Q1 2022 Generac Holdings Inc Earnings Call

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Good day and thank you for standing by welcome to the first quarter 2022 General Holdings incorporated earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one again telephone and address.

If you require any assistance. Please press star zero now, it's my pleasure to hand, the conference over to your Speaker today, Mike Harris, Vice President corporate development and Investor Relations. Thank you. Please go ahead.

Good morning, and welcome to our first quarter 2022 earnings call I'd like to thank everyone for joining US. This morning with me today is Aaron <unk>, President and Chief Executive Officer, and York Ragen, Chief Financial Officer, We will begin our call today by commenting on forward looking statements certain statements made during this presentation and other information.

Got it from time to time by generic or its employees may contain forward looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors in.

In addition, we will make reference to certain non-GAAP measures during today's call additional information regarding these measures, including reconciliation to comparable U S. GAAP measures is available in our earnings release and SEC filings I will now turn the call over to Eric.

Thanks, Mike Good morning, everyone and thank you for joining US today, we experienced another all time record in shipments during the first quarter as net sales adjusted EBITDA and adjusted EPS were all ahead of our previous expectations.

The revenue outperformance was primarily driven by continued progress on our capacity expansion plans and effective management of a challenging supply chain environment.

This led to higher than expected shipments of home standby generators power cell energy storage systems and C&I products globally.

The higher revenues drove adjusted EBITDA dollars, which were also ahead of our prior expectations. Despite elevated input costs, resulting in lower than expected margins in the quarter <unk>.

Demand for our products also exceeded our expectations for the quarter, resulting in an increase in overall backlog from the end of 2021 2021 with the home standby backlog remaining significant and providing us with considerable visibility in the quarters ahead.

Year over year overall, net sales increased 41% to $1 4 billion.

And also grew sequentially from the fourth quarter of 2021, which was the previous all time record.

We continue to experience robust and broad based growth across the business with each of our residential and C&I product classes and domestic and international reporting segments, all growing at incredibly strong double digit rates as compared to the prior year on an as reported basis.

Strong momentum in core sales, which exclude the impact of acquisitions and foreign currency continued in the quarter with 33% growth over the prior year led by our residential product category.

Overall residential sales growth was again driven by a substantial increase in shipments of both home standby generators and power <unk> energy storage systems as well as the impact from recent acquisitions.

C&I sales increase was led by our mobile and telecom channels domestically growth across all regions internationally and the contribution from recent acquisitions.

Adjusted EBITDA margins of 17, 3% were lower year over year, primarily due to the impact of higher input costs driven by ongoing supply chain challenges in the overall inflationary environment.

Partially offsetting those cost headwinds were the increasing impact of multiple pricing actions implemented over the past year favorable sales mix and the early impact of product cost reduction initiatives.

Importantly, we expect growing realization of the previously announced price increases as 2022 progresses as well as incremental favorable margin impacts from additional pricing actions, which were enacted during the second quarter further execution on cost reduction projects and easing input cost headwinds, resulting in sequentially improving margins throughout the year.

Now discussing our first quarter results in more detail shipments of home standby generators in the first quarter grew at an exceptionally strong rate over the prior year and continues to benefit from the convergence of multiple megatrends that are significantly increased consumer awareness for the category.

Power outage activity as measured on a rolling four quarter basis at the end of the first quarter was approximately in line with the long term baseline average an early forecast for the upcoming hurricane season are pointing to another year of above average activity.

As discussed previously home consultations faced a challenging comparison with the prior year due to the high profile, Texas Winter storm event, and several significant outages and other states in the first quarter of last year, but were in line with our expectations for the quarter for.

For some perspective home consultations during the first quarter were nearly three times higher than the level seen in the first quarter of 2020, reinforcing our view that demand for the home standby category has once again achieved and held a new and higher baseline level.

Activations, which are a proxy for installs continue to grow at a solid rate compared to the prior year led by the south central and Midwest regions.

We ended the quarter with over 8100 residential dealers and increase of more than 400 dealers over the past 12 months.

We made better than expected progress increasing production levels for home standby generators as daily build rates at our Wisconsin facilities further increased over prior year levels and build rates continue to aggressively aggressively ramp sequentially at our new Trenton, South Carolina facility.

Higher output levels are driving an important improvement in lead times, which have been declining to approximately 20 weeks from the approximately 27 weeks at the end of 2021.

Despite the ongoing improvements in build rates and lead times on standby backlog remains well above $1 billion.

Build rates are projected to further increase throughout the year, we still expect to carry a meaningful portion of this backlog into 2023, even without the benefit of a major outage event in our forecast.

In response to higher inflationary pressures. We're also taking additional pricing actions in the home standby category in the second quarter and we expect to realize the benefit of these additional increases primarily during the second half of 2022.

New orders now reflect this higher pricing and orders and backlog will also see a price increase effective June one.

In addition to the several pricing actions, we've taken significant cost reduction initiatives and moderating input costs are expected to further benefit margins for the product category moving forward.

Our clean energy products contributed meaningfully to overall growth in the first quarter as shipments of our power <unk> energy storage systems grew significantly from the prior year period as our team successfully navigated industry wide supply chain and logistics challenge.

Supporting this rapid growth is the continued build out of our installer network as we ended the first quarter with more than 2600 trained and certified dealers with approximately 1100 registered on our powerplay sales platform.

In response to rising input and expedite logistics costs. We have also recently implemented additional price increases for our clean energy products.

In spite of policy related uncertainty in the near term, we believe the mega trends and secular growth drivers underpinning consumer demand for residential clean energy solutions is as compelling as ever.

We remain very optimistic about the new and innovative product offerings, we're bringing to market in 2022, including our new PV micro inverter product offering called the power micro which is continue to receive significant prelaunch interest from our channel partners.

In addition, our recently launched power manager load control device has garnered positive feedback in the market and we expect this industry, leading innovative products to further strengthen our position within the residential energy storage market.

We are still expecting clean energy revenue growth well above 50% for the full year with continued strength in power cell energy storage systems, along with contributions from the initial rollout of new products.

I would now like to provide a quick update on <unk>.

We're seeing good progress in developing cross selling opportunities for eco vs hardware solutions with <unk> retail and wholesale partners.

Longer term, we're presuming pursuing opportunities with residential and clean energy dealers as well as working to leverage <unk> existing HVAC dealer base to sell <unk> products.

In the smart thermostat product category, the <unk> brand resonates well with consumers and we have exciting new product introductions coming here in the second quarter.

Additionally, eco piece dedicated energy services team has seen a number of wins with several utilities and grid operators, including a recently announced demand response program with a local utility provider in Colorado.

This is a simple but important example of a program that can be replicated across the country, which allows for the adjustment of eco be smart thermostats during periods of high demand, resulting in energy conservation financial benefits for homeowners and improve grid stability.

We're also seeing promising commercial developments between <unk> and <unk> services with utilities, having an increasing interest and <unk> product offerings.

The <unk> services and <unk> sales teams are jointly bidding on projects and this collaboration offers significant growth potential and a large and rapidly expanding market by leveraging <unk> growing installed base of more than 2 million connected homes.

Our ability to increase our share of the value stack of a grid services program is also improving the economics and payback for homeowners, which has the potential to improve demand for eco be hardware as well as participation and grid services programs.

Expanding a bit more on generate grid services. The team is executing on its strategic vision and has an increasingly impressive and diverse sales pipeline that includes expanding the cross selling of <unk> equipment, along with other opportunities beyond software as a service contracts driven by our unique hardware plus software plus services value proposition.

<unk> services also experienced strong growth during the quarter in key metrics such as connected assets under management, and we signed and closed a number of important software as a service turnkey and performance contracts.

In addition, a growing proportion of hardware orders, including home standby generators and power cell energy storage systems, along with other contracts in the final stages of negotiation have improved our line of sight for a significant ramp in this business during 2022.

Importantly, the general accurate services team is making great progress integrating <unk> products onto the <unk> platform software platform to create complete solutions for utilities and grid operators.

We are excited about the economic and societal value of these opportunities as we work to facilitate the decentralization the digitization and the decarbonization of the power grid.

Now, let me make some comments on our C&I products, which also grew rapidly in the first quarter with strengths strength across multiple end markets and geographies.

Specifically global C&I net sales increased 38% on an as reported basis and 24% on a core basis as compared to the prior year.

Strong growth in net sales for domestic C&I products in the first quarter was led by National Telecom and rental equipment customers as well as growing demand for our natural gas generators used in applications beyond traditional emergency standby projects.

We also have a substantial backlog for C&I products, which increased further during the first quarter supporting our expectations for solid growth to continue in the category.

Shipments of C&I stationary generators through our North American distributor channel grew again in the first quarter and improving close rates helped drive growth in orders and backlog in this channel.

Shipments to national Telecom customers increased significantly during the first quarter as compared to the prior year benefiting from elevated levels of capital spending by several of our larger telecom customers.

Catalysts for the investment in backup power in this important vertical continues to be driven by the elevated power outage environment environment over the last several years the power security mandate in California, and the growing number of connected wireless devices alongside the Buildout of high powered an increasingly critical <unk> communications infrastructure.

We also experienced very strong growth with our national and independent rental customers. This quarter. These customers are investing heavily in fleet equipment and we remain optimistic about the long term demand outlook for mobile products given the megatrend of the critical need for infrastructure improvements and recently passed legislation supporting infrastructure spending.

We're also very excited about the opportunity to bring our mobile energy storage solutions, which we recently added through the off grid energy acquisition in the U K, So the north American market in 2022 and.

And we have already seen meaningful order activity from key domestic channel partners for these products.

Additionally, we are experiencing significant momentum in project wins for our natural gas generators used in applications beyond traditional standby power generation.

Such as they are used in energy as a service Microgrid solutions and other distributed generation projects.

Diverse range of customers from National and regional regional commercial accounts to municipalities and beyond are showing substantial interest in these solutions.

We believe this demand is being driven by the need for enhanced resiliency and grid stability that these larger blocks of power offer for grid operators, while simultaneously, providing a tangible and meaningfully improved return on investment for the asset owners.

Strong momentum also continued in our international segment, as well as which as well with shipments increasing 49% year over year on an as reported basis during the first quarter with 27% core net 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.

Overall demand remains very strong across our international segment with backlog further increasing since our fourth quarter earnings call. The.

The European region is seeing particularly strong demand for portable generators mobile products in C&I generators due in part to the Russian invasion of Ukraine.

In the near term our heightened focus on energy independence and security has emerged in the region, but longer term implications of the conflict remain uncertain, given the troubling and very fluid nature of the situation.

In addition to strong core growth, our recent international energy technology acquisitions, deep-sea electronics and off grid energy reported impressive results in the first quarter.

<unk> sales synergies are developing for off grid energies mobile storage systems through <unk> global distribution footprint, resulting in incremental demand in new geographies driving significant backlog for these products.

We've also begun additional product development projects within the mobile storage category to significantly expand the power capacity range of the product lineup.

Global demand for deep sea controls and automation products are at all time highs and order intake has surpassed our previous expectations with.

With respect to synergies, we're further embedding deep sea controls and technology into our legacy C&I products globally.

Additionally, deep sea provides important capabilities that are core to the growth of our portfolio of grid connected energy as a service and micro grid solutions.

Our international segment has also experienced much stronger profitability, despite inflationary headwinds and supply chain challenges.

First quarter adjusted EBITDA margins expanded to 15, 2% from six 2% 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 today I am extremely proud of the <unk> teams efforts and delivering record sales record net sales results in navigating the difficult operating environment to deliver overall results that exceeded our previous expectations.

We'll be discussing in detail our 2022 forecast update during the outlook portion of our prepared comments. This morning, but in short we're raising our net sales guidance for full year 2022, and maintaining our overall guidance for adjusted EBITDA dollars, which reflects the visibility provided from our increased backlog and confidence in our ability to execute.

Supply chain challenges in the overall inflationary environment have persisted but.

But we believe we have also taken appropriate measures to offset these ongoing headwinds.

While we are tactically executing on our near term initiatives, we remain focused on the longer term mega trends for our business and their alignment with the strategic pillars of our powering a smarter world enterprise strategy.

As we execute on our strategic plan, we are building out an ecosystem of connected energy technology solutions for both the residential and C&I markets to address the challenges faced by the aging electrical grid and the serious supply and demand imbalances that are developing.

We remain confident and squarely focused on building out the solutions portfolio is the modernization of the power grid is expected to significantly expand our addressable markets.

Ultimately lead to further growth opportunities for our business in the years ahead.

I'd now like to turn the call over to Europe to provide further details on our first quarter 2022 results and our updated outlook for 2022 your thanks Aaron.

Looking at first quarter 2000, 22022 results in more detail net sales increased 41% to $1 4 billion. During the first quarter of 2022, another all time record as compared to $807 million in the prior year first quarter.

The combination of contributions from acquisitions and the unfavorable impact from foreign currency had an approximate.

Plus 7% impact on revenue growth during the quarter.

Looking at consolidated net sales for the first quarter by product class.

Residential product sales grew to $777 million as compared to 542 million in the prior year, representing a 43% increase despite a strong prior year comparable.

Contributions from the <unk> and <unk> acquisitions, and the impact of foreign currency contributed approximately 5% of revenue growth for the quarter.

Home standby generator sales made up the majority of the residential product core sales growth increasing by approximately 50% over the prior year as we continue to expand production capacity for these products.

Shipments of power cell energy storage systems also grew at a significant rate as compared to the prior year as the U S residential solar plus storage market continues to grow and as we expand our distribution network for our clean energy solutions.

Partially offsetting this strength.

<unk> generators faces a tough prior year comparison due to the significant outages caused from the severe winter storm impacting several states in the first quarter of 2021, including the high profile, Texas Winter Storm event.

Commercial and industrial product net sales for the first quarter of 2022 increased 38% to $279 million as compared to $202 million in the prior year quarter.

Contributions from the deep sea and off grid acquisitions, and the unfavorable impact of foreign currency had a net positive impact of approximately 13% on net sales growth during the quarter.

The very strong core revenue growth was broad based driven by growth across all regions highlighted by robust telecom and rental volumes.

Net sales for the other products and services category increased 28% to $80 million as compared to $63 million in the first quarter of 2021.

Contributions from acquisitions and the impact of foreign currency contributed approximately 8% of revenue growth during the quarter.

Strength in aftermarket service parts continues to be a key driver of the core sales growth in this category due to the heightened power outage activity in recent years, and our larger and growing installed base of our products in the field, which is also leading to higher levels of extended warranty revenue.

Also contributing to the increase were continued growth in our services offering in certain parts of our business and higher grid services subscription revenue.

Gross profit margin was 31, 8% compared to 39, 9% in the prior year first quarter as the challenging supply chain and overall inflationary environment drove higher input costs during the quarter.

Specifically.

The lagging impact of elevated commodity prices and other component surcharges higher inbound logistics and expediting costs.

Increased labor rates and continued plant ramp up costs, all pressured margins in the current year quarter.

The increasing realization of multiple price actions previously implemented and favorable sales mix, partially offset these margin headwinds.

Operating expenses increased $73 million or 55% as compared to the first quarter of 2021.

This increase was primarily driven by the impact of recurring operating expenses from recent acquisitions together with the increase in intangible amortization expense.

In addition, higher employee costs and additional variable expenses from the significant increase in sales volumes also contributed to the increase.

Operating expenses as a percentage of revenue, excluding intangible amortization increased approximately 50 basis points as compared to the prior year period due to the impact of recent acquisitions that have a higher operating expense load relative to sales given their startup nature.

Adjusted EBITDA before deducting for Noncontrolling interests as defined in our earnings release was $196 million or 17, 3% of net sales in the first quarter as compared to $214 million or 26, 5% of net sales in the prior year.

The decline in EBITDA margin was driven by the previously discussed decline in gross margins.

I will now.

Ill briefly discuss financial results for our two reporting segments.

Domestic segment sales increased 39% to $6 million to $965 million in the quarter as compared to $693 million in the prior year.

With the impact of acquisitions contributing approximately 5% of the revenue growth for the quarter.

Adjusted EBITDA for the segment was $170 million, representing a 17, 7% margin.

As compared to $207 million in the prior year or 29, 9% of net sales.

The lower domestic EBITDA margin in the quarter was primarily due to significantly higher input costs and the impact of acquisitions.

Partially offset by the increasing realization of previously implemented pricing actions and favorable sales mix.

International segment sales increased 49% to $171 million in the quarter as compared to 115 million in the prior year quarter.

Core sales, which excludes the impact of acquisitions and currency increased approximately 27% compared to the prior year.

Adjusted EBITDA for the segment before deducting for Noncontrolling interest was $26 million or 15, 2% of net sales.

As compared to $7 1 million or six 2% of net sales in the prior year.

The significant expansion in international EBITDA margins was primarily due to strong margin contributions from the deep sea and off grid energy acquisitions, and improved overhead absorption and operating leverage on the significantly higher sales volumes.

Now switching back to our financial performance for the first quarter point to a 2022 on a consolidated basis.

As disclosed in our earnings release GAAP net income for the company in the quarter was $114 million as compared to $149 million for the first quarter of 2021.

GAAP income taxes during the current year first quarter were $28 6 million or an effective tax rate of 19, 7%.

As compared to $35 4 million or an effective tax rate of 19, 1% in the prior year.

The year over year increase in effective tax rate was primarily due to a lower discrete benefit from equity compensation in the current year quarter as compared to the prior year.

The effective tax rate in the first quarter is seasonally below our full year 2022 guidance due primarily due primarily to the timing of vesting of certain equity awards and the related benefit recognized for tax purposes.

Diluted net income per share for the company on a GAAP basis was $1 57 in the first quarter of 2022 compared to $2 33 in the prior year.

Adjusted net income for the company as defined in our earnings release was $135 million in the current year quarter or $2 <unk> per share.

This compares to adjusted net income of $153 million in the prior year or $2 38 per share.

As disclosed in our reconciliation schedules in our earnings release, our adjusted net income and EPS for the current year no longer adjust for cash taxes due to the exploration of our significant tax shields that originated from our LVL transaction in 2006.

Cash flow from operations was negative $10 million as compared to positive 153 million in the prior year first quarter.

And free cash flow as defined in our earnings release was negative $37 million as compared to positive $126 million in the same quarter last year.

The decline in free cash flow was primarily due to a much higher working capital investment in the current year quarter.

The higher working capital investment was primarily driven by seasonal inventory build for certain product categories, increasing production rates and further increases in inventory levels due to the challenging supply chain environment and extended logistics in transit times.

As of March 31, 2022, we had approximately $500 million of liquidity comprised of $206 million of cash on hand, and $290 million of availability on our ABL revolving credit facility, which matures in May 2026.

Also total debt outstanding at the end of the quarter was 1.09 billion, resulting in a gross debt leverage ratio at the end of the first quarter of only one three times on an as reported basis.

In addition recall our term loan doesn't mature until December 2026, we did not have any required principal payments on this facility until the maturity date.

And then it has a low cost of LIBOR, plus 175 basis points.

We also have interest rates swap arrangements that fix our interest rate exposure on approximately $500 million of this debt through the maturity date of December 2026.

With that I will now provide further comments on our updated outlook for 2022.

As Aaron previously discussed our strong execution and ability to maneuver through this challenging supply chain environment allowed us to exceed shipment expectations during the first quarter of 2022.

In addition, the higher than expected inflationary environment that has manifested over the last couple of months has required us to implement another round of price increases here in the second quarter of 2022.

As a result of these factors we are raising our topline guidance for full year 2022.

Net sales are now expected to increase between 36% to 40% as compared to the prior year on an as reported basis, which includes an approximate 5% to 7% net impact from acquisitions and foreign currency.

This is an increase from the previous guidance of net sales growth between 32% to 36%.

This revenue outlook now assumes shipments of residential products increased at a mid to high 40% rate during 2022.

Up from prior expectation for a low 40% right.

And revenue for C&I products is still expected to grow at a high teens rate compared to the prior year, despite larger than expected FX headwinds.

Importantly, this guidance still assumes a level of power outage activity during the year in line with the longer term baseline average.

As a result, consistent with our historical approach. This outlook does not assume the benefit of a major power outage event during the year.

Given we are still expected to be producing at full capacity for home standby generators throughout the year the upside of a major power outage would be more limited to incremental portable generator shipments during 2022, meaning any extra lift for home standby generators from a major power outage.

Most likely result in incremental revenue in 2023.

As we ramp capacity.

And our supply chain for home standby and clean energy products and as incremental price realization kicks in over the remainder of the year, we're expecting quarterly revenue to increase sequentially over the next couple of quarters with net sales in the first half approaching 47% weighted as a percent of full year sales.

Looking at our gross margin profile as we have discussed at length cost pressures cost pressures have continued to impact our profitability thus far in 2022.

We expect first quarter 2022 to be the peak of this year over year price cost headwind as price realization has a more meaningful positive impact on our gross margins certain inflationary pressures progressively ease for the remainder of the year.

And as the benefits of our focused cost reduction initiatives further materialize.

As a result of these factors, we expect quarterly gross margin percent to increase sequentially throughout 2022 with fourth quarter gross margins are expected to recover back to first quarter 2021 levels in the 40% range.

This would result in gross margin percent for the full year 2020 to be approximately in line with 2021 levels.

Looking at operating expenses as a percentage of sales excluding amortization expense, we expect full year 2022, opex percent to increase approximately 100 basis points compared to full year 2021, primarily due to the impact of recent acquisitions that have a higher operating expense load relative to sales given their startup nature.

Yeah.

Adjusted EBITDA margins for the full year 2022 before deducting for Noncontrolling interests are now expected to be approximately 21, 5% to 2020 to 22, 5%.

Compared to the previously expected range of approximately 22% to 23%.

The additional price increases required to offset the higher than expected inflationary pressures are resulting in this modest EBITDA percent dilution from previous expectation.

Importantly, the midpoint of this guidance range would result in adjusted EBITDA dollars in line with our previous guidance.

From a seasonality perspective, adjusted EBITDA margins are projected to improve significantly as we move through the year, primarily driven by improving gross margins as previously discussed.

We expect that the first quarter marked the low point for adjusted EBITDA margins for the year with the progression of sequential improvement approximately level loaded by quarter, resulting in fourth quarter of 2022, adjusted EBITDA margins returning to the 26% range similar to Q1 2021 levels.

Several additional guidance items that we provide to assist with modeling adjusted earnings per share and free cash flow also require updating for the full year of 2022.

Our GAAP effective tax rate is now expected to be between 23% to 24% for the remaining quarters of the year, resulting in a full year 2022, GAAP effective tax rate of approximately 23%.

This compares to our previous full year 2022 guidance of 24% to 25%.

This decrease is driven primarily by higher than expected equity compensation deduction in the first quarter as well as lower state income taxes is expected during the full year 2022.

For full year 2022, we now expect interest expense to be approximately 32% to $44 million an increase from the previous guidance of $41 million to $43 million, reflecting higher than previously expected levels of LIBOR rates throughout 2022, while still assuming no additional term loan principal payments during the year.

Depreciation expense is now forecast to be approximately $54 million to $56 million in 2022, given our assumed capex guidance as compared to 56% to $58 million previously expected.

GAAP intangible amortization expense in 2022 is now expected to be at the high end of the previously expected range of $95 million to $100 million.

Stock compensation expense is expected to be between $32 million to $34 million for the year.

As a result of these updated guidance items in our first quarter performance net income as a percentage of sales is expected to be similar to our prior guidance.

Our full year weighted average diluted share count is expected to be approximately 65.0 to $65 5 million shares.

Our capital expenditures are still projected to be approximately two 5% to 3% of our forecasted net sales for the year.

For full year 2022, operating and free cash flow generation is still expected to follow historical seasonality and be disproportionately weighted towards the second half of the year.

Given the very strong organic sales growth expected. During 2022, we still expect the conversion of adjusted net income to free cash flow to be approximately 70% to 80% for the full year as a portion of cash flows will be invested in working capital to support this growth.

Finally, this updated 2020 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value.

This concludes our prepared remarks at this time, we'd like to open up the call for questions.

We will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad again star one on your telephone keypad. Please limit yourself to one question and one follow up please.

Please standby, while we compile the Q&A roster.

Your first question comes from the line of Mike Halloran with Baird. Please go ahead.

Hey, good morning, everyone.

Sure Mike.

So can we just dig into the home standby side, a little bit obviously, you seem pretty comfortable with the in home consultations of the consultations in general.

In line with your expectations, but backlog came down how much of that is.

Comment on demand coming in a little bit.

Is your capacity ramping to cover some of.

Cover some of that incremental backlog and maybe just what youre seeing in the channel in general from a customer demand perspective at this point book to Bill anything like that.

Yes, Mike I think I'd point to a couple of things that we talked about on the prepared remarks, and I will give you a little bit more color around it beyond that so that the <unk>.

<unk> backlog hsp backlog did come down as projected.

Our demand was was in line.

With our expectation so <unk> I think our prepared remarks, we said there were three times. The 2000 22020 Q1 levels. So there are significantly elevated when you look past the Texas event last year, which is.

Just.

It was a very unique set of circumstances.

And none of our guidance contemplated that reoccurring nor does any of our guidance contemplate any major events happening. This year, so if something does happen.

We're going to obviously end the year with.

Even greater demand and we project at this point.

On the execution side of things, we did execute better than we thought we would in Q1.

So our output levels for home standby were were better.

We were able to navigate a couple of supply chain challenges that we're facing and continue to face.

Our Wisconsin factories as a matter of fact just.

Continue to.

To outpace our our projections here, we're getting a lot of output out of the factories here and then obviously in Trenton, South Carolina, we've been aggressively ramping that factory and the output grows.

Every week that goes by so continue to lift that up so the combination of increased output.

And then the demand being in line still puts us with an incredible backlog for hsp, well above kind of where we would have thought we would be at this point, especially if you go back to our Investor day remarks in September .

Yes.

We really werent planning on kind of being where we're at today. So.

Pretty pretty exciting times for the Hsp category.

So a question on pricing then as a follow up.

Maybe a sense for the cumulative amount of pricing you guys have put in over the last.

Arbitrarily 12 months or so but did I hear you right. There in the prepared remarks that you suggested that the backlog.

Was re priced for the current marketplace.

It will be on June 1st correct.

Okay.

Cumulative pricing.

Cumulative pricing.

Think high teens is kind of what we would call. It over the last close to now 15 months 18 months, maybe including this latest round, including this latest round here in April which is the repricing of the of a backlog on June one effective date.

Okay.

Thanks, guys appreciate the time thanks, Mike.

Your next question is from the line of Tommy Moll with Stephens. Please go ahead.

Good morning, and thanks for taking my questions Hey.

Tommy.

Aaron I wanted to stick with the.

The theme of pricing here.

Insight do you have on how elastic demand for home standby.

Any insight into what portion of the underlying unit volumes are financed versus purchased outright by the homeowner.

Yes, those are great questions, Tom ill, probably let York maybe tackle the finance piece I don't know if we've given that.

Still a relatively small piece, but it is growing.

Growing pretty rapidly the finance piece historically it wasn't a financed purchase but its growing well I think as the category expand maybe it's 10%.

But it's growing it's been growing quite a bit in terms of elasticity around pricing Tommy I think what we would tell you is we have a ton of data and metrics that we watch very closely so everything from.

Inbound console patient requests to obviously the.

Proposal costs that go out on average.

Recall that.

The high teens number that I just quoted for pricing impact on the Hsp is just the product itself.

And the product itself is maybe half of the total cost of the project. So you have other inputs there around labor and other materials that.

No.

<unk> also increased of course.

But when we look at those project costs, we're able to then look at the close rates that we're seeing and that helps us kind of gauge.

The impact of each round of pricing to date, we're not seeing any significant impact on pricing.

And expensive product to begin with right. So.

To say it was all in kind of a nine to $10000 project for a home standby generator today. It's maybe 11000 dollar project to 11500, when you look at the average proposal costs.

That extra $500 thousand and $500 doesn't seem to be dampening.

The enthusiasm for demand for the category and I think that really speaks to the underlying megatrends that are driving the need for resiliency and backlog and I would point to again in our prepared remarks, we talked about <unk> being up three acts over this point last two.

2000 22020.

So just up dramatically over that environment, so pricing would be that kind of mid teens, maybe 20% overall increase.

In product category price, so we feel pretty good that and.

And I would say Thats just my last comment on this.

Having been around this business as long as I've been around it we've had to do pricing over the years.

In the past.

The category is incredibly durable with respect to.

The demand and with respect to the impact from pricing.

That durability I'd point, you back to the 2008 2009 recession.

Our overall consumer residential business was up even in the depths of that.

I think if anybody would have said that that category will be up kind of a large ticket kind of arguably discretionary.

Product tied to residential investment I think most people would have said.

Nuts, but.

But we actually did outperform and I think it speaks to the potential durability of the category.

Just one last comment I know you said that was my last time. One last comment you also have to think of the category because it's really it's a home improvement project, yes think of it as the impact of the price of that product in relation to the home's value.

A lot of home values are way up so when you think about it in the context of as a percentage of the homes value, it's not up significantly at all.

I might argue that home values have risen faster than the price of the project itself. So anyway I'll leave it at that but thanks for that question Tommy.

I appreciate the context.

Erin.

Sticking on the home standby theme.

As we think about some of the factors into next year.

You mentioned that you've achieved in held to a higher level of underlying demand versus the pre pandemic baseline and.

And so once we get through most or all of your backlog and assuming away any kind of major outage event next year.

What are some of the things that you can do.

To drive that awareness.

Higher or to drive the underlying demand higher I mean, I'm thinking largely around customer acquisition spend.

Surely there is a.

A lot of focus on units next year once it's a quote unquote normal environment, we'll see if we ever get there what is within your control that drive that demand yeah, no. It's a.

Great question and something that we're constantly focused on and I would tell you.

We test a lot of things.

We have hesitated to kind of rollout bigger things right now because obviously demand has been strong our backlogs as big as it is so adding to that.

We're kind of up against do we frustrate customers with the lead times versus.

Adding incremental demand so I would tell you that while we've been here's an example of program. We're testing we have accumulated.

Hundreds and hundreds and hundreds of thousands of unclosed leads over the last several years.

The category awareness has grown.

All of those leads came in based on prior spend we know that we when we Reengage unclosed leads in particular after maybe a localized outage or maybe on the back of a promotion regionally or nationally.

Just a phone call just to reengage them and maybe discuss ahead of the hurricane season, the upcoming hurricane season, if theyre located in those regions or ahead of the upcoming winter season, if theyre in those regions. We found that we can we can move the needle on close rates.

So we've stood up internally our group a team that is outbound calling to those enclose leads that is something that as we watch the return on that and we're very pleased so far with the early returns on that pilot program. That's one area that could be scale could be scaled quickly could be scaled.

With outsource resources or we could internalize it we have a lot of capability when it comes to call centers and.

The ability to do those those types of outbound campaigns. So thats one area. Another area is pulling on promotional levers, which again largely not done over the last several years I think there's a tremendous opportunity there just because we've been laying low and you do have you do have consumers who want to wait on those promotions they find whether they are extended warranty.

Promotions or.

We're talking about.

Free first year of monitoring type promotions or whatever the promotion maybe we've done those promotions in the past with great effect.

Done a lot less of them over the last two years, so that would be another lever to pull so theirs.

I think we have a lot of things at our disposal.

Hello.

A lot of people I think are wondering if you listen to this call are you watching the company, what's going to happen to demand for home standby in 2023.

You've learned nothing about following this company over the last decade, it's that.

Not sitting around waiting for some exogenous event to happen, we're very active very proactive and we're constantly pushing the category forward. We always have been we always will be.

That's one of the reasons, we have such a massive share of the category. We are the category.

And when you've got the leader like that we are it's incumbent on us to continue to move the needle and we have definitely moved the needle to a new place you mentioned it a new hire a new baseline level. We've seen this happen time and time and time again with this category its expanding it continues to expand and I'm confident that in the future.

It will continue to expand and that's just I think being around it as long as we have in understanding the drivers the purchasing drivers and seeing what we're seeing in terms of the demand markers out there. We're really encouraged that the category is going to continue to grow.

Your next question is from Ross Gilardi with Bank of America. Please go ahead.

Good morning, guys.

Hey, Ross.

Maybe we could just expand on your your lapse.

Comment there.

Erin so.

So if you take your new guide Youre at five 1% to $5 $2 billion in revenue in 2022, and your three year target from your Investor Day, I think I have an app.

Five six so how are you thinking about that now I mean is it real.

Thank you.

You will raise the $5 5 billion sometime soon within the $5 5 billion is the home standby business, a larger smaller business larger or smaller business than where it will finish in 'twenty two.

If we see the hsp come off its highs in the next one to two years do you have enough other growth levers to comfortably get to the five and a half.

Yes, I think when we laid out the guidance in the in the Investor Day Ross.

We never said, we were going to grow in a straight line. The company continues to grow with a grower and a.

Dynamic grower at that but we know that there are things that happened in the category, sometimes that are outside of our outside of our control things like what's happened in Texas.

Yes, I don't know if youre going to get a strong hurricane season recall that none of our.

I think in our Investor day, we really only had one major events.

Assumed in the three year period so.

To that effect, we've got a number of things that werent in the guidance back in the Investor day and things like <unk>.

We don't have additional M&A in the guide.

Seeing some tremendous potential out of our grid services teams, we've got the entire clean energy story that is.

We're just tapping into a whole new market opportunity, it's pretty interesting I mean, we go through so we do strategic planning like every company I'm sure and.

And we go through a pretty rigorous exercise around kind of our kind of Tam and Sam evaluations in each of the categories and channels that we participate in the total addressable market that we have available to us today is so much greater than what it was even a couple of years ago that based on.

Only where we've acquired companies and gotten into new spaces, but where we've continued to grow organically where some of the spaces. We were in before are growing organically.

Yes. It is.

It's actually pretty stunning and I think it's to me when I think about why why is the company growing the way. It's growing we grew 50% last year. Our guide here. This morning is to grow between 36% and 40% again. This year, yes, there aren't a lot of companies doing that.

So why is that I would tell you I think we've.

<unk>.

We are taking advantage of the opportunities in front of US we're taking advantage of what we've built and we're leveraging it we're leveraging it for better effect, we're leveraging it into these bigger.

Addressable markets and I think that that is a big a big reason why we're experiencing the growth we're experiencing will that continue in the future at these at these rates I mean, I don't know were not here to update guidance. This morning from a long term basis.

But I do know that all the signs that we have and all the success that we've experienced point too much bigger market opportunities based in particular on the Mega trends that we're tapped into strategically here I think we're just in the right place at the right time with the right products and I think we're going to continue to build on that.

Not only the remainder of this year, but in the years going forward.

Thanks Darrin.

Just HSBC dealer inventories.

Normalized yet and then just when you talk about production you seem to be seeing more so that youre getting youre squeezing more out of Wisconsin is trend and actually hitting the.

Production targets.

You had laid out at the Investor day, or Wisconsin, having too.

Compensates for that maybe ramping slower than you thought.

Yes, it's a great question, it's actually on pace with where we thought there would be really the outperformance in Q1 came out of the additional output out of the Wisconsin facilities, we continue to dial in and we've added a lot of automation to all of those facilities with the kinds of production rates, we're talking about here with HSV two.

To be honest I mean being around the category as long as I've been around their mind blowing in terms of the daily rates that we're producing.

But to see our Wisconsin facilities, continuing through supply and the supply chain challenges getting around some of that stuff. We have baked some of that we had we had we had maybe hedged a little bit in Q1 for that so that's the answer to that question on the dealer inventories.

We're seeing days of inventory be a little at the high end of where they've been historically.

That happens kind of seasonally about now it's coming out of the winter season.

It's been in the spring weather has been I don't know.

About many of the people on the call here, but if you live anywhere in the upper Midwest. It's a wonderful winter we're having this spring.

And I think I actually saw snowflakes again yesterday, so it may 3rd so.

It's been difficult to get out and install product that the kind of pacing, we want to see and we're also starting to see.

Some of the some of the limitations of the expansion of the category in terms of permitting in some areas, especially some newer areas like California.

Just really struggling with getting permits issued there so that's been our.

That's been a hurdle we've called it out a couple of times just continues to to be funneled me, how how difficult that is permitting and in that particular region.

But we need to we need to increase the installed pace because outputs increasing so that.

That is a massive area of focus for us.

And we're working hard with our existing dealers, but also with new dealers in terms of increasing.

They're there.

Their ability to install products more quickly and and Theyre struggling also by the way with labor.

It's another struggle for the channel out there so.

It is something we're watching closely but we are seeing install rates move up we just need to see them move up even faster.

Believe there's buyers for those units that are in the field. So I think they are absolutely, yes, the IAC yet based on the IC side.

And we think the demand is there to support what we're what we're seeing in the field in terms of inventory and increase the install bandwidth right.

Your next question is from Phillip.

Shen with Roth Capital Partners. Please go ahead.

Hey, guys. Thanks for taking my questions.

First ones.

On a follow up on the price increase.

My sense is it was around 6% since Thats effective June one can you talk through if Thats right and then also.

What is the chance that we could see.

More price increases in Q3 and four.

How much is that a meaningfully low probability or is that actually on the <unk>.

Radar because of.

The inflation you see ahead.

Yes, it's a great question, Phil I would tell you that youre pretty close on that price increase it depends on yes.

Which skew in which model, but kind of mid single digits.

5%, 6% somewhere in that range was the last round of pricing and that was across a number of products.

The home standby category for sure and then.

A little more aggressive in some of the clean energy products you may have your channel checks.

In terms of where we'll go with pricing Q3, Q4, I mean, I would tell you right now the guidance contemplates that additional pricing.

Because we're taking the somewhat extraordinary step of repricing the backlog as of June one that is going to read through a lot quicker than previous price increases. So today, we feel like our guidance.

If you just look at kind of the margin progression here Q1 is going be the bottom Q4, we're going to return somewhere like took back to where we were kind of in the beginning of 2021.

And so that's.

That's a pretty big step right to get from today to there and a lot of that is because of that 5% to 6% kind of reading through the back through.

Through the balance of the year here alongside some some additional cost reductions plus previous pricing actions that we've done also reading through.

To get the full impact of all the pricing so we feel pretty good that said.

Obviously.

Sitting here like on the last call. It was prior to the Russian Ukrainian conflict.

We're actually starting to see some.

Some pullback in some of the basic commodities, we're big users of steel copper and aluminum were actually seeing some moderation in those those commodity costs and then that conflict.

<unk>.

And we saw kind of a reengagement of those inflationary trends on those basic commodities as well as just continued and persisting high logistics costs, which have been really.

Somewhat amazing to watch.

We were very optimistic.

Stick around in the last call that those cost commodities and logistics would start to moderate through the balance of the year I am not as optimistic as I sit here today that they will and that's reflective of this kind of most recent round of pricing and why we did that.

In our latest guide we've got steel prices that they are at their higher levels here in copper and copper has actually moderated since then but it has actually it's Paul.

And we are starting to see the beginnings of some of the logistics costs moderate so that.

That will be helpful.

But.

Yes, if if costs continue to rise from like let's say today's levels. Then it's something we would have to evaluate right, but I think the team was able to react very quickly to these higher higher inflationary pressures that we're seeing today and given the elasticity comments I made prior it doesn't it doesn't worry as such we have to do that.

The thing that we probably could have done to help ourselves earlier as to reprice the backlog more fully earlier on in.

That's an extraordinary step we try to avoid doing that because we know that.

Our distribution partners oftentimes they have already bid out a job they already have a contracted arrangement with end customers. So repricing. The backlog is effectively just reducing their economics on a project or they have to go back to their end customer and also increase price, which.

Current.

Channel partners approach that differently, but that's a pretty painful step and we understand that but thats something that.

We it doesn't it doesn't worry us if we have to do that we will do that again.

Okay, Alright, thanks, guys.

In terms of capacity.

And you just talked through.

Hitting your Q2, 'twenty, two double double and you've talked through.

The strong demand the new baseline level.

Else do you need to see.

Before.

You become well what else do you need to see for the next capacity expansion to become official.

Like where are you in that process.

We've talked it through over the past few quarters here.

<unk> been waiting for something.

What is that something and how close are we in.

And.

If we are looking at another leg of expansion.

Where is it.

To what degree can you sketch it out thanks, yeah, yeah. Thanks, Phil so.

We've been in the process for evaluating.

Either an expansion in our existing facility in Trenton, or perhaps another facility.

Our home standby production in particular.

We haven't announced a location yet or what our plans are there.

We did take the extraordinary step of ordering some of the additional tooling will need to take another leg up in capacity to increase capacity further there because we know the lead times along that tooling right now would hit sometime in the first quarter of next year in 2023.

Where are we deliver that tooling to and where where we take that production capacity to us. The question in terms of what do we need to see I think we've already seen it we've seen.

New and higher baseline for the category, we know that we want to have for ourselves we need to build in some some upside here in terms of the.

Expansion capacity, if you will we need some excess capacity there too to handle where demand surges happen we call it surge capacity.

Today, we think we have we've made pretty good shape, not knowing what's going to happen in the back half of the year for the demand curve again.

All of our guidance here does not assume.

Even though contrary to what the latest hurricane forecast does not assume that we get a major event. So if we do see an active hurricane season, obviously, we want to move faster not slower on the capacity expansion plans, but in the meantime, we're going to have to figure out where we deliver this tooling and we've got to figure out.

What that that kind of longer term capacity for <unk>. It looks like we do have some similar challenges on the C&I side of our business, which has been growing at a very similar clip.

Know that we need to add capacity there and are also in the current.

Evaluation phase of do we add another facility to expand existing facilities, what do we do to address that as that category builds out we've been in the meantime, filling up our facility south of the border outside of Mexico City, we have a brand new beautiful facility down there that we've got a couple of years ago, mainly for the Latin American markets.

And it was going to give us really nice long term growth capacity down there, we just filled it up very quickly with.

Our capacity here in the U S and Canada. So we're starting to get really tight on capacity in C&I. So that's another area and then clean energy is another area, where we have to evaluate capacity needs for the longer term. So that is a very active process across the entire business. When you grow 50% in one year and 36% to 40% then.

Next year.

During out what that footprint is going to be to accommodate that growth and growth in the future. It's almost an everyday discussion.

Your next question is from Jeff Hammond with Keybanc. Please go ahead.

Hey, guys good morning.

Jeff.

So I know you've covered some on kind of price cost, but I just wanted to kind of level set on your confidence in the second half kind of margin ramp.

As it relates to kind of the start up freight and can components surcharges, if you need some reprieve there to kind of.

I hit that hit that margin ramp thanks.

Yes, Jeff this is you're looking at.

Our commentary gross margins are expected to go up let's say roughly 8% from Q1 to Q4 I would say about half of that will just be the realization of the pricing that we've just been talking about at length here over the call.

Other half is the cost.

Inputs that you just mentioned.

If you think about like where steel was at its peak it is actually off from its peak so relative to what we're experiencing in Q1, which was the peak and as that progresses through the year.

Steel should come off a bit.

We are starting to see the beginnings of lower inbound freight costs. We don't believe we will need to expedite as much as.

As we do feel like we brought in a good amount of safety stock here over the last couple of quarters. So we just believe that inbound logistics costs should moderate a bit as we ramp we'll start absorbing.

And particularly our Trenton plant better.

And then we do have line of sight on focused.

Bill of material cost reductions on on home standby telecom product et cetera. So so we feel like we've got good line of sight on on some of the easing input costs.

To execute on that gross margin improvement.

As I mentioned before.

The guidance does assume steel costs at these higher levels that ramped up after.

After the Russia, and Ukraine invasion, there and.

So we feel like from a future commodity standpoint, we think we have embedded the curve.

<unk> environment.

Into the guide so.

Good line of sight to all of the pieces.

To get to to give that 8% increase in gross margin.

Okay, Great and then I don't know if I missed it can you give us the updated lead time on home standby and then just.

Any updates on kind of the net metering noise in kind of this trade circumvention.

Kind of having any impact on your clean energy businesses.

Yes.

Great questions, Jeff about 20 weeks on HSV today on inbound orders, so still pretty extended pretty long backlogs still well north of $1 billion on <unk>.

But I'd say.

We're continuing to make progress there as we ramp production.

In terms of on the clean energy business the impacts to the net metering disc.

Discussions have been going on you know kind of coast to coast right from California to Florida.

We've seen the Florida thing play out the governor there vetoed.

Vetoed the the potential.

Rule changes around net metering.

<unk> <unk> of net metering, California is reevaluating the proposed draft rule, making there by the PUC.

We don't see actually when you think about it let's just take California. For example, we don't they don't have a dramatic penetration in the state of California. So.

Probably kind of a non event for us in fact, I would say.

Probably that kind of a situation net metering kind of being curtailed and by the way that's kind of the inevitable situation around net metering.

As you get more homes that have solar and are producing their own power on site selling that back to utilities at retail rates is untenable economically I mean, it just doesn't work longer term, so but there needs to be a gradual kind of glide path. We've talked about this we've engaged regulators on this you can't have this abrupt kind of.

Pulling the punch Bowl away kind of situation I think that's detrimental to the industry, but in what's being proposed in California that would if they did pull the punch Bowl away and net metering was curtailed dramatically there as being as proposed.

Storage is the answer so we've actually seen marked increased and interest in storage systems. As a result, and I think inevitably that that is what is going to drive storage attachment rates, even higher we're kind of in that 20% to 25% range right now on storage attachment rates and then the trade circumvention discussion really that.

We're talking to our channel partners. They are not concerned about it in terms of impacting <unk> solar maybe more on the utility scale solar projects those bigger projects.

Some of the suppliers of panels to those types of projects are maybe going to be the ones that are caught up first.

In this evaluation.

This investigation on the residential side frankly, there are other panel providers that might push panel prices up a bit but again looking at the total cost of these projects not dramatically. So in terms of the impact to the projects I just don't think there'll be any real demand destruction on the back of that at the residential level. So no major concerns.

Or at least today based on our discussions with channel partners.

Your next question is from Brian Drab with William Blair. Please go ahead.

Hi, Good morning. This is Blake Keating on for Brian .

Hey, Blake.

I appreciate you taking my question I'll just ask a quick one here since it's after the hour.

The two lockdowns in China affected any of your suppliers, there or your supply chain network overall.

And do you see that as a potential risk moving forward continue to be under lockdown.

Yes, it's a great question Blake.

Helpful.

Just broadly we have.

Supply chain there in that part of the world and.

The Lockdowns have created.

Another yet another kind of struggle or challenge for.

For our operational teams. So we're working around it I do think that Europe may have made this comment before relative to our.

Current working capital situation, where we're feeling like we've got a lot of inventory sitting here that we are preparing for season. So.

You can kind of think of it as like a little extra safety stock right now, which is helping us buffer the impact of that but we do have some instances, where we're having to expedite logistics again, we're having to fly some products over the top of things to get here faster because of the Lockdowns, where we can't load a ship or.

Can't get something here on a timely basis. So if those lockdowns extend could that impact us I think.

Like anything probably would have some kind of an impact I do think that we've done a really nice job over the last couple of years.

Broadening our supply chain.

Meaning we have fewer single sources of supply now than we've ever had for some of our critical categories like home standby.

We do have other options our not as concentrated on supply. So that I think just de risks the category a bit and.

And makes any one disruption.

Much less impactful so I feel I feel like we're in a better shape to weather that.

Got it thank you I'll pass it along.

Thanks.

Your next question.

From Mark Strouse with Jpmorgan. Please go ahead.

Your line is open.

Sorry about that can you hear me now and now Mark.

Sorry, guys I was on mute.

Thanks for taking my questions good morning.

Most of them have been answered.

I did want to talk about the new silicon products. So I'm, sorry, if I missed that but are the new micros or are they still on track for introduction later this quarter.

They are yes, we're going to be shipping our first beta sites here late in the in Q2, and we expect to ramp full production in full shipment volumes here in the second half I mean, we still had a pretty modest part of our clean energy guide for the year that was associated with power micros that hasnt changed at all we know that that's going to be a slower ramp than probably what our.

George ramp was originally but.

I'll say this every time, we engage with the channel partner in the.

Kind of the renewable space the solar space.

They are very excited to have us there as a potential supplier. We know that we've got we've got to prove ourselves there but.

But we like where the opportunities could take us that could be one of the more meaningful things one of the more meaningful product launches here not only for clean energy, but maybe for this company in the years ahead. If we if we look forward, we feel really bullish about where that category is growing.

Great. Okay. That's it for me thank you.

Thanks Mark.

Your next question is from Jerry Revich with Goldman Sachs. Please go ahead.

Yes, hi, good morning, everyone, Hey, Jay.

I'm wondering if you just talk about given the initiatives that you spoke about earlier on the call in terms of growing database and just improvement.

Improvement in.

Conversion rates today versus.

Five years ago, 10 years ago, how do you feel about that.

The trough.

In residential standby demand in this cycle compared to what feels like 30.

<unk>, 30% Magic number we've seen post Katrina.

And Rita and Sandy et cetera, how are you thinking about that within the context of.

The way you are positioned today, yes.

Yes, Jerry that's a really interesting question and one that we continue to ponder here as well I would tell you that.

When you think about sandy and even Rita and some of the kind of go back more than a decade ago.

The category was in a very different place in terms of awareness in terms of distribution.

In terms of our brand recognition.

Even in terms of kind of.

Our consumers' view on the need for backup power right just given everything that's transpired in the last decade.

Outages or more frequent outages are lasting longer people are spending more time in their homes.

Grids in a different spot I think.

We are that much more dependent on.

Continuous source of power in our homes and everything that we do.

So I don't know if im ready to make a comment that it'll be it'll be.

In terms of numerically how it will differ but I think the category. There is no question in our categories in a completely different place.

Awareness levels around the products are much much higher today than they've ever been.

So I feel like.

It's not that 10 years ago. This was a category that was dependent on the episodic nature of things outside of our control I do not feel that that's the case today I feel like we have a lot more.

We have a lot more levers to pull we have a lot more buttons to push and we have a lot more ways to stimulate demand and theres a lot more need in the marketplace for that well just think about grid services and just having an ROI to the generator where in the past it did a whole another angles Hillary we're starting to see interest in home standby generators as.

Part of these grid services bids and that that would be something we wouldn't have had back then I'm sure I mean, it's a Great example York.

And I'm wondering can you just expand on that last point.

Closer we're pursuing these contracts and moving forward as part of grid services, you had in California and alignment with our so utilities I'm wondering.

We're close to anything similar for the home standby category and utilities.

Yes.

That's an area, we're watching very closely as well grid services, our prepared remarks, we said we've gotten.

We've won a number of deals in Q1, our grid services team I think it was eight or nine.

Kind of important deals for us that some small some large that.

And we don't press release every one of them I know others in our market do because I think they have nothing else to talk about so you talked about that which.

As the only thing you can talk about but for us.

Just one more thing we're marching forward here building that out it's given us a lot of confidence about.

The future opportunities there not only just kind of how we think about the balance of this year, but how we exit this year and going forward with grid services and it's a mix of products, it's not just home standby.

From power sales to thermostats, we talked about <unk> and some of the prepared remarks, but a lot of interest and thermostats and Theres a reason for that because utilities understand the cost of a home standby the cost of a power cell that's a pretty expensive products. There. They are impactful of course on the grid, but thermostats or more affordable.

When you talk about low and moderate income households in particular.

Utilities have to solve for all of their ratepayers they have to solve this problem across their entire rate paying base.

And so not every one of those ratepayers, there's going to be able to put in a battery storage system or a home standby generator. So in order to really address all of the ratepayers thermostats are a great way to do that and so I've been actually pleasantly surprised by the number of high quality conversations I was down in Houston last week.

Are you talking to a couple of larger utility partners down there and just the the enthusiasm they have for the full suite of products that we offer but also around thermostats in particular I think it's just been.

I think it's one of the many areas of traction that we're seeing but one that I think longer term. It makes a lot of sense, because you can deliver a lot of value across the entire rate paying base.

Not a lot of investment and I think thats that really is exciting for for many of those grid operators and utility companies.

Your next question is from <unk> <unk> with credit Suisse. Please go ahead.

Hey.

Good morning, and thanks for taking our questions. Most of my questions have been answer maybe just like on the <unk> backlog. If you could help us understand how much is coming from California and Texas.

<unk>.

Just maybe.

Thinking about the truth in those markets beyond 2022.

Should we expect like a similar run rate Youll see a new goal.

Backup generator market or.

What are you seeing.

Last year, the industrial market.

Yeah, no great quick questions when he thanks.

Breakout backlog traditionally by region or by state but.

Obviously the demand curve.

You did call out last year and last quarters last year that we were seeing obviously tremendous interest from those two markets specifically that you mentioned, California, and Texas has seen a lot of distribution growth in those markets, which would lead to additional growth opportunities in the future I would just point to one thing that I did mentioned I think I answered it kind of.

Indirectly and another question about kind of the.

The field inventories, but California, particularly the permitting process there.

Has continued to kind of be.

Challenging it slowed the growth of that market in my opinion in terms of what we can install the rate at which we can install.

Interest level and the category remains very high though when we look at IHS.

In home consultations and we look at them historically.

Vis vis <unk>.

Kind of the 2020 level.

Thats something that we still see.

Elevated levels in Texas, and California for sure in terms of interest in the category and again just I just mentioned on the last last question Q&A question I took.

We were down in Houston last week, we talked to a number of the participants down there in the market and they continue to see very strong demand.

Demand around the products I think there are a lot of homeowners, who maybe were disenfranchised when they tried to get a quote a year ago in the height of the demand surge coming off of the Texas Winter event, they were a little bit disenfranchised by either the lead times or just even the time to get an in home consultations done.

And so they are coming back around this year and theyre starting to think about okay. I want to be ready for next winter, meaning the winter of 2022, and so they are actually starting to see and talk to customers who were not in the funnel. They just kind of a self selected out because it was just too long to wait and so they are coming back and revisiting it so I feel like those.

Markets are going to be continue to be growth markets in the future and an important part of the overall story for for home standby growth as we as we see the penetration rate deepen.

Thanks.

Your final question is from cash Harrison with Piper Sandler. Please go ahead.

Good morning, everybody. Thank you for taking my questions and all the details.

So circling back to the commentary around home consulting <unk> being <unk> above 2020 levels. This might be perhaps a simplistic way to think about things but.

I mean should we effectively just think about quote unquote normalized baseline level.

Ex excess backlog is more or less being three times your U S residential revenues from back in Q1 2020 since presumably.

Power solid <unk> werent really contributing that much to revenues back then.

That's an interesting thought I mean, it's an interesting question I would tell you that you'd have to take into consideration where our close rates at.

That's a part of that equation.

And recall that <unk> are not our full that's not everything we do right. So it's we think it's representative or proxy for the HSV market, but that's just that's a portion of what we do so there are other channel partners. There. We've also seen growth outside the.

The U S markets, where we're more established with Ics.

Didn't talk dramatically about that this time, but we continue to see interest in the product category growing outside of North America, but yes.

Yeah.

You'd have to run the numbers have to unpack kind of the.

<unk>.

The hsp growth as we've seen it in kind of the backlog, there and where we're at if we took that away.

Im not sure that I could say with.

With 100% certainty that the go forward rate baseline rate is three acts like I'd have to I'd have to think more about that it's an interesting question.

Forecast future close rates and then what is the storm season, this year and I think theres a lot of them, but if youre thinking about baseline, which I think is this question I think it's an interesting question, but there's a lot that goes into that but it is it's certainly going to be higher that's what we always talk about this new and higher baseline level that gets created after these kinds of events are cycles, and we've seen them historically over the last.

Nearly 30 years, we kind of grow we infill with new distribution, we infill with new levels of awareness.

And then the.

Our brand recognition and everything that goes into that and invariably. It holds those higher baseline levels, it's really quite something to see and then you've got our clean energy business growing rapidly and then you've got a global C&I business that is doing very well on top of all right. So that those would be able to put all the pieces together and be accretive.

Yeah.

That's helpful. Thank you and then just as my follow up.

Im trying I was wondering if you could just maybe circle back to the relationship between the HSV lead times and backlog.

You mentioned lead times are now around 20 weeks from 27% to 30 at year end, but you still have over $1 billion in backlog and you expect to carry some of that into 2023 and so I was wondering if you could just maybe remind us what you consider a quote unquote normal lead times to be and then.

Are there like seasonal market dynamics that would would would stop.

The reduction in lead times from being linear meaning that the time in the next call you would industry are up another 7% to 10 weeks and then another seven to 10 weeks after that I'm, just trying to better understand how to think about the relationship of how the lead times might evolve over the next few quarters and then how the backlog might evolve with those lead times. Thank you yes.

Thats a great question Kash and maybe a good place to end the call today obviously.

Obviously, the hsp backlog I think the thing that for US we're going to have a meaningful backlog in HSV. When we exit this year that has become clear to us given that demand has remained robust in line with our expectations in Q1, but was elevated off from Q4, where we thought it was going to be coming into this year that push.

Kind of at the original assumption when we sat at our Investor Day was that we would be back down to our historical lead times, which are zero to two weeks that was part of your question. What are historically to have zero to two weeks and it's almost like we inventory for the product we want to have product available. So that when there are <unk>.

Demand searches searches we can handle it.

Don't foresee ourselves getting back to that level by the end of this year and in fact will be quite a bit and lead times will remain fairly elevated there wont be at 20 weeks, but they won't be back at zero to two weeks.

And remember that.

Because we're also we're ramping production here each week of backlog, we're talking about is a bigger number right because we're producing a lot more per week. So we're accelerating and so that week. Each week backlog is actually a bigger numbers. So the quantum is growing as we grow our output here. So.

That's without by the way our assumption does not include a major event.

So it includes <unk>.

No major events, so a muted hurricane season, which is not which would with that's not what's projected so.

We are I guess, maybe being a bit conservative there I don't know, we've always guided without storms, whether that's right or wrong, we could debate that for another hour on this call, but that's the way we guide.

And so there is like a free option embedded in the stock that way. If you want to think of it that way is that if you do get a storm season Thats in line with what experts are saying.

We're going to see more demand I don't know that we'll be able to satisfy a much more of that demand this year because.

It'll be a 2023 story more so than anything we do have portable gens and other things we're in pretty good shape. There from an inventory standpoint, we'll be able to capitalize on that if there were outages that were major outages. This year, but we're going to have a sizable backlog going into next year and thats. The big I think thats, where wed probably leave it out here for this call so but great question.

And that concludes the question and answer session now I'll hand, the conference back to Mr. <unk>.

For final comments.

We want to thank everyone for joining us. This morning, we look forward to discussing our second quarter 2022 earnings results with you in early August Thank you again and goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining you may now disconnect.

Okay.

Yeah.

Yeah.

Yes.

Yes.

Yes.

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