the latest example of increasingly severe and more volatile weather patterns, and we believe the power grid's growing supply and demand imbalance is far from resolved, as we add intermittent renewable generation sources, while simultaneously pursuing the electrification of our homes, our businesses and our transportation. The secular growth themes and megatrends supporting the company's Powering a Smarter World enterprise strategy remain firmly intact, and as reliance on electricity around the world grows further, we will continue to invest in innovative products and solutions to lead the evolution to the next generation grid. I now want to turn the call over to York to provide further details on our third quarter 2022 results, our outlook for the year and our preliminary views on 2023. York?

Operator:

[Operator Instructions] And our first question comes from Michael Halloran with Baird. Your line is now open.

Aaron Jagdfeld :

Very good morning, Mike.

Aaron Jagdfeld :

Yeah, Mike, this is Aaron. Yeah, it's a great question and one that obviously not only caught us by surprise, but even our channel partners. I think we hit kind of our peak output levels with home standby. We've been working very hard over the last couple of years to – we've quadrupled the output and we really – we hit our stride as we predicted we would kind of as we exited the second quarter and began the third quarter. And so we’re producing at a really high rate. And we thought that was really important because we wanted to bring our lead times down, because we knew that that was having a negative impact on close rates, it's having a negative impact on our ability to sign new channel partners. So we really – we're working hard to do that and so we kind of open the floodgates on shipping to get all that product out in the market. And what we started to see at the end of the second quarter, and we mentioned it, as you said on the call, was that our installation, our activation rate, which is our proxy for installations, it was up year-over-year, but it wasn't increasing at the same rate commensurate with our output increase. And so we could see field inventory building. And we had been talking to our channel partners for several quarters about this coming. And we were trying to get them prepared for that, helping them hire people. We had a number of programs actually in place to get ahead of this, but in the end, it's just – that we have 8,500 channel partners, dealers and then obviously, a lot of non-dealer contractors who install these products. And it's a ton of one-off conversations, and we just weren't able to change that inflection point on the installation rate to the degree we thought we could. So the flaw in the model, the simple answer is, the flaw in the model here was that we modeled unconstrained installation bandwidth and that actually was not how it played out. We had never had that happen before, by the way. I've seen probably six of these cycles in the past, and successively as we kind of hit our peak rate with new output levels, we had never seen the installation bandwidth be a barrier. So that was the problem. And it, unfortunately, stacked up really quick when you're shipping at those rates and only installing at kind of marginally higher rates. So the field inventory started to stack up, and they physically started to run out of room, run out of credit. And so what we saw is we saw cancellations and deferrals on orders from those home standby dealers and other channel partners during the quarter, and that accelerated through the quarter here in Q3. And it became very clear very quickly and again, that's why we did the prerelease because as soon as we put all this together, we can see what happened a couple of weeks ago. It's like, okay, this is information we want to get to folks so they understand it. And we've redoubled our efforts, tripled our efforts on what we can do to increase installation bandwidth. So anyway, that's kind of answering your first question. That's the issue in a nutshell if you will, for home standby.

Aaron Jagdfeld :

Yeah, I think probably the best way to maybe get your head around that is we believe that currently today, field inventory levels are about double where they should be. And so that's the bad news, right? That's the additional output that we’ve put into the market ahead of the installation capacity increasing to the right levels. We are modeling that installation capacity is going to increase next year. The challenge, of course, is that just seasonally, we're coming into – as we turn the page here and get into Q1 and Q2, we normally run into a seasonally low period of installations, because parts of the country like the Midwest and the Northeast where installations are much harder to do because of the cold weather because of winter. So unfortunately, even though we are targeting the installations are going to improve year-over-year, we have this seasonal challenge we've got to deal with. It's just nature. We can't really, that's a hard one to fix. And so it won't increase necessarily as quickly as we needed to in the first half. Now the good news is, when we pull our dealers, half of that field inventory that's out there today is spoken for, meaning it's got a customer contract against it. A customer has got a deposit on it. And again, it's indicative of the installation challenge, because we're now back to what we said in the prepared remarks is mostly normal lead times. We still have backlog. We have a couple of models - we're still out there, some liquid cool products, things like that. So that's supportive of where we're going here in Q4. But what ends up happening is that we have these mostly normal lead times for us to our channel partner, but if you are a homeowner and you call and you try and get a product, you still are being quoted longer lead times, because of these constraints, whether they’d be people constraints or permitting constraints or component constraints, gas meter upgrades, we've – there are localized issues all over the country where some of our channel partners are bumping up against just delays. And so they're working through that and as those ease, that will help. But we think that it's likely going to take the first half of next year to get through this and that's going to put pressure on the incoming order rate for home standby through the first half of next year and so that's really the challenge. We think that, again, in our prepared remarks, we said by the second half of the year, we're back to growing again in the category and really only down modestly for the year in total for the category. So anyway, so that's – it’s I think when you put it all together, we feel pretty good about longer term that the end market is supportive.

Aaron Jagdfeld :

Right. Return to normal seasonality, return to growth in the second half.

Aaron Jagdfeld :

And then again, just the first half is going to be down considerably, second half will grow, still down kind of moderately for the category, only modestly for the company overall. That's kind of our overall guide for next year, but just to clarify that.

Aaron Jagdfeld :

Yes, thanks, Mike.

Jeffrey Hammond :

Hey, good morning, guys.

Aaron Jagdfeld :

Hey Jeff.

Aaron Jagdfeld :

Yeah, I mean, again, that's a big part of the headwind for the first half of next year is the comp, because we're – obviously, we were bringing that backlog down heavily in the first two quarters of this year and so we'll be comping against that without having the benefit of that backlog kind of as we get into next year. So that's a big part of it.

Aaron Jagdfeld :

Moderately in total, returning to growth in the second half, but yes, for 2023.

Jeffrey Hammond :

Okay, okay.

York Ragen :

Yes, yes. We're just talking standby. But that – we've got an headwind on the backlog that's driving that.

Jeffrey Hammond :

And then, just what are you guys doing with your production levels as you get this reset? And just how should we think about destock of your own inventory? It looks like your own inventories are a bit elevated as well.

Operator:

Thank you. And our next question comes from Brian Drab with William Blair. Your line is now open.

York Ragen :

Hey, Brian.

Aaron Jagdfeld :

Yes, market is still growing, although there is some mixed comments out there about the market growth. But, yes, the loss of that major customer of ours in the second half of the year here, they really ceased operations in July. So we've got to do the hard work that, honestly, we should have been doing all along of continuing to expand our channel to more channel partners, but that hurts us definitely in the year, Brian. So, unfortunately, that's going to be down this year. Looking for that to return to growth next year. But as we kind of fill in with new customers and we kind of reset, so 2022 is going to end up being a reset year for us here on energy storage, which is disappointing, but I think – and a rather painful learning lesson for us on just some of the trials and tribulations of that market some of the customers and the dealer partners there, you're having to pick your partners carefully. Again, a lot of learning cycles we are going through there.

York Ragen :

Yes, this is York. So yes, so total company, to clarify, we said weakness in the first half, total company, mainly driven by the home standby discussion we just had a little bit of, maybe a little bit of clean energy as we build growth there. But second half, I think important to note, total company returned to solid growth for total company in the second half. You put that all together then for full year, that would only be a modest decline for full year 2023. That's total company. So then home standby specifically, again, weakness first half, sequential growth from first half to second half and then a much more modest decline in sales growth over the prior year in the second half of the year. So maybe down a little bit, but it's much more modest decline relative to the first half for home standby.

Mark Strouse :

Yes, good morning. Thanks for taking our questions. York, curious if you can just talk about margins through the first half of next year? Just kind of the lower factory absorption with HSB, the lower mix of HSB and then kind of offsetting that somewhat easing of some of the supply chain issues that you've had. And how we should think about margins going forward?

Mark Strouse :

Okay. And then just to clarify on the Clean Power business. Is most of the reduction in the revenue outlook driven by needing to backfill for the customer that has gone bankrupt? Or is there a broader issue with the actual product itself that there is some actual reconfiguring of the solution?

Operator:

Thank you. And our next question comes from Joseph Osha with Guggenheim Partners. Your line is open.

York Ragen :

Hi, Joe. Morning.

Aaron Jagdfeld :

Yes. Joe, great questions. Just let me touch on the ecobee piece first and then I'll get to the AC coupled solution. So on ecobee, there – it's a great company, really well run. It’s - they've really struggled this year with component availability in the first half of the year. So they've under-delivered a bit to our expectations and their own expectations just around that. But things have really picked up here as they exited the third quarter. They're looking at fourth quarter being their highest quarter ever as a company and looking at big things. I think a lot of that, you can probably tie back to higher energy prices, right? Homeowners, I think, are looking for solutions to mitigate those higher energy prices, and smart thermostat is kind of a really cost-effective way to go after that. The paybacks are really strong, and you buy one of these products, inside of a year, you can pay that back. And that's even -- not even assuming the opportunity to connect that thermostat to a grid services type program, like a demand response program, which can enhance the payback even more. So really excited about that business. I think when we announced it, it's something like $125 million. It's grown nicely this year and will continue to grow and we're not going to break down the pieces because we don't want to get into doing that every quarter here going forward. So, but it's a great business, well run and a lot of upside there. And I think one of the bigger opportunities within that is just the team that they have, the expertise they have is going to be central to this single pane of glass initiative that we see as sitting at the heart of the smart home energy system that we've talked about, connecting whether it be generators or PV microinverters or storage devices or smart thermostats or water heater disconnect switches, load management, ultimately EV charging, things like that. We think all of that...

Aaron Jagdfeld :

No, that was what we said when we announced the deal back in December. That was their runrate.

York Ragen :

They've grown nicely.

Joseph Osha :

Thank you.

Operator:

Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Your line is now open.

Aaron Jagdfeld :

Well, production rates won't be because we're bringing those down because of the field inventory issue, and we've got plenty of inventory, as well. So, that – if the question is around production rates, we won't be up in the fourth quarter. We'll be lower. So we expect that and that's built into our guide today. But again, installation capacity, that normally, seasonally does peak in the fourth quarter. And we continue to see, again, we added 300 new dealers in the quarter alone, which is helpful for that. We are pacing well, again, to add more dealers here in the fourth quarter and we need to be hitting our peak rates for installation by the end of the year, but that's all contemplated in the guidance. I don't know if I'm answering your question, Jerry or not, but.

Aaron Jagdfeld :

No, no. So what we've said is that the order rate is going to continue to – we're going to have headwinds there as they work their field inventory down. So they've got – again, field inventory, which is about double where we should be at this time of the year, and "normal" in terms of days of field inventory is about double. But about half of that – so really the problem, right, the doubling is already sold. So they just have to get it installed. So because of that, we're not – the order rate is going to be artificially depressed until we get through that.

Aaron Jagdfeld :

Yes, effectively right, exactly. And could accelerate some of the drawdown of field inventory in the Florida regions, in particular, where Ian impacted. But no, we think that the order rates that we are seeing today that we'll continue to see through the end of this year and in the first half of next year are artificially low as we right-size that field inventory.

Aaron Jagdfeld :

Exactly. That's a good point.

Maheep Mandloi :

Hey. Thanks for taking our questions. Can you enough guidance on gross margins for the C&I – for the HSB projects in Q4 and the first half. But maybe if you could just opine on OpEx in Q4 and the first half given all the data points you're seeing on channel inventory and in-house consolidations? Should we expect any changes over there? And then I just have a follow-up on i should go.

Maheep Mandloi :

And any guidance on how should we think about it in 2023?

Operator:

Thank you. Our next question comes from Kashy Harrison with Piper Sandler. Your line is now open.

Aaron Jagdfeld :

Yes, Kashy, really, the C&I business has been ripping along here for a number of quarters and really hitting its stride. We are taking share in the market. We're seeing in our industrial distribution channel. Everything was up basically in C&I. So our telecom vertical that is a really important vertical for the company was up. Our mobile business was up as the national rental accounts continue to refleet and top off their fleets our business internationally, which is mostly C&I, was also up very nicely. Again, just a lot of the same opportunities there. Probably one area that I would call out that was up even more so than in past and I think we categorized that in the prepared remarks as early inning, was this kind of – we refer to it as beyond standby applications. So, mainly natural gas generators, large C&I natural gas generators that would otherwise have normally been sold into emergency backup-type of applications are being sold into applications where they are still used as emergency backup power, but they can also be called upon to support the grid during times of significant stress. So, heat waves, outages, things like that. So think micro grids or kind of energy-as-a-service types of programs, demand programs where the generator can be switched on remotely by a grid operator or a utility oftentimes connected through our grid services software platform, Concerto and we're seeing that market was up really large in the quarter for us. Now it's still pretty small in totality, but it's growing very quickly and the quality conversations we are having with people on projects, potential projects in the future, the pipeline here for that business looks really good. So much so that we are oriented around adding capacity in our C&I factories to accommodate that growth. And so, additional test capacity, additional manufacturing capacity, additional sheet metal fabrication capacity, we're making investments there, so that we can be ready for that business as it grows because we think it's a fundamental part of the mega trend that we've identified of kind of the grid instability issues that are coming from the rapid decarbonization of utility scale sources and the - on the demand side, the electrification of everything, inclusive of transportation. This supply-demand imbalance, many utilities and grid operators have really struggled here and had to scramble over the summer in particular. Now they were able to avoid any major outages, which was pretty remarkable. But in the end, the reserve margins, that's really kind of what it gets down to is the reserve margins is the excess capacity or sources that they have over demand. And those reserve margins have gotten compressed dramatically in certain markets out West, even here in the Midwest, where the reserve margins are down to kind of critical levels, where if you get a spike in demand or you get some kind of interruption in supply, a major plant goes offline or there's some other disruption, can cause significant challenges. And this is really at the heart of what happened in February of last year in Texas. The cold snap that happened there has exacerbated the supply-demand challenges that were underlying what was going on in the ERCOT region or the ERCOT market. And so the opportunity to use generators, fossil fuel generators, but natural gas generators, which burn much cleaner, obviously, than diesel generators, has really come into focus as a potential opportunity to use these assets for the purposes of grid support. So that was kind of what happened in C&I in a nutshell. As you mentioned, the other category was also up nicely. That encompasses some of our monitoring businesses, encompasses some other areas of the business that have been growing very nicely, as well. So, between those two segments or not segments, but product classifications, those we saw really nice growth in the third quarter.

Aaron Jagdfeld :

Yes, so, the C&I business is a backlog business. I mean, that always has been a backlog business. So we look at that, you've got lead times on products there that, in some cases, go out 26, 36 weeks depending on the size of the product. It's custom built and it always has been this way. This is not the new kernel in the story over the last two years is the fact that home standby, which has never been a backlog business became a backlog business. But the C&I business has always been backlog, provides great visibility for us. So we feel very good about that. You are also seeing kind of some of the public statements, like if you look at the national rental account customers that we sell to, they are indicating that they believe their CapEx budgets and CapEx spends are going to continue to grow into 2023 as, again, some of these mega trends around the infrastructure investments that need to be made around the country. We had the investment, the Infrastructure Act that did get passed earlier this year. There's a lot of spending that's going to come through for that, for roads and bridges and airports and ports and all those types of massive infrastructure areas, our rental customers are going to serve that. The telecom business continues to – our telecom customers continue to tell us that their midstream and the build-out of their – not only hardening their existing networks, but the build-out of their fifth-generation or 5G networks. So that feels really good. And then, again, the quality of the pipeline, as I said, around some of these newer things like the beyond standby opportunities, the microgrid opportunities in C&I. We think that there is – those have a lot of legs yet going into 2023.

Operator:

Thank you. And our next question comes from Praneeth Satish from Wells Fargo. Your line is now open.

York Ragen :

Yes. No, I think we alluded to it before that I mean, there is some backlog that were satisfying here in the second half of 2022 that won't repeat. So there is a little bit of a, I guess, year-over-year headwind when you're looking at 2023 versus 2022.

York Ragen :

Yeah, that would be upside. So if you're looking for upside, where could we grow...

York Ragen :

Yes, things happen. Mother Nature happens. So that would definitely be a scenario where things could grow. But that's an inherent – the backlog situation here, resolving that backlog here in the second half of 2022 is an inherent headwind for the second half of 2023. But I think sequentially, as we get through these field inventory challenges here in the first half, you definitely would see growth sequentially from first half to second half, at least in terms of how we're seeing it in our framework here for 2023.

Aaron Jagdfeld :

Yes. We have an upgrade path on that component. It's a rooftop mounted shutoff device and that device is the previous generation of that device, it has a higher failure rate than what we'd like to see. So we're proactively replacing those devices for customers. So they don't see an interruption of the production of their systems. So, but everything is – we've got path forward and have had a path forward here for some time. We just have to get the upgrades complete. And so to speed that up, we brought in a bunch of third-party, service companies that are going to help us do that. We were relying on some of our channel partners, but with the loss of that largest channel partner became obvious that we needed to enlist the help of others, and that's why the third-party folks are going to be in there. And that upgrade, the total effort there is what's reflected in that additional warranty reserve charge that we took here in the quarter.

Donovan Schafer :

Hey guys. Thanks for taking the questions. Hi, can you hear me?

Donovan Schafer :

Okay, okay. Good. So, on the home standby side, I was just curious, is there any kind of a pattern in the lower orders from the channel partners in terms of, is it more concentrated on the side of big-box retailers like Home Depot and Lowe's or maybe regional installers or even potentially kind of the longer tail smaller installers? I think the smaller installers tend to be limited, maybe more on warehouse space and access or willingness to use credit. So, I am just curious if it kind of is disproportionately in any one of those areas? And then I have a follow-up.

Donovan Schafer :

Okay. And then, as - my next – my follow-up question is just, focusing on what's going on in Europe, because you guys – in commercial and industrial, and you really are kind of a global business and you've got a lot in Europe and India other parts of Southeast Asia, there is kind of just so much. But when I look at what's going on in Europe, it feels like there are a lot of puts and takes that could be kind of both tailwinds and headwinds because you've got the energy crisis and all the fees and stability around there, but then simultaneously, you are also going to have people saying, this is why we shouldn't be using natural gas. And so there might be resistance against natural gas infrastructure and installing more generator sets to rely on that. Maybe even if there's any diesel that might be seen as much more of like a short-term thing and so they don't want to invest the CapEx for a longer-term back up. So, it just seems like there is a lot of potential puts and takes there and the sort of differences of Eastern Europe versus Western Europe. So could you just go under a little bit more detail on like what exactly you are seeing specifically in Europe and how that's kind of unfolding for your businesses?

Operator:

Thank you. And our final question comes from Saree Boroditsky with Jefferies. Your line is now open.

York Ragen :

No, we didn't necessarily frame that out. I think what we're looking at is more – when you look at the total company returning to solid growth in the second half resulting in only a modest decline for the total company for the full year. So, you can sort of get the magnitude of – what that means for the first half on a total basis. You know that as based on our comments that C&I is going to continue to be strong in the first half. So you'll see growth there. We'll be sequentially improving our clean energy business throughout the year in 2023. And so that basically leaves you sort of – gives you some framework for how to put all the pieces together.

Aaron Jagdfeld :

Well, pen rate this year, we're around 6% is where we anticipate ending. So, it doesn't – it didn't change that dramatically and we are going to have to update our guidance on the long-range guidance. Again, I would point out, we did say at our Investor Day, that growth was not going to happen in a straight line. I know we have people who haven't been around the company that long and are learning kind of how the cycles work here. But we have, in particular with home standby, we have the dramatic increase cycles where you have these step functions up, then growth kind of levels off, comes off of the peak actually, comes down off of a peak and normalizes to a baseline level, a new baseline level that's materially higher than the previous baseline level. And then, you kind of – as you increase awareness and distribution then you are ready for the next step up in growth. So it's more of a step function grower. We'll have to review the long-term targets. We are not prepared to update them this morning. But we are going to have – we'll have another Investor Day next year for sure, if not before then in terms of updating the long-range guidance.

Michael Harris :

We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter and [Audio Gap] in mid-February. Thank you again and goodbye.

Operator:

Good day, and thank you for standing by. Welcome to the Second Quarter 2022 Generac Holdings Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the call over to Mike Harris, Senior VP, Corporate Development and Investor Relations. Please go ahead.

Aaron Jagdfeld:

Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our second quarter results were very strong with robust revenue growth, significant sequential margin expansion and all-time records in net sales, adjusted EBITDA and adjusted EPS. Shipments of home standby generators and global C&I products outperformed our previous expectations, primarily driven by continued progress on our capacity expansion and our team's ability to effectively manage the challenging supply chain environment. Growth in adjusted EBITDA margins were also ahead of our expectations in the quarter, reinforcing our prior forecast of margins bottoming in the first quarter. Gross margins benefited from favorable product mix, largely driven by home standby generators. These dynamics drove adjusted EBITDA margin outperformance and sequential margin expansion, combined with impressive top line growth, resulted in an all-time quarterly record for adjusted EBITDA dollars. Positive underlying demand trends led to continued backlog strength with C&I products and home standby backlog, both providing us with considerable visibility for the quarters ahead. Year-over-year, overall net sales increased 40% to $1.29 billion and grew sequentially from the first quarter of 2022, which was the previous all-time record. Strong momentum in core sales, which excludes the impact of acquisitions and foreign currency, continued in the quarter with 33% growth over the prior year. Overall, residential sales growth was again very robust, driven by a substantial increase in shipments of home standby generators as well as the impact from recent acquisitions. The C&I sales increase was broad-based, led by growth across all channels domestically, all regions internationally and the contribution from recent acquisitions. Adjusted EBITDA margins expanded sequentially from 17.3% in the first quarter to 21% due to improved price realization and the moderation of input costs. Importantly, we expect growing realization of previously announced price increases in the second half of the year, further execution on cost reduction projects and continued easing of input cost headwinds resulting in sequentially improving margins over the remainder of the year. Now discussing our second quarter results in more detail. Shipments of home standby generators grew at an exceptionally strong rate over the prior year. Growth also accelerated sequentially from the first quarter as we continued to expand production and power outage activity in the U.S. as measured on a rolling 4-quarter basis at the end of the second quarter remained above the long-term baseline average. In addition to elevated baseline outage activity in the U.S., severe storms left more than 1 million utility customers without power in Ontario and Quebec in May, which resulted in robust leading indicators of demand in Canada as well. Power grid stresses are expected to persist, with forecasts for the upcoming hurricane season pointing to another year of above-average activity and multiple grid operators warning of potential outages as a result of excessive demand coinciding with supply challenges. Home consultations or sales leads continue to point to strong underlying demand for home standby generators, growing at a mid-teens rate despite a prior -- a strong prior year comparable period driven by the Texas winter storm event in February of 2021. This demand was broad-based, with 4 or 5 regions experiencing year-over-year growth in home consultations in the quarter. To frame just how much home standby baseline demand has grown over the last several years, second quarter home consultations were more than 4x greater than pre-COVID levels seen in the second quarter of 2019. Importantly, strength in this leading market indicator has continued here in the month of July. In addition, activations, which are a proxy for installs, continued to grow at a solid rate in the second quarter compared to the prior year, led by the South Central and Midwest regions as we further added to our residential dealer base as we ended the quarter with approximately 8,200 dealer partners. We continue to make excellent progress increasing our production levels for home standby generators, with daily build rates dramatically higher as compared to prior year levels and ramping sequentially as our Trenton, South Carolina facility continues to expand capacity. As we have increased build rates, lead times have continued to improve, and we are getting product in the hands of our customers and channel partners in a more consistent and a more timely basis. As a result of this progress, close rates on our sales leads have begun to improve, supporting our belief that reducing our lead times will improve our ability to capture more of the new and higher baseline of home consultations or sales leads within our sales pipeline. Our build rates and supply chain challenges have been the main growth constraint for the home standby category over the last few years. We have now ramped production capacity to the point that our lead times for the product category have materially improved. However, the constraint has now shifted to the installation capacity of our dealer base, driven primarily by contractor labor availability, permitting and utility-related delays and shortages in certain materials needed to complete an installation. As a result, project lead times for homeowners, as measured by the time between the signed contract and the installation date, have not come down in proportion with our production lead times. We have a number of initiatives focused on increasing installation bandwidth in the market, including aggressive campaigns to add new dealers to our network, cultivate and train non-dealer contractors on home standby installations and decrease the overall time associated with the project. Additionally, as housing construction activity begins to slow, we believe we have a greater ability to focus installing contractors on improving the pace of home standby installations. I'd now like to discuss our increasingly diverse suite of clean energy products and solutions. With the closing and integration of the ecobee acquisition, and given the growing commercial sales synergies and cross-functional initiatives between residential energy storage and microinverters, monitoring and management devices and grid services solutions, we now have one of the broadest portfolios of clean energy products and solutions in the industry. Net sales from these combined clean energy products grew well over 50% on an as-reported basis in the second quarter over the prior year. Macroeconomic uncertainty, input cost pressures, industry-wide supply chain and logistics challenges and lack of clarity around regulatory policy have impacted residential clean energy markets as of late. But rising prices for traditional energy sources and a growing focus on energy independence and security have the potential to more than offset these concerns and continue to drive adoption of alternative and emerging solutions over time. Additionally, we're very encouraged by last week's announcement of the Inflation Reduction Act as a potential positive catalyst for demand, although it's still not fully through the legislative process. As we work to capture this demand, our residential clean energy installer network continues to grow as we ended the second quarter with approximately 2,800 trained and certified technicians, with approximately 1,150 registered dealers on our PowerPlay sales platform. We remain excited about the new and innovative products we're bringing to market in 2022, including the recent product launch of PWRmanager and the pending launches of our PWRgenerator, which is the industry's only engine-driven battery charger, an AC coupling solution for our PWRcell storage product for use in retrofit applications and our new PV microinverter product called the PWRmicro. As expected, we began shipping PWRmicros for beta testing in June and are now working to expand beta testing with full commercial launch expected in the fourth quarter. I'd now like to provide a quick update on ecobee. Integration is proceeding as planned, and we continue to make good progress in developing cross-selling opportunities for ecobee's hardware solutions through Generac's distribution partners. The ecobee team successfully launched 2 new thermostats with industry-leading features during the quarter. And high temperatures and rising energy costs across North America are driving increased interest in the smart thermostat category. Early reception on these new products has been encouraging, reinforcing ecobee's differentiated competitive position ,focused on intelligent, intuitive, feature-rich devices that maintain comfort while unlocking significant value creation and energy conservation for homeowners and grid operators. This differentiation also drives significant market opportunity for ecobee's energy services offering, which has been further enhanced by synergies with Generac's grid services efforts. ecobee's installed base of more than 2 million connected homes is particularly valuable to grid operators seeking load flexibility and resilience. Consumer awareness of elevated energy market volatility is also driving potential growth for recurring services revenue as ecobee enables consumers to take advantage of variable rate pricing structures. Additionally, we are beginning to leverage the amazing talent within the ecobee team to help accelerate the development of our residential energy ecosystem, a key element of our connected devices strategy. Now expanding a bit more on Generac Grid Services, the team continues to drive momentum in its increasingly impressive and diverse sales pipeline, building on the recent success across software-as-a-service, turnkey and performance contracts as well as experiencing an increasing mix of hardware sales, which are proving to be a competitive differentiator for our Grid Services business. From distributed generation and storage to load flexibility assets, our grid services suite of solutions is unmatched in the market. We announced a number of recent contract wins since our first quarter call that highlighted our expanding capabilities, including EV charging, monitoring and optimization, a turnkey program for low- and moderate-income households utilizing PWRcell energy storage systems and a unique solution for the German power market. Utilities and grid operators continue to warn of potentially significant disruptions to the power grid as a result of supply/demand imbalances, underscoring the need for new technologies to decentralize and digitize the power grid through the development of virtual power plants or VPPs. As an example, this need was on full display during the recent heatwave in Texas, as a number of home standby generators enrolled in the VPP program were autonomously controlled by our Concerto software platform to take demand off the grid and help keep critical community resources online. The market opportunity for residential energy storage and microinverters, monitoring and management devices and grid services solutions remains extremely compelling and we believe will prove to be a key long-term future growth driver for Generac. For the full year 2022, we expect net sales of these clean energy products and solutions to approximately double from the prior year to more than $500 million in sales, with strong core and inorganic growth contributions and an even larger opportunity in the years ahead. Now let me make some comments on our C&I products, which also grew at a strong rate in the second quarter across nearly all end markets and geographies. Specifically, global C&I net sales increased 22% on an as-reported basis and 16% on a core basis as compared to the prior year. Strong growth in net sales for domestic C&I products in the second quarter was led by national rental equipment and telecom customers as well as our North American distributor channel. We saw continued strength in demand during the quarter, which contributed to a further increase in our backlog for C&I products and supports our expectations for solid growth to continue in the category. Shipments of C&I stationary generators through our North American distributor channel also grew significantly in the second quarter, and improving close rates helped drive growth in orders and backlog in this channel. Strong momentum in quoting activity has continued as of late, highlighting the sustainability of demand trends for backup power for C&I applications. Shipments to national telecom customers increased again during the second quarter as compared to the prior year as several of our larger telecom customers further invest in hardening their existing LTE sites and begin to build out their fifth generation or 5G networks. Telecom infrastructure upgrades remain one of the key megatrends we expect to drive growth for our business in the coming years. We also experienced substantial growth with our national and independent rental equipment customers during the quarter. These customers have been investing heavily in equipment to refresh and expand their fleets, to serve increased commercial construction activity as well as other infrastructure projects, supporting a resilient demand environment for mobile products and the megatrend of the critical need for infrastructure improvements. We also continue to see material traction in orders for Off Grid Energy's mobile energy storage systems from our key North American rental channel partners as they work to reduce the carbon footprint of their equipment fleets. Momentum remains strong across our domestic C&I channels and is being supplemented by emerging capabilities that support the long-term growth profile of the category. Specifically, we're establishing a strong reputation and applications beyond traditional emergency standby projects, driven by our ability to deliver customized turnkey solutions to serve this market. Our unique hardware and software portfolio in this vertical is highlighted by expanding smart grid-ready features that allow connection to grid services programs. Large C&I generators can provide enhanced resiliency and stability for grid operators while simultaneously providing a tangible and meaningfully improved return on investment for the asset owners, which is driving demand for these solutions across a diverse range of customers. Strong momentum also continued in our international segment, with total sales increasing 43% year-over-year during the second quarter, with 34% core sales growth when excluding the benefit of the Deep Sea and Off Grid Energy acquisitions and the unfavorable impact of foreign currency. The core sales growth was driven by strength across all regions, most notably in Europe and Latin America. The European region has seen strong demand across product lines as the heightened focus on energy independence and security that emerged following Russia's invasion of Ukraine has continued. But longer-term implications are uncertain as geopolitical and macroeconomic conditions in the region remain volatile. International energy security concerns are not unique to Europe, and we are evaluating additional opportunities for home standby generators across multiple regions as a result. External sales in the Latin American region continued to grow at a solid rate, while intersegment sales grew substantially as our Generac Mexico operations continue to ramp production of telecom products for the North American market. In addition to strong core growth, our recent international acquisitions, Deep Sea Electronics and Off Grid Energy reported impressive results in the second quarter. Demand for Off Grid Energy's mobile storage systems continues to grow across our global distribution footprint as we integrate the product offering through our commercial sales branches and channels. In addition, we have several product development projects underway within the C&I energy storage category, including expansion of the power capacity range of the mobile product lineup as well as potential stationary applications. Concerns around power security and energy prices in key international markets underpin the opportunity for an increasingly broad storage product portfolio for C&I applications. Deep Sea also benefited from healthy global demand for advanced generator controls during the quarter. And we remain very excited about the additional engineering capabilities Deep Sea brings as we leverage the team's electronics controls expertise to advance product road maps across our enterprise. Our international segment has also experienced much stronger profitability despite inflationary headwinds and supply chain challenges. Second quarter adjusted EBITDA margins expanded to 14.5% from 9.7% in the prior year period due to the accretive margin profiles of the Deep Sea and Off Grid acquisitions, improved overhead absorption and better operating leverage on significantly higher volumes. In closing this morning, I'm extremely proud of our team's continued ability to deliver record results and maintain our 2022 outlook despite the developing uncertain economic environment. Our strong sequential margin improvement reinforces our expectation that margins bottomed in the first quarter of 2022 and will continue to improve throughout this year. Additionally, our recent refinancing has provided further liquidity to accelerate our evolution into an energy technology solutions company. We remain focused on executing against our Powering a Smarter World enterprise strategy, and the megatrends supporting this strategy are as compelling as ever, many of which have the potential to decouple from the broader macroeconomic environment. Structural supply-demand imbalances facing the grid are not impacted by inflation, and increasingly severe and volatile weather cannot be slowed by higher interest rates. The energy ecosystems that we are building for the future will give our end customers the ability to take control of their power security, lower their energy bills and reduce energy consumption while also helping utilities and grid operators to balance supply and demand. With our broad portfolio of products and solutions, combined with our services, our distribution, our brand and importantly, our expertise, Generac is uniquely positioned to lead the evolution to a more resilient, efficient and sustainable energy future. I now want to turn the call over to York to provide further details on our second quarter 2022 results and our outlook for the year. York?

Operator:

[Operator Instructions]. And your first question comes from Michael Halloran of Baird.

Aaron Jagdfeld:

Yes, Mike, this is Aaron. Yes, the lead times have come down now, on average, we're talking home standby category here, 8 to 10 weeks, which, again, is, I think, directly the result of our actions in increasing production and was always part of the plan, as we've talked. What we're really encouraged by and what continues to pace ahead of kind of expectations here is the front-end kind of lead generation, the end market. I think there are a couple of catalysts there that we can point to that, I think, are probably at work. The first would be the summer season here has come with it a number of high-profile kind of warnings, if you will, from utilities and grid operators about the potential for outages on shortfalls in supply, I mean, just raw supply not being enough to meet demand. So that's kind of 1 catalyst that's new this year. A second one, obviously, we got a very aggressive forecast again here for hurricane season. It's been quiet so far but the season forecast was well above average. And then the third thing I would point to as a catalyst for why we think the end market is still very active in the category is really around this outage that happened in Canada. We don't talk about Canada as much as we probably should. It's a great market for us. It always has been. We have over 500 dealers up there. It's actually -- it's a great market because from a demographic standpoint, fits quite well with the buyers of the category. But they suffered a pretty high-profile outage of 1 million utility customers in Ontario and Quebec about 1.5 months ago, it was. And that really has -- jumps off the page when you look at it in our statistics when we track by region. We actually track some -- just a lot of data really down to the zip code level in areas. But it's interesting to see how much of an impact that had for us in that part of the world. So I would point to those things, again, end market demand very strong, but we continue to ramp production to bring that -- the lead times on the category down.

Aaron Jagdfeld:

Yes. We've always said home standby visibility, usually, it's not very good, right, because we typically don't have a backlog. We've been in a backlog situation now for close to 2 years as we've been working to ramp production and tackle these supply chain challenges, which we've been doing. That backlog is still significant. And in fact, we -- as we have said previously, we still expect to have a backlog by the time we exit this year. So even though we've got our ramp ongoing in production output, we're still not going to catch that by the end of the year. And we'll continue to bring the lead times down, but the backlog is still significant for home standby.

Julien Dumoulin-Smith:

So let me just come back to the gross margin question. Obviously, you guys reaffirming here the outlook and troughing off 1Q. Can you comment a little bit about some of the input cost reductions flowing through? How much latitude should that provide you as you look forward going into your longer-term outlook, '23-'24, et cetera? How much is that going to cascade? And also, can you speak a little bit more about repricing the backlog, the success and perhaps pricing trajectory given some of the moderation in the cost input here?

Julien Dumoulin-Smith:

Got it, yes. It sounds like maybe there's even more latitude there as you continue to compound with some of these benefits. But maybe just if I can pivot quickly, I know you said high teens for C&I. Just with respect to that business and obviously, there's a litany of reasons why you should continue to see some of that input. How is that trajectory going today? And how much is that helping some of the backlog commentary here to just continue to keep that at a robust level? I know that, obviously, the backlog here is normalizing for some of the factors from last year. But can you comment a little bit on C&I here and how that could complement the backlog?

Operator:

And your next question is from Philip Shen of ROTH Capital Partners.

Aaron Jagdfeld:

Yes. Thanks, Phil. I'll unpack that here with a lot of it around -- or all of it around leads. Let's talk a little bit about home standby leads. Four out of 5 regions, they were up quarter-over-quarter and up big in some regions. The only region we saw a pullback was in the South Central region and that's Texas. Texas is the -- you take that February 2021 winter event out there. And that's where if you are doing channel checks, you may find in Texas, I mean, they were so high a year ago. In fact, I would just point out that when we look at all of our states, just individual states, Texas was still the top state on just an absolute basis for us in the quarter. So even though the South Central region was off as a region and Texas off big within that region, actually, on an absolute basis, the number of leads we generated in Texas was the highest of any of the 50 states. So I would think that if you're doing channel checks, that's the only region, at least based on our data. I think as we said before, we're really pleased to see the kind of the lead activity because it's just -- it's such a great barometer of the market activity that is to come. We've proven this out. We've been tracking sales leads for almost 10 years now, and it's a pretty solid, reliable predictor of volumes in the future. So it's a great leading indicator. Specifically to the clean energy business with leads, yes, as you indicated, that is and has been a differentiator for us vis-à-vis others in the marketplace. And it's really been helpful for us to help court new channel partners and new dealers. Giving those leads to customers in a market like the solar market, as a for instance, they historically has had very high customer acquisition costs, I think, is -- I think, again, it's an area that we excel at based on our experiences with it, and our channel partners are coming to find the real value in that. That said, I think there's even more that we can do there as we dial in kind of how we go to market with our messaging. And that's everything from the type of media that we buy to the regions and particular markets that we target. But we've enjoyed some pretty good success out of that early on here in terms of the clean energy business.

Aaron Jagdfeld:

Yes. On the backlog -- on the lead time question, I'll hit that here first. The category, it's about 8 to 10 weeks and that's air-cooled and liquid-cooled products. That's obviously average for the weighting of each of those products within there. We have certain SKUs where we're obviously -- we're performing better than that average and certain SKUs where we're longer. It depends on sometimes component supply challenges. We have, as an example, we're launching the 26-kilowatt product here this month. And so that's been sitting in backlog. So those lead times look particularly long. And we have some other products within the air-cooled family, where either we have component shortages or other constraints that have manifested. And in the liquid-cooled side, that demand has been incredibly robust with liquid-cooled. And our ability to increase production output there has been a bit hampered by supply chain. So working to bring all of those lead times down. And again, we've been speaking -- when we talk about lead times, we've been talking about the averages, and that's the average number of weeks of orders in backlog. And I think that's an important distinction, because when you talk to dealers, you're going to find different dealers are in different places, right? Some dealers are -- they can't get enough product, right? They'll take more product if we can get it to them. They either have the space or the financial capacity to do that. You have other dealers, maybe don't, right? In particular, as you get into smaller dealerships. They don't typically have a warehouse so they run out of space more quickly. They don't typically have the financial capacity, right? A lot of times, they're paying with a credit card even in some cases. And in the prepared remarks, I spoke to the fact that installation bandwidth, in particular, when you look at the smaller end of the dealer spectrum, they're struggling to find labor. They're struggling with some components that they need, things like propane tanks and other things. They're struggling with permitting delays or getting a utility to come out, to pull a meter or upgrade a meter. Those things are all starting to manifest themselves. As we've kind of brought our output levels up to a significantly higher level year-over-year, now you're starting to see the constraints kind of move kind of downstream, if you will. And that's exactly what -- we're working with the channel partners to alleviate that, whether it's talking to individual AHJs about permitting issues or delays there or it's looking to -- we've even stood up. We've got HR efforts here to help hire contractors for our dealers or noncontractor labor for our dealers, depending on what their needs are. So kind of we're recruiting for our dealers. And of course, we're bringing new dealers in all the time. We added another 100 dealers here this past quarter. We're now at 8,200 and we need more. That's something that we're working hard on. As far as cancellations, of course, we have -- our policy around orders has always been a pretty, I'll call it, a liberal policy that way. So the ability to cancel or defer an order is -- you'll see that in those smaller dealers that are coming up against some of those constraints as you point out. I would say on balance, it's not a material number when you look at the total. But we work through that and it's kind of dealer by dealer. It's really kind of hand-to-hand combat down in the trenches in terms of working with the dealers on -- and again, this is where other programs are really, really helpful with -- our Wells Fargo program is a great program for dealers to stock product. And so we encourage dealers if they're not already signed up on that platform, to get on that platform. That's a great way for them to be ready for the season. The last thing we want dealers to do is to not be ready for the season. And so that's the messaging that's going out in the field.

Jeffrey Hammond:

Okay. If we could just get into battery storage. I think you said there's some noise and I know there's a lot of supply chain issues. So just talk about what's going on in that business and what kind of your growth expectation or updated growth expectation is on that.

Jeffrey Hammond:

Okay, great. And then a lot of my companies have kind of built a lot of working capital into the first half. And with all the supply chain and demand, et cetera, just -- I don't know if you updated the free cash flow guide and how you think working capital is -- how big of a source it can be in the back half?

Operator:

And your next question is from Brian Drab of William Blair.

York Ragen:

Well, we did mention shipments were up over 50% for home standby, which is indicative of our build rates for this category.

York Ragen:

Yes. No, I think our theoretical capacity, as we get Trenton up and running, and particularly another set of machine tooling here in the second quarter, that should -- basically, that gets us to what our projected capacity increases were expected to be. So it would -- and that actually even gives us room here from where we're at today to even surge, should we get a major event. So there's -- we're good from a capacity standpoint in terms of our expectations now.

Aaron Jagdfeld:

Well, there could be, Brian. We took the action last year of getting an additional machine, filling an order, even though we don't even have an address to deliver it to at this point. We'll kind of watch how the season plays out here. And if we do get the aggressive hurricane forecast that's been projected, none of that's in our guidance, obviously. So if that comes to fruition, we probably would need to find a home for that tooling. Now it could be an expansion of our Trenton facility, which is expandable. We've talked about that. It could be another greenfield site. But we're kind of -- it's a little bit of a wait-and-see approach here to the market. But at some point, our belief in the category continuing to grow, there will be capacity adds that are needed at some point in the future.

Aaron Jagdfeld:

I don't have that in front of me but we did not -- they were up, yes. Mike's pointing up. So yes, they were up sequentially. They've been on a tear here in Q2, specifically to the catalyst that I mentioned. But it's been -- we've been surprised by the robustness of the end market demand, to be very frank. I mean, it's something that has -- I think it speaks to how the category continues to move into more of a mainstream -- as more of a mainstream appliance, if you will, for homeowners.

Aaron Jagdfeld:

Sequentially, yes.