Q2 2022 Generac Holdings Inc Earnings Call

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Good day and thank you for standing by welcome to the second quarter of 2022 generic holdings earnings 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.

One on your telephone.

You will then hear a tongue acknowledging your request. 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.

Good morning, and welcome to our second quarter 2022 earnings call I'd like to thank everyone for joining US. This morning with me today is Aaron yard felt president and Chief Executive Officer, and York Ragen, Chief Financial Officer, We will begin our call today by commenting on forward looking statements certain statements made during this presentation as well as other information provided from.

Time to time by <unk> or its employees may contain forward looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make.

Reference to certain non-GAAP measures during today's call.

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, our second quarter results were very strong with robust revenue growth significant sequential margin expansion and all time records.

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 supply the challenging supply chain environment.

Gross and 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 topline 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 in 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 exclude 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 during 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 four 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 forecast 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, where sales leads continue to point to strong underlying demand for home standby generators growing at a mid teens rate. Despite a price a strong prior year comparable period, driven by the Texas Winter Storm event in February of 2021.

This demand was broad based with four or five 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 four times greater than pre COVID-19 levels seen in the second quarter of 2019.

Importantly, strengthened its leading market indicators continued here in the month of July .

In addition, activations, which are a proxy for installs continue 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 80 to 100 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 are continuing to improve and we are getting product in the hands of our customers and channel partners in a more consistent in a more timely basis.

As a result of this progress close rates on our sales rates 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 are sales leads within our sales pipeline.

Our bill 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.

The constraint is 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 and installation.

As a result project lead times for homeowners is measured as measured by the time between a 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 in 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 <unk> acquisition and given the growing commercial sales synergies and cross functional initiatives between residential energy storage and micro <unk> 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.

But rising prices for traditional energy sources, and a growing <unk> 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 are very encouraged by last week's announcement of the inflation reduction act as a potential positive catalyst for demand. Although it is 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 was approximately 2800 trained and certified technicians with approximately 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 power manager and the pending launches of our power generator, which is the industry's only engine engine driven battery charger AC coupling solution for our power cell storage product for use in retrofit applications.

And our new PV micro inverter product called the power micro.

As expected we began shipping power micros 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 <unk>.

Integration is proceeding as planned and we continue to make good progress in developing cross selling opportunities for eco vs hardware solutions through <unk> distribution partners.

<unk> successfully launched two 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 <unk> differentiated combatant 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.

This differentiation also drive significant market opportunity for <unk> energy services, offering which has been further enhanced by synergies with <unk> grid services efforts.

<unk> 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 <unk> enables consumers to take advantage of variable rate pricing structures.

Additionally, we are beginning to leverage the amazing talent within the <unk> 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 <unk> grid services. The team continues to drive momentum and it's increasingly impressive and diverse sales pipeline building on our 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 of turnkey program for low and moderate income households, utilizing power solar energy storage systems, and a unique solution for the German power market.

Utilities and grid operators continue to warrant a 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 grids. So the development of virtual power plants or vps.

As an example, this need was on full display during the recent heat wave in Texas as a number of home standby generators enrolled in the PPP program, where autonomous we control 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 micro Inverters 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 <unk> for.

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 our second quarter as compared to the prior year as several of several of our larger telecom customers further invest in hardening their existing LTE sites and begin to build out their fifth generation or <unk> networks.

Telecom infrastructure upgrades remain one of the key Mega trends, 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 our resilient demand environment for mobile products and the Mega trend of the critical need for infrastructure improvements.

We also continue to see material traction in orders for off grid energy as mobile energy storage systems from our key North American rental channel 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 Spa.

Specifically, we are establishing a strong reputation in 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 as 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 growth core sales growth when excluding the benefit of the deep sea and off grid energy acquisition 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. 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 intersegment sales grew substantially as our <unk>, 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 <unk>.

Demand for off grid, <unk> 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 an 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 underpinning the opportunity for an increasingly broad storage product portfolio for C&I applications.

Deep Sea also benefitted 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 teams electronics controls expertise to advance product roadmaps 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 nine 7% in the prior year period due to the accretive margin profiles of deep sea and off grid and of the deep sea, an awkward acquisitions improved overhead absorption and better operating leverage on significantly higher volumes.

In closing this morning, I am 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 Mega trends supporting this strategy are as compelling as ever many of which have the potential to decouple from the broader macro 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're 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.

<unk> is uniquely positioned to lead the evolution to a more resilient efficient and sustainable energy energy future.

I'd now like to turn the call over to York to provide further details on our second quarter 2022 results and our outlook for the year. Your thanks Erin.

Looking at second quarter 2022 results in more detail.

Net sales increased 40% to $1 $9 billion during the second quarter of 2022, another all time record as compared to $920 million in the prior year second quarter.

The combination of contributions from acquisitions and the unfavorable impact from foreign currency had an approximate had an approximate 7% impact on revenue growth during the quarter.

Briefly looking at consolidated net sales for the second quarter by product class.

<unk> product sales grew to $896 million as compared to 600 million in the prior year, representing a 49% increase despite a strong prior year comparable.

Contributions from our clean energy acquisition and the unfavorable impact of foreign currency contributed approximately 7% of revenue growth for the quarter.

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

Commercial and industrial product net sales for the second quarter of 2022 increased 22% to $309 million as compared to $254 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 impact of approximately 6% of.

Net sales growth during the quarter.

The strong core revenue growth was broad based driven by growth across all regions globally.

And all channels domestically.

Net sales for other products and services increased 31% to $86 million as compared to $66 million in the second quarter of 2021.

Contributions from acquisitions and the impact of foreign currency contributed approximately 13% of this 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 a larger and growing installed base of our products in this in the field.

Which is also leading to higher levels of extended warranty revenue.

Also contributing to the increase was continued growth in our services offering and certain parts of our business.

Gross profit margin was 35, 4% compared to 36, 9% in the prior year second 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 surcharges higher inbound logistics and expediting costs increased labor rates and continued plant ramp up costs, all pressured margins relative to the prior year quarter.

The increasing realization of multiple pricing actions previously implemented and favorable sales mix, partially offset these higher input costs.

We are very we're very encourage that gross margins expanded 360 basis points on a sequential basis as pricing benefits increased input costs began to ease during the second quarter reinforcing our expectation that margins have bottomed in the first quarter.

Operating expenses increased $83 million or 53% as compared to the second quarter of 2021. This.

This increase was primarily driven by higher recurring operating expenses from recent acquisitions and an increase in intangible amortization expense.

Higher employee costs and additional variable expenses from the significant increase in sales volumes also contributed to the increase.

Operating expenses, excluding intangible amortization as a percentage of revenue increased approximately 75 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 as those businesses scale for future growth.

Adjusted EBITDA before deducting for.

For Noncontrolling interests as defined in our earnings release.

Was an all time record $271 million or 21% of net sales.

In the second quarter as compared to $218 million or 23, 7% of net sales in the prior year.

The decline in EBITDA margin versus prior year was driven by the previously discussed decline in gross margins and higher operating expenses, but again, we're very pleased with the 370 basis point sequential improvement in EBITDA margins relative to Q1 2022.

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

Domestic segment top total sales, including intersegment sales increased 42% to $1 3 billion in the quarter as compared to 793 million in the prior year with the impact of acquisitions contributing approximately 6% of the revenue growth for the quarter.

Adjusted EBITDA for the segment was $242 million, representing a 21, 5% margin.

Third to 204 million in the prior year or 25, 7% of net sales.

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

The offset by the increasing realization of previously implemented pricing actions.

And favorable sales mix.

International segment total sales, including inter segment sales increased 43% to 203 million in the quarter as compared to 142 million in the prior year quarter.

Core sales, which excludes the impact of acquisitions and currency increased approximately 34% compared to the prior year.

Adjusted EBITDA for the segment before deducting for Noncontrolling interests was $29 5 million or 14, 5% of net sales as compared to $13 7 million or nine 7% 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 significantly higher sales volumes.

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

As disclosed in our earnings release GAAP net income for the company in the quarter was $156 million as compared to $127 million for the second quarter of 2021.

GAAP income taxes during the current year quarter were $45 8 million or an effective tax rate of 22, 5%.

As compared to $46 4 million or an effective tax rate of 26, 6% for the prior year.

The decrease in effective tax rate was primarily due to a discrete tax item in the prior year quarter, resulting from a legislative tax rate change in a foreign jurisdiction that unfavorably revalue deferred tax liabilities by $7 million, which had an approximate.

Which had an approximate 4% tax rate impact to the prior year quarter.

Diluted net income per share for the company on a GAAP basis was $2 21 in the second quarter of 2022 compared to $2.01 in the prior year.

Okay.

Adjusted net income for the company as defined in our earnings release was $194 million in the current year quarter or $2 99 per share. This compares to adjusted net income of 153 million in the prior year or $2 39 per share.

Recall from last quarter and 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 shield that originated from our LVL transaction in 2006.

Cash flow from operations was $24 million as compared to 123 million in the prior year second quarter and free cash flow as defined in our earnings release was $6 million as compared to $96 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, partially offset by higher operating earnings.

Inventory levels inventory levels stabilized in the second quarter. So the higher working capital investment during the current year quarter was primarily driven by an increase in accounts receivable given sequential sales growth.

And a reduction in accounts payable as we optimize inventory levels and purchasing patterns.

We expect free cash flow conversion to return to the historical long term average in the second half of 2022, resulting in approximately 90% conversion of adjusted net income to free cash flow.

We significantly enhanced our liquidity profile in the second quarter with the amendment of our existing credit facilities. This included establishing a new term loan facility in an aggregate aggregate principal amount of $750 million.

And a new revolving credit facility in an aggregate principal amount of $1 5 billion, which was unfunded at closing.

Proceeds from the $750 million new term loan were used to prepay $250 million of the existing term loan b facility.

And to fully pay off the existing ABL revolving credit facility, which had 285 million outstanding at closing.

With the remaining funds added to the balance sheet to be used for general corporate purposes.

Our new term loan a and revolving credit facility matures in June 2027.

These new debt facilities will initially bear interest at Sulphur, plus 150 basis points through the end of 2022 and.

And beginning on January one 2023, the applicable spread will range from 125 to 175 basis points based on the company's total leverage ratio.

Additionally, our existing term loan B does not mature until December 2026, we do not have any required principal payments on this facility until the maturity date and it has a low cost of sulfur plus 175 basis points.

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

As of June 32022, we had approximately $1 $72 billion of liquidity comprised of $467 million of cash on hand, and $1 $25 billion of availability on our revolving credit facility.

Also total debt outstanding at the end of the quarter was $1 37 billion, resulting in a gross debt leverage ratio at the end of the second quarter of only one five times on an as reported basis.

Before discussing outlook I want to highlight that we have been we've been repurchasing our shares opportunistically, thus far in the third quarter in.

In fact, we have exhausted the remaining $124 million of share repurchase authorization that existed as of the end of the second quarter.

As a result on July 29, 2022 of the company's board of directors approved a new stock repurchase program that allows for the repurchase of up to $500 million of our common stock over a 24 month period.

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

As Aaron previously discussed we are maintaining our sales growth and adjusted EBITDA margin guidance for the full year of 2022.

We continue to expect net sales to increase between 36% to 40% as compared to the prior year on an as reported basis, which includes an approximate 4% to 7% net impact from acquisitions and foreign currency.

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

And revenue for C&I products is still expected to grow at a high teens rate compared to the prior year.

Looking at seasonality for the second half of the year revenue is expected to increase sequentially in both the third and fourth quarters, continuing the strong double digit year over year growth trends with fourth quarter sales levels up more modestly above the third quarter.

Looking at our gross margin profile as discussed we expect that margins have bottomed in the first quarter we continue.

To expect fourth quarter gross margins to recover back to first quarter 2021 levels in the 40% range driven by increasing price realization continued easing of inflationary pressures through the remainder of the year and further material ovation of cost reduction benefits.

This would result in gross margin percent for the full year 2022 to be approximately in line with 2021 levels, which is consistent with our previous expectations.

Operating expenses as a percent of sales excluding amortization expense for the full year of 2022 are still expected 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 as they continue to invest for future growth.

Adjusted EBITDA margins before deducting for Noncontrolling interests are still expected to be approximately 21, and a half to 2002 and a half for the full year.

From a seasonality perspective, adjusted EBITDA margins are projected to improve sequentially in the second half primarily driven by improving gross margins as previously discussed with fourth quarter of 2022, adjusted EBITDA margins approaching 26%.

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

Our GAAP effective tax rate is now expected to be approximately 24% for the remaining quarters of the year.

<unk> and our full year 2022, GAAP effective tax rate of approximately 23%.

For full year 2022, we now expect interest expense to be approximately $52 million to $54 million, an increase from the previous guidance of $42 million to $44 million.

Reflecting our updated capital structure due to the refinancing of our credit facilities in June 2022.

In addition, we have updated our interest rate assumptions to reflect our latest market expectations for sulfur in the second half of 2022.

This assumes no additional changes in outstanding debt for the remainder of the year.

Depreciation expense is still expected to be approximately $54 million to $56 million in 2022, given our assumed capex guidance.

GAAP intangible amortization expense in 2022 is now expected to be approximately $100 million to $105 million as compared to our previous guidance of the high end of the $95 million to $100 million range.

Stock comp expense is still expected to be between 32% to $34 million for the year.

Our full year weighted average diluted share count is now expected to be in the low at the low end of the previous guidance range of approximately 65 to $65 5 million shares given our share repurchase activity in July 2022.

Our capital expenditures are still projected to be approximately 2.5% to 3% of our forecasted net sales for the year.

And as previously mentioned free cash flow conversion is expected to return to historical norms of approximately 90% in the second half of the year.

Finally, this 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.

Great and as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

And your first question comes from Michael Halloran of Baird.

Okay.

So so theres a lot of great content in there could you just help me triangulate with something Youre talking about backlogs that.

We're starting to be filled.

Lead times coming down.

At the same time really good IHG consultations and you feel pretty good about the underlying demand environment. So.

Could you maybe give some context to what that backlog bleed has looked like or what the inventory lead times look like and maybe put that in context for the visibility that you have how far out that tracks relative to <unk>.

Yes.

A typical timeline.

Yes, Mike this is Aaron.

The lead times have come down now on average.

We're talking home standby category here eight to 10 weeks, which again is I think.

The directly the result of our our actions and 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.

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.

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 one catalysts. That's new this year, our second one obviously.

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 is really around this outage that happened in Canada, which 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.

Yes, I'd say, 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.

Pretty high profile outage.

A million utility customers in Ontario, and Quebec.

About a month and a half ago. It was in that that really has.

Jumps off the page when you look at it in our in our statistics, when we want and we tracked by region, we actually track some just.

A lot of data really down to down to the.

Down to the ZIP code level and 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 <unk>.

Bring that the lead times on the category down.

The backlog part of that question, then Erin, whereas the backlog growth into us and then.

Maybe some thoughts on how far that visibility stretches out for you at this point.

Yes, we've always said home standby visibility.

Yes.

Usually it is not very good right because we typically don't have a backlog we've been in a backlog situation now for close to two years as we've been working to ramp production and tackle the supply chain challenges, which we've been doing.

That backlog is still significant and in fact 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.

Ramp ongoing in production output, we are still not going to catch that by the end of the year, we will continue to bring our lead times down.

But the backlog is still is still significant for home standby.

Thanks I appreciate it.

Thanks.

Yes.

And your next question is from Julien Dumoulin Smith Bank of America.

Julien Your line is open.

Sorry, guys.

Wasn't sure excellent. Thank you.

Appreciate the time guys. Good morning, So let me just come back to the gross margin question. Obviously, you guys reaffirming here the outlook.

Dropping off <unk> can you comment a little bit about some of the input cost reductions flowing through how much.

Does that provide you as you look forward.

Going into your longer term outlook 'twenty, three 'twenty four et cetera, how much is that going to Cascade and also can you speak a little bit more about.

Repriced in the backlog the success and perhaps.

Pricing trajectory given some of the moderation in the constant cuts here.

Yes, Julien This is York, so we posted 35.4% gross margins in the in the second quarter very pleased with the sequential improvement off of Q1.

And we are starting to see pricing read through you mentioned repricing in the backlog, we did announce a price increase in April that reprice the backlog as of June one.

We still have some additional price pricing that launched late last year that will will flow through backlog into Q3.

But as our prepared comments said.

We posted 35, 4% gross margins in Q2 expect them to get closer to 40% by the end of the year as we ramp that what does that 4% to 5% increase about half of that sequential increase will be about half of that will be pricing price realization continuing to come through.

The other half being moderation of input costs.

When you look at commodity starting to rollover, we will start we will see the lagging impact of that Theres always a lag in our realization is as commodities move theres always a lag we'll start seeing this.

Some of that here latter part of the year.

We're seeing inbound freight costs come down some of our expediting costs are coming down.

Just getting our plants absorption improve we do have a number of just cost out projects. We're working on our bill of material of our product of our products that will materialize in the second half. So all of that supports and gets us comfortable with that progression of of sequential margin improvement.

To the point, where when we exit 2022 here, we will feel very comfortable with our margin profiles again back to where they were early part of 2021 before all this inflationary pressures happened.

Got it yes, it sounds like maybe there's even more latitude there.

As you continue to compound with some of the benefits that maybe.

Maybe if I can pivot quickly I know you said high teens for C&I.

With respect to that business and obviously.

Any 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.

And how that could complement the backlog.

Yes, Julien this is Aaron.

The C&I businesses.

Yes.

We don't.

We don't spend enough time talking about that business, it's a really great solid business it.

It has been growing quite nicely and is really the benefactor of many of these mega trends we've been talking about.

C&I products in particular in a couple of areas and I'll point them out telecom.

Telecom market for US we are.

We are a significant share player in that telecom market, we supply all the major tier one carriers here in the U S and many of the secondary and tertiary players as well.

We have a diverse offering of product.

Engineering design specific solutions for specific network applications.

A lot of these.

Gen sets you would think their standard products and they are but there are specific to a particular customer's network. So we will customize around the needs of each network, which are different so.

So that's one trend and obviously is as you know.

The telecom companies are spending a lot of capex to harden their networks and build out the fifth generation net.

<unk> networks that we're benefiting from that trend and we think that that will continue.

The next several years at the very least.

The other one is.

In the rental space the rental channel partners that we have they're all re fleeting. So they kind of went through a process after through the COVID-19 cycle down where they reduced their purchases obviously with the uncertainty on what might happen and then as the economy began to really.

Come to life.

As a result of a lot of the stimulus spending they found themselves with fleets that were aged or undersized for the market requirements. So we're.

A leader in when it comes to power generation temporary lighting.

Temporary dewatering heating those types of applications, we've got a great product assortment that we sell to again all the major rental accounts and that has been a that's proven to be a really.

A really great business and then just one other point I'll make the international side of C&I most of our international business is C&I, we do have a nice growing.

Residential business in there and we don't talk a lot about that but we're seeing home standby activations around the globe, which is.

<unk>.

An indication of some of the power security issues that exist not only here in the U S, but but certainly everywhere, but internationally that business has done incredibly well.

They have been doing well for several quarters now and that's on the back of some of the energy security issues in Europe , but just again power security in general.

Whether you are talking about the conflict, the Russia, Ukraine conflict or whether you're talking about challenges in other parts of the world.

We need power, we need to continue to source of power and backup generation.

Is going to be in demand for a long time. So that's C&I business is great book to Bill was positive in the quarter and.

And backlog grew again.

Okay.

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

Hey, guys. Thanks for taking my questions.

Hey.

No.

Some of our checks suggest that lead flow has dropped.

Certainly in some regions I think some regions have.

Healthy lead flow, but others are a little bit down some of the lethal it might be down 25% to 40%.

From maybe four or five months ago can.

Can you talk about.

How that might serve as a leading indicator at all I know you were talking about <unk>, but.

These floor at some level is.

Precedes that and then if you can touch on lead flow for.

The solar business as well you know to what extent are.

When you kicked when he started.

Solar business or when you're early into it.

Generating lead flow is a key point of differentiation, where does that stand with your ability to create value for your dealers.

And so forth.

Yes, thanks, Phil.

I'll unpack that here with a lot of it around or all of it around leads let's let's talk a little bit about home standby leads four out of five regions they were up quarter over quarter.

Up big in some regions. The only region. We saw a pullback was in the south Central region and Thats, Texas.

Texas is you take that that February 2021 winter event out of there and that's where if you are doing channel checks you may find in Texas I mean, they were so high.

No 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 a quantity.

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 generate in Texas was the highest.

If any of the any of the 50 states. So.

I would think that if youre doing channel checks, that's the only region at least based on our data.

As we said before.

We're really pleased to see kind of the lead activity because it's just it's such a great barometer of the market.

Activity that is to come and we've proven this out we've been tracking.

Sales leads for almost 10 years now.

It's a pretty solid reliable predictor of volumes in the future. So its a great leading indicator.

Pacifically to the clean energy business with leads yes. As you indicated that is and has been a differentiator for us vis vis others in the marketplace and it's really been helpful for us to help court, new New channel partners in new new dealers.

Giving those leads to customers in a market like the solar market as a for instance, the historically has had very high customer acquisition costs.

I think it is.

I think again, it's an area that we excel at based on our experiences with it.

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.

Two two of the regions in particular markets that we target, but but we are in.

Enjoyed some pretty good success out of that early on here in terms of.

In terms of the clean energy business great.

Great. Thanks, Eric.

As it relates to backlog you know we've talked about it a bit already.

Some of our conversations with dealers suggest the 22 and 2004 kilowatt are basically caught up basically it's like a one to two week lead time.

So you can kind of get it when you need it it seems like.

Long lead time generators are the liquid cooled ones.

So was wondering.

If that's true and then also in your backlog to what degree have you received cancellations in your backlog.

Were there because some of the people we've talked to their full in terms of inventory.

They just don't need as much.

Given the.

Situations. So just wondering if youre seeing any of that thanks.

On the backlog.

On the lead time question I would like to hit that here Firstly the category. It's about eight to 10 weeks and Thats air cooled and liquid cooled products.

Obviously average for the weighting of each of those products within there we have certain skus, where obviously.

We're performing better than that average in and certain skus, where we're where.

We're longer depends on sometimes component supply challenges.

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 or other constraints that are manifested and electrical side demand has been incredibly robust.

Liquid cooled.

And our ability to increase production output there has been a bit hampered by some.

Supply chain, so working to bring all of those lead times down and again, we've been speaking and when we talk about lead times, we've been talking about the averages.

The average number of weeks.

Orders in backlog and I think that that's an important distinction because when you talk to dealers youre going to find different dealers are in different places right. Some dealers.

Are they cant get enough product right.

Take more product, if we can get it to them.

They either have the space of the financial capacity to do that you have other dealers, maybe don't right. It's been particularly as you get into smaller dealerships.

<unk> typically have a warehouse so they run out of space more quickly. They don't typically have the financial capacity right and a lot of times you are paying with a credit card even in some cases.

In the prepared remarks, I spoke to the fact that installation bandwidth and.

Particularly when you look at the smaller end of the dealer spectrum. They are struggling to find labor. They are struggling with some components that they need things like propane tanks and other things. They are struggling with permitting delays were getting utility to come out to pull a meter upgrade a meter that those things are all starting to manifest themselves as we kind of brought our output levels up to.

A significantly higher level year over year, now youre, 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 ahk's about permitting issues or delays there or.

We've even stood up we've got HR efforts here or two to help hire contractors for our dealers or non contract labor for our dealers.

Depending on what their needs are.

So we're 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 8200 and we need more.

It'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 in order as you will 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 worked through that and it's kind of dealer by dealer it's really.

What 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.

It's a great program for 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 and 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.

And your next question is from Jeff Hammond of Keybanc capital markets.

Good morning, Jeff.

Hello, Good morning, guys.

Sorry, I didn't hear what you said there.

Can you hear me, yes, yep, Okay, if we could just get into battery storage.

I think you said there is some noise and I know theres a lot of supply chain issues. So just talk about what's going on in that business and what kind of your growth expectations. Our updated growth expectation is on that.

Yes.

That's great. Thanks, Jeff I appreciate it yes.

Yeah on storage, particularly supply chain challenges have been numerous and in fact I would say we hit our most challenging quarter with that here in Q2.

It was not really about cell supply it was actually challenges and all the electronics components that go into this gear from microprocessors too.

Thats to everything that we use.

In the inverter in the.

In the storage cabinet in the storage devices themselves. So.

No that was challenging in the quarter end.

We're hoping here for the second half to be better.

In supply of those components.

Demand has remained strong and again when you look at IHS sees again sales leads we're seeing good strengthen in lead volume and clean energy, So and and obviously, there's been a lot of noise around the regulatory environment are we going to have build back better or are we not now you've got the.

The inflation reduction Act.

Which still has hurdles to clear legislatively, but that could be.

Obviously, a catalyst for additional demand as we said in our prepared remarks.

Our position in storage, we still feel very good about our position there but.

But.

The supply chain has been has been.

It has been a burden here in Q2 and so.

To come on that we've got.

A nice forecast here for the balance of the year our guidance I think when you think about just.

We've talked about this in the past we have we've gone away from like trying to talk about discrete numbers of megawatts and everything else I mean that business is so much more diverse for us in terms of clean energy and all the things that kind of work together there from the energy monitoring and management to the grid services elements too we've got our power generators, we've got.

Power managers, our load management controls are just a lot of stuff. There. So we didn't feel it was appropriate to just talk about a single metric. So what we've said here and what our prepared remarks said is that we are anticipating that entire complex of products and services that we refer to as clean energy smart thermostats everything that go into that now to be in excess of $500 billion for the full year, which is based.

With double.

What it was last year, so feeling really good about that business and where it's going in the future.

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.

I don't know if you updated the free cash flow guide and how you think.

Working capital is.

Big of a source that can be in the back half. Thanks.

Yes, Jeff. This is York, we did say that looking at.

Basically our performance to date, where we are coming into the second half from a working capital standpoint.

We like that we saw inventories stabilize in the second quarter with that we should get back to a more normalized free cash flow conversion in the entirety of the second half of the year.

Recall normal cash flow conversion for this business is around 90% so.

It will probably be more weighted towards into Q4, but when you look at the second half in totality free cash flow conversion should should improve and.

In return.

A return back to <unk>.

Normal normal free cash flow levels for.

For this business.

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

Hey, good morning, Thanks for taking my Hey, good morning, Brian .

On home standby.

Build rates you mentioned are up significantly year over year, obviously can you quantify how much were up year over year second quarter build rates and where is your capacity now relative to.

What you feel you need in that business.

While we Didnt mentioned shipments were up over 50% for home standby, which is indicative of of our of our build rate.

This category that's a good proxy for that yeah, no I think theoretical capacity.

We get Trenton up and running and particularly another set of.

Ah machine tooling here in the second quarter that should basically that gets us to what our projected capacity increases were expected to be.

So.

Would that and that actually even gives us room here from where we're at today.

<unk>.

Even surge should we get a major event. So there is.

There is.

<unk>.

We are.

We're good from a capacity standpoint in terms of our expectations now.

Okay and is there.

Anything you can tell us about.

Capacity expansion plans for the medium term are you.

I mean are there is there another phase to capacity expansion coming over the next couple of years do you feel like youre going to need that.

While there could be Brian we took the action last year of getting additional machine tools.

We don't even have an address to deliver it to at this point.

Watch how the season plays out here.

And if it 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 tool I know it could be an expansion of our training facility, which is expandable we've talked about that it.

It could be another greenfield site, but.

Yes, 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.

There will be capacity adds that are needed.

Point in the future.

Okay and then just.

Lastly, you mentioned I mean, there's a lot of discussion around IH six obviously.

Did you say, specifically whether IH these were up sequentially from first quarter to second quarter.

I don't I don't have that in front of me, but we did not.

We're up yes, Mike's pointing up so yes, they were up sequentially.

They've been they've been on a tear here 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 Barry to be very Frank.

It's something that is.

I think it speaks to how the category continues to.

Continuing to move into more of a mainstream.

As more of a mainstream appliance if you will for homeowners in fact, they were up very nicely sequentially sequentially, yes, very nice.

And our next question is from Mark Strouse of Jpmorgan.

Good morning, Thank you very much for taking our questions.

Might be splitting hairs here, a little bit, but I wanted to come back to the installation constraints with you mentioned dealer labor in permitting and other components.

Is it a function of the.

Those conditions deteriorating since your last call or is it more so they are just not keeping up with your increased manufacturing output no. They are increasing we said that activations increased actually year over year. So we are seeing installs increase or just not increasing at the same pace. So it's it's not a deterioration its more of a.

It's the pace has not.

Increasing at the same rate proportionate to our output.

Okay. Okay that helps and then just curious within the home standby business for for new construction and new homes, just curious what youre hearing from your.

Partners within that channel.

While new home construction slowing but again, our <unk> are up so we've always been.

Marginally exposed to new construction.

I think it was something 10% to 15% of our total volume goes into that so.

So it's not it's not a huge thing you never really has been in fact, we've always said that could be a nice opportunity area. If we could get it to grow and it has grown from kind of that 10% range to more like 15 now but.

It's still it's kind of relative I think it's mainly a retrofit category kind of always has been.

Theres just a lot of housing stock out there in a lot of areas of the country that.

Are struggling with the power quality so.

We don't really see and we're not hearing anything directly from channel partners about that the only thing we do hear from them is it more home builders want to offer the product as a feature as a potential not necessarily a standard feature but certainly as a feature to the.

The people who are looking to build a home.

And your next question is from Jerry Revich of Goldman Sachs.

Hey, Jerry Yes, hi, good morning, everyone Hi.

Aaron I'm wondering if you just put a finer point around the order trends in standby it sounds like based on your backlog comments that net orders were about $200 million in the quarter compared to 500 million last quarter can you just comment on that because I know you looked at it on a port.

Poor production basis, when you quote lead times.

Just put that into context for us because obviously sharp pick up in <unk>.

<unk> consultations year over year.

Would just love to get your thoughts on that disconnect. If those numbers are right.

Alright, as Jerry's York, but we havent necessarily talked orders historically, we're running up against tough comps on the order standpoint, just given where the Texas.

Outage last year, so comparing that and as well as some of the installed bandwidth comments that Aaron talked about but.

I mean, you really have to look at the IH seized to really understand what's going on with the.

The end market demand and having those up.

Nicely year over year here in the quarter and up what we said was four times from three times over over top four times pre to have pre pandemic levels. So the underlying demand for the category is still very very strong.

But comparing that order rate is.

Versus prior year is probably not the right metric.

Okay.

What we've seen is higher baseline post major outages we've seen.

Generally a 30% peak to trough decline is.

Second adopters, if you will wind up installing gen sets a year after the peak installation rate can you just talk about.

Just on your <unk>.

How do you feel like that might play out.

This year I know, we touched on last quarter's call, but I'm wondering if you could expand on that.

One more quarter of information across the board here.

Yes, Jerry this Aaron.

Again, I think when you think of as a category.

The historical context is the right place to look I mean, the category has changed dramatically.

Over the last several years and.

I think all of the major kind of trends that.

Underlie the demand in the category and the strength that we're seeing in particular in Ics.

We believe we're going to remain intact here for the foreseeable future. So I think that frankly, I just think that the.

So the world has changed so to speak.

Whether it's work from home or whether it's so that's our home is a sanctuary trend or whether it's.

Power quality trends that continue to.

Be front and center for homeowners homeowners.

Homeowners, who they are buying the category today or at least shopping the category today, because they're worried about a potential outage.

The category used to be all about outages happening and it's still largely that's an important demand catalysts, but.

All the rhetoric and dialogue around utility companies struggling with raw supply.

As we worked to electrify everything is where decarbonising. The grid all of this kind of rapid shift in how we produce energy and consume energy is is exposing.

The just massive vulnerabilities and supply and demand balancing and that is something that is obviously a catalyst for not just home standby generators, but also C&I products, our clean energy products, our grid services products.

Those are all directly.

In line to benefit from just.

The sheer chaos that the grid has become.

It's a patchwork quilt to begin with but now it is equipped with a lot of holes in it.

And youre talking about massive concerns by people about just keeping their lights on keeping their families save for their home.

Property safe their business their livelihood safe all of these things operating so I think I think its just I don't know that you can compare it to kind of what has happened historically in any of those categories.

Okay.

And your next question is from William Griffin of UBS.

Great I appreciate you squeezing me in here.

A simple one here, but wondering if you could talk about some of the puts and takes on the sequential margin improvement in the domestic segment and specifically to what extent.

Any product discounting initiatives.

Then an offset to that.

No.

I mean pricing price realization is actually going up.

<unk>.

There is.

Anything very limited promotion going on I mean, there's always some just general underlying undercurrent of some minor promotions. We have planned promotions that are there, but I mean normally when we're not in a backlog situation. There is an ordinary course of promotions.

But even when you are in backlog you have some.

Some minor promotions going on side sequentially, there is nothing going on there.

In fact, we've obviously raised price.

Repriced the backlog June 1st.

And I think.

Partly maybe where you're going with that is to get to that back to that price increase stick in the marketplace.

And it did.

Okay.

Got it.

Just curious if you could quantify what the eight to 10 weeks of backlog translates to in terms of value.

I Didnt hear you mentioned that on the call. Yeah. We don't we don't disclose that Thats why you Didnt hear it.

Okay.

And your next question is from heat bandwidth of credit Suisse.

Okay.

Good morning.

Thank you.

Yeah.

Your line is open.

Yeah.

Your line is open.

So Christy I think we can probably go to the next question.

And that question is from Kashi Harrison of Piper Sandler.

Alright, good morning, and thanks for taking my questions.

Erin just wanted to revisit lead times, just just one more time.

You mentioned that now you're in the high singles versus 20 weeks last update.

I know you had mentioned last time that.

Capacity is increasing the relative dollar per week of lead times is different from what it was last time. So I was wondering if you could just give us maybe a sense of how to think about that rate of change.

Per week this time versus last time, even if it's just like a general percentage number and then may be part and parcel with that maybe.

Maybe just some some thoughts around the length of time before these bottlenecks between the dealers and installs begin declare along with the risks.

Bottlenecks persist.

Yes, Great question I think it's also a good point that the and we said this in the past that as we increase our production rate that.

Backlog as we stated in weeks of orders as that grows right I'd say as the output grows per week.

We're not going to we want to catch it and we wanted to catch up.

We think that as we said in our prepared remarks, one thing. We're seeing is we're seeing improved close rates on <unk>, because we are bringing down lead times. So that's part of our overall strategy here.

<unk>.

You are a customer and you're shopping the category, even if you're here eight to 10 weeks on a product.

You might be.

You might kind of sit on the sidelines and see what happens right and even worse kind of getting into the second part of your question is.

If a channel partner a dealer is quoting something longer because.

Their bandwidth to install.

Got them kind of at a fixed rate debt.

That keeps the lead time longer so that gap is as we pointed out it kind of grew in the second quarter because of the increase in our production output and they increased activations are installs, but not to the same level. So.

We're working with them to bring that inside.

We're going to need more dealers, we're going to need more installing contractors.

A lot of initiatives around trying to make installations easier.

And less time consuming.

Today, an installation of typical installation still takes.

Two individuals about an eight hour eight hours a piece of about 16 hours of labor in the installation. So if we could get that down now obviously frees up some additional bandwidth. So that's where our focus has been.

And again its dealer by dealer. So it is not widespread but we are seeing dealers struggled with that.

Particular dealers that are in markets, where either housing has been really hot in certain markets, that's where they're really struggling with labor for construction labor contractor labor.

Again part of our prepared remarks as well as the housing market cools, we actually think that will help us refocus installing contractors attention towards the category and will hopefully improve.

Lead times two to the end market.

And just a quick follow up there. So so the high singles would that be.

50% more than last time on a per week basis, 75% double just just any rough sense of how to think about it on a relative basis would be great.

No.

<unk>.

You would have to we'd have to do the math.

I don't have a ratio I don't have a ratio like that put together, but.

I think lead times, we quoted last time were in the 2020 weeks following week range that roughly half of that now eight to 10.

But again that eight to 10 represents a greater amount. So in terms of our production output. So it's not it's not half of what it was before so to your point I think thats functioning to get to I, just don't have the math in front of me on that.

Okay.

And your next question is from Preneed cities at Wells Fargo.

Thanks.

Trying to understand here with the constraints on the installer side I mean, if there was some kind of major weather event in the second half of this year, what would be would you be in a position to benefit from that or would that be basically kind of adding to the 23.

Sales at this point.

Yes, as we've said before if we get if we today. The plan is we're going to probably exit the year with some backlog remaining so that.

Does a that there's not a lot of room for upside for the storm there hasnt been.

All year for Hsp, we've got some room on portable generators.

We're in a good inventory position there ready to serve the market.

If there is an active storm season, but on <unk>.

And this is again why we're working with the channel to increase their installed capacity, because we've got to get that to a higher level longer term.

We've got we have seen.

Opportunities for that to expand but the backdrop right now what we're hearing from these contractors that are struggling is primarily labor some components and then some permitting and utility related delays.

We're attacking all of those things, we've got a broad slate of initiatives to get after those things and have been here for the balance of this year, because we kind of we could see this coming we needed to see the installation rate pick up and while it has increased it just hasnt increased enough at this point.

Any of the ramp your supply chain up further as well that's a good point in these challenging environment could have could limit that but definitely.

Would help all of 2023, it's a good point.

Got it and then just switching gears can you give us an update on the grid services business.

How many deals did you did you win in Q2 and are you seeing an acceleration in that side of the business with.

Utility rates going up and utilities kind of looking for any way to lower their costs.

Yes that has been a really active space for us.

Really pleased with the sales pipeline that's building there.

The challenge of course in <unk>.

In that business and as we've said before is just the time it takes to get these programs through you.

Not only the utilities themselves in terms of developing the programs, but also then the regulators.

For approval. So we have a couple of.

Really nice wins that we will youll see some announcements here.

In the weeks ahead on that.

I think really are a good example, both of the wins that Youll see a really good examples of the power of the hardware plus software approach that we've taken here and I think that as I mentioned in the prepared remarks, we are definitely beginning to see there.

As a differentiator for us as a company because we bring so much more to these these potential programs by offering solutions that span.

Everything from our smart thermostat program to generate a program to a battery program.

Our C&I generator program I mean, there is no big chunks of load that come from C&I generators, and we can bring all of that hardware to bear alongside this this really advanced software platform called Concerto that our team has developed it's just it's a really.

Interesting space going forward.

To the point about utilities, we have seen a change in their attitudes over the last several months several quarters really.

In terms of the sense of urgency and which and they're.

Asking questions and engaging with US we were down and distribute tact, which is kind of the utilities the utility markets trade show, if you will down in Dallas.

A while ago, a couple months ago, and I was struck by just the quality of the conversations the quantity of the conversations we had with utilities and grid operators and they just feel like they're back is against the wall.

They can't solve their problems with traditional means right like a traditional mean being if demand is going up because of <unk>.

More EV adoption in a particular market.

Grid, operator utility would simply have outlined a plan to add gas, peaking plant.

To cover those.

Those points in the curve, where they need additional supply and so that's something that they can't do anymore that regulators are saying look we're.

We're not going to allow you to add another thermal asset to your fleet for supply and so.

They are finding themselves in the uncomfortable situation.

Having to it's kind of like a dual mandate they'd have to decarbonize their grids because of that mandate, but the other mandate is they have to continue to provide resiliency and so they're really struggling with ways to do that so they have to have new tools in the tool kit and they see these virtual power plants and these distributed energy resources like generators and batteries and load management and thermostats.

As ways to it's really valuable ways to help them build out.

The additional supply or the reduction in demand that they need to provide the resiliency that there that they are charged with providing.

Yeah.

And your next question is from Donovan Schafer of Northland capital markets.

Hi, guys. This is Donovan Schafer how has it gone good.

Thanks, Thanks for taking my questions. So.

It seems like there has been so much changing.

All over the world in the last few months.

So I'm just wondering if we can step back and talk about.

Some of this in terms of what it means for the Mega trends you guys like to talk about so.

First there's grid instability.

But I do it does seem on some level than in the United States. There are at least some bonafide grid investments.

Infrastructure Bill those passed last year.

Plans to make it easier to permit transmission lines.

Does seem like there's a bit of traction there. So on that front I'm wondering if there are any risks or if there is any chance, we could get kind of a reduced trend and outages not near term, but maybe say three to five years out I know MISO I think just recently approved 18 high voltage.

Transmission lines too.

Handles 53 gigawatts of capacity or something.

And then I also want to talk on the Russian situation.

That does make the diesel to natural gas Mega trends certainly in Europe .

Some people it looks like a bad idea I know you also sell diesel generators. So maybe you can kind of be agnostic there, but historically the mega trends you've talked about has been the shift to natural gas.

And then kind of on the flip side.

Growth in the LNG markets, maybe that allows him or HFC and natural gas generation elsewhere.

Increasing energy security.

Generally I mean nations like Japan, Taiwan.

Philippines really struggle with electricity generation limited resources, having to import everything.

Probably don't feel great about China right now.

So those could be positive drivers so just.

I'm curious kind of again stepping back and looking at Mega trends in these kind of big movements globally, we've been saying.

Which ones are you watching which one do you think could really.

Things do you think could really be material over a couple of years.

Any clarification on that would be very helpful.

Yes, Jonathan.

I'm a megatrend standpoint.

The grid the mass.

There is nothing in the next three to five years I mean, you can talk to any utility company any utility executive or and while they will get some transmission lines approved in a couple of other things going in the right direction, maybe that will light a fire under regulators.

But there are some.

So much deferred if you just if you didnt have the electrify everything trend. If you just took that away for a second.

And you dealt with the.

The the more severe climate.

Experiences that we're having.

And just the de carbonization of the grid in general and that kind of generating fleet those sources.

<unk>.

They're moving to a more intermittent nature and because the technologies have not kept up like battery technology is just not there yet commercially.

To be a viable.

Storage technique and Thats really what we need we need storage, if we're going to move to a 100% of our power being generated from renewable sources, you've got to have the ability to store that power at times. When those renewables are not able to perform. This is this is a massive challenge that grid operators and utility executives are trying to solve for.

There is no silver bullet there there is no easy way to do it there's no technologies that have that are presented that allow for that in a commercial way.

Cost effective ways, certainly and there is nothing in the next three to five years and they would tell you that even if they had an approved plan all the resources necessary to execute that approved plan. It would be decades, just to execute against it the build out of the transmission lines. The upgrade of all the equipment that needs to happen to modernize the grid.

There are trillions and trillions of dollars behind and deferred spending.

And just the raw effort to do that is decades in the making so we don't see anything on that front on your question on natural gas versus diesel.

Almost 100% of our business C&I wise outside of the U S. As diesel there is a little bit of natural gas as we've said, we think that thats a trend longer term that'll that'll improve where the gas to debt the net debt diesel and natural gas trends have been more much more prevalent is here in the U S and where we have a lot of gas available and that's not an issue and I.

And even in Europe .

They need gas so whether it comes from Russia, or whether it gets imported from other areas, they're not going to move away from pipelines that they've got the infrastructure, they're going to get gas scoping and important part of vehicles, they're not going to change how they heat theyre not going to change how they how they use gas for process I mean any gas so they'll get it from somewhere it's probably going to be <unk>.

LNG coming into the countries when they need it in the name of natural gas liquids and natural gas and re designated in Europe as it clean.

As a clean fuel, which is which is great. So I think longer term, we feel really confident in those trends may be shorter term there'll be some noise around that but again that business. Today is mostly diesel so it's really not not a today impact and then youre right <unk> got other countries, where there's opportunities for US you mentioned a couple of countries in Asia.

That have their islands rights are important whether it's Japan, whether it's Taiwan.

Those are all areas, where the import and we do see LNG, becoming.

Important fuel and this is where I think the United States is in a really good spot here.

To be able to provide a path for countries.

<unk> need that that important fuel source, whether its baseload power generation or process or or for energy security.

That's going to be something that I think.

Is going to be a.

That's a trend that's going to continue long into the future natural gas is a fantastic energy resource, it's going to be part of our base load power structure here as well.

As a global populous for a long time to come.

And our final question is from Mohit <unk> of credit Suisse.

Okay.

Again, I hope you guys can you hear me.

Yes.

Oh, hey, thanks.

So.

Towards the handset.

Two quick ones one just on the backlog.

That said more than $1 billion last quarter.

In line with that range.

Different.

How to separate follow up.

Yes.

Talked about eight to 10 weeks of orders in the backlog and it's.

It's sizable it's a big backlog.

And we expect to still have backlog as we exit the year even despite.

The increased production rate so.

Yes.

It's a sizable number.

We want to get that down because thats, how we think that serving the market with shorter back or the shorter lead times is really important too.

Winning in the market.

In particular on those sales leads that we've talked about so that's a.

Really important focus for us may happen.

Continuing to lean into that.

And again working on that installation bandwidth as well, but that eight to 10 weeks is is really how we would speak to the backlog.

And I would now like to turn the call back over to Mike Harris for any closing remarks.

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

And this concludes today's conference call. Thank you for participating you may now disconnect.

Yeah.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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