Q3 2022 Generac Holdings Inc Earnings Call
Good day, and thank you for standing by walking through the general third quarter.
2022 earnings results 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 one on your telephone.
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I would now like to hand, the conference over to your speaker today.
Mr. Mike Harris, Senior Vice President corporate development and Investor Relations. Please go ahead.
Good morning, and welcome to our third 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>.
Employees may contain forward looking statements and involve risks and uncertainties that could cause actual results to differ materially from these forward looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call.
Additional information regarding these measures, including reconciliation to comparable U S. GAAP measures is available in our earnings release and SEC filings I will now turn the call over to Aaron. Thanks, Mike Good morning, everyone and thank you for joining US today, our third quarter was in line with the preliminary results, we announced on October 19th.
Momentum in the commercial and industrial product category remains strong the residential product sales, while still growing compared with the prior year were weaker than expected in the quarter driven by lower shipments of home standby generators and clean energy products relative to our prior expectations.
Year over year overall net sales increased 15% to 1.09 billion, primarily driven by core sales growth of 10%, which excludes the impact of acquisitions and foreign currency.
Overall residential product sales grew 9% during the quarter led by sales of home standby generators and the impact from recent acquisitions, partially offset by lower shipments of power So energy storage systems.
C&I product sales increased 20% led by growth across all channels domestically strength in the European region and the contribution from recent acquisitions.
Now discussing our third quarter results in more detail.
Home standby generator sales grew at a mid teens rate over the prior year baseline power outage activity in the U S. During the quarter remained above the long term baseline average and hurricane Ian which occurred in the last week of the quarter drove total power outage activity well above the long term average.
Home consultations are sales leads were lower in the quarter when compared to the prior year, which include which included Hurricane Ida.
However, the third quarter of 2022 was tied for the second highest total for any given quarter. Since we began tracking the metric in 2013, and we experienced a return to year over year growth in the month of October resulting from Hurricane Ian.
We continue to focus on expanding our distribution network as we experienced sequential growth in our residential dealer base and ended the quarter with nearly 8500 dealer partners a net increase of approximately 300 dealer sequentially.
Activations, which are a proxy for installs continue to grow in the third quarter compared to the prior year.
However, as we mentioned in our preliminary announcement installation capacity for home standby generators lagged our production output.
The ability of installing contractors to fully service the demand for backup power for from homeowners continues to be constrained by labor availability permitting and utility related delays and shortages in certain materials needed to complete installation.
Furthermore growth in our dealer base was constrained in prior quarters by our extended production lead times.
All of this resulted in elevated levels of field inventory and lower than expected orders from our channel partners. Despite the continued strength in end customer demand.
Importantly to address these activation challenges, we're working on a number of specific initiatives to increase home standby installation bandwidth such as providing resources to help existing dealers expand their labor forces and additional installation training locally for non dealer contractors.
We are working to streamline home standby projects by creating universal permitting packages and replicating past successes and simplifying approval processes from certain local utilities.
Other efficiency related initiatives include conclude dealer scheduling and quotation refinement to enhance the top of the sales funnel and optimize the allocation of sales leads within the dealer channel to favor those dealers that have capacity to install more generators.
Importantly, we have also intensified efforts to further expand our overall dealer count and we expect another strong quarter of sequential growth in the fourth quarter.
Our dealer count growth initiatives have recently benefited from our shorter production lead times, which have now mostly returned to normal levels as we ramped our production output of home standby generators in prior quarters.
Although installation capacity constraints have resulted in lower orders from our channel partners. It is important to reiterate that underlying demand and market fundamentals of the home standby category remained strong and supported by meaningfully sequential improvements in a number of key dealer related metrics during the third quarter.
In home consultations grew close rates continue to rebound and while still elevated the time between contract signing and installation declined meaningfully as compared to the second quarter.
Dealer productivity as measured by Activations per day per dealer improved to an all time high during the third quarter.
In addition, our dealer survey data suggests approximately half of all the field inventory is allocated to an active customer contract highlighting the need to further increase the pace of installs to close the gap between strong end customer demand and installation capacity.
While the previously mentioned sequential improvements provide evidence that our channel partners are beginning to make progress in working through their elevated backlog and field inventory, we expect home standby order headwinds to persist through the first half of 2023 as field inventory levels normalize.
Even when assuming no major outage events in the second half of 2023, we expect significant sequential sales growth from the first half of the year and only a modest decline in sales on a year over year basis, as we maintain a new and higher baseline level of demand.
Over the last 30 years, the home standby category has grown in a step function pattern as penetration rates of expanded rapidly for several years at a time driven by notable major power outage events, followed by periods of flatter growth as demand normalizes.
With each successive growth period comes increased awareness around home standby generators and in an increased distribution for these products both of which have been critical in helping the category reached new and higher levels of baseline demand.
The latest growth step that the product category has experienced was underpinned by an increase in power outage activity over the past several years with four of the top 10 major outage events since 2010, having occurred in just the last two years alone.
This growth can be evidenced through a number of key market metrics and comparing the first three quarters of 2022 to the comparable period of 2019 as Activations per day more than doubled home consultations more than tripled and our dealer count increased by nearly 40% from 6200 to 8500.
The approximate mid teens compounded annual growth rate in the category over the past several decades can be tied to the increase in power outages over that time as the nation's electrical grid has struggled to reliably supply supply power to homeowners and businesses.
The aging and Underinvested grid infrastructure has become more vulnerable to the increasing severity of high impact weather related events, such as Hurricanes Heatwaves day rate shows ice storms and polar vortex is.
Additionally, new Mega trends have emerged that we believe will drive the next step of growth in the category.
Grid resiliency concerns have been increasing as de carbonization trends accelerate causing a widening gap between supply and demand, leaving many utilities and grid operators scrambling to avoid rolling blackouts over the past several years and we believe little has been done to rectify the situation.
We also believe the home is a sanctuary mega trend will persist as the shift to remote or hybrid work remains intact. The electrification of homes continues to grow and demographic trends are driving increased levels of aging in place.
With the nationwide penetration rates still in the mid single digit range and these mega trends firmly intact. We are confident that the long term growth trajectory for the home standby category remains significant.
I would now like to discuss our residential clean energy products and shipments of power cell energy storage systems in the third quarter were negatively impacted by the significant liquidity challenges of a large customer that ceased operations and subsequently filed for bankruptcy.
Additionally, during the quarter, we continued to address certain warranty related matters for the upgrade of a component within our power <unk> energy storage system.
As part of this effort we have engaged a number of third party service companies to assist with the completion of these upgrades and these efforts are well underway.
As a result of these items, we recorded a $55 million charge in the quarter comprised of an $18 million bad debt reserve and a $37 million warranty charge.
The challenges we experienced in our clean energy business in the third quarter were very disappointing, but we believe that the solar plus energy storage market continues to represent an important strategic opportunity for <unk> longer term.
However, this quarter's results have demonstrated the need for us to further expand our distribution by focusing our efforts on partnering with high quality reputable sales and installation companies for these products.
Importantly, we are committed to supporting the dealers that are participating in our warranty coverage upgrade program.
As they play a vital role in restoring our competitive position in the residential clean energy space.
In addition, we continue to broaden our product offering and bring new innovations to this market as we announced an update to the power <unk> energy storage system during the quarter that enables AC coupled battery storage as well as AC generator integration.
Work also continues on our PV micro inverter product called the power micro as our beta testing began late in the second quarter.
And we will continue through the balance of this year we.
We anticipate a phased commercial rollout beginning in the first half of 2023 and a full commercial launch targeted for the second half of the year.
I would now like to provide a quick update on our <unk> acquisition, which we completed last December .
During the initial period of our ownership we have been focused on developing cross selling opportunities for eco vs hardware solutions through <unk> distribution partners and have seen positive indications of demand for smart thermostats alongside other clean energy products.
Synergies between <unk> and <unk> grid services teams continued continues to be validated and we are identifying higher potential value creation for <unk> devices and demand response programs amid ongoing concerns around grid stability and rising energy prices.
We've also begun leveraging the talented <unk> team to help accelerate our connected devices strategy, which is core to the development of our residential energy ecosystem that will ultimately be accessed and controlled by a single pane of glass user interface.
I also want to provide some additional color on the efforts of our grid services team as they continue to execute on our growing and diversified sales pipeline.
We have further expanded our efforts to extract synergies across our commercial teams as they worked to offer an increasing mix of generic hardware alongside our concerto grid services software platform.
Our comprehensive suite of solutions aimed at the distributed energy resource management related programs is unmatched and is proving to be a competitive differentiator for our grid services team as the number of devices in megawatts of capacity connected to the <unk> platform continues to grow.
We announced a number of program wins since our second quarter call, including software as a service contracts with Dominion energy and UK based Pearl Stone energy as well as a performance contract with Arizona Public service, which demonstrates <unk> unique ability to deliver end to end solutions in grid services programs.
The long term market opportunities for residential energy storage micro Inverters monitoring and management devices and grid services solutions remains highly attractive and core to our strategic vision.
However, the loss of a major customer during the quarter along with the specific warranty related issue has impacted near term demand and our outlook for the full year 2022.
We now expect the combination of clean energy technology products and services to deliver sales between $300 million to $330 million for the full year 2022, as compared to our previous previous guidance of approximately $500 million.
Our continued investment in the people and processes involved in the development of these products remains a key focal area for the company as we work to further broaden our product offering while also improving the quality and performance of the technology that we've acquired and developed over the last three years.
With that in mind, we are building a talented and focused clean energy technology management team beginning with the addition of norm Taffe in August as our new President of this organization.
Along with the New Chief Technology Officer, Senior Vice President of Finance and senior Vice President of policy.
Norm and his team bring decades of industry leadership experience as well as robust technical expertise that will help drive <unk> integrated clean energy technology solutions forward.
Additionally, the policy backdrop for this market has never been more favorable with the inflation reduction act, providing the necessary visibility for long term value creating investments.
We will continue to build out our energy technology leadership team and our suite of products and solutions as we expect to play an important role in the transition to a cleaner more sustainable and more reliable electric grid.
As a result of these investments and the strong outlook for this market, we expect clean energy technology sales to return to strong growth for the full year 2023 with sequential sequentially improving results throughout the year.
Our C&I products continue to perform exceptionally well in the quarter as global C&I net sales increased 20% on an as reported basis and 23% on a core sales basis, which excludes the impact from acquisitions and foreign currency as compared to the prior year.
Both in shipments for domestic C&I products in the third quarter was led by strength across national rental equipment telecom and industrial distributor customers.
We experienced continued strength in demand during the quarter as backlog for our C&I products remained at record levels and expanded further in the month of October giving us excellent visibility that solid growth will continue in the category well into 2023.
Shipments of C&I stationary generators through our North American distributor channel grew significantly again in the third quarter and order trends indicate this momentum will continue in the quarters ahead as backlog in the channel increased on a sequential basis.
Quoting activity and close rates remain elevated compared to prior year levels, highlighting our market share gains as well as the durability of demand trends for backup power for C&I applications.
Shipments to National Telecom customers also increased again during the third quarter as compared to the prior year as several of our larger national customers continued to invest in hardening their existing sites and the build out of their fifth generation or <unk> networks.
These networks are increasingly considered as part of the nation's critical infrastructure and require backup power for resiliency.
Grades to telecom infrastructure remain one of the key Megatrends that we expect to drive growth for our business in the coming years as global Tower and network hub counts continued to expand.
We also experienced another quarter of substantial growth with our national and independent rental equipment customers as they continue to invest in equipment to refresh and expand their fleets.
We anticipate the demand environment for mobile products will remain robust in the quarters ahead as the megatrend around the critical need for infrastructure improvements continues to play out.
Strong customer interest for our natural gas generators used in applications beyond traditional emergency standby projects also continued in the quarter with sales of these products growing at an exceptional rate.
We believe where we are in the very early innings of growth for this exciting new market opportunity as grid stability concerns and volatile energy markets are expected to further drive demand for these innovative solutions.
We also took a significant significant step forward in our C&I generator connectivity efforts shortly after quarter end with the acquisition of Blue pillar and industrial Internet of things platform developer that enables distributed energy generation monitoring and control.
Blue Blue pillars connectivity solutions can make previously stranded C&I backup generators available for using grid services programs by connection to the <unk> software platform and will provide a foundation for our longer term vision of creating a single user interface for our suite of connected C&I assets.
Our international segment continued to experience very strong momentum as total sales increased 14% year over year during the third quarter with 22% core total sales growth when excluding the benefit of acquisitions and the unfavorable impact of foreign currency.
Core total sales growth was driven by strength across all regions, most notably in Europe , and Latin America with Intersegment sales also growing substantially in the quarter as our <unk> Mexico facility further ramped production of telecom products for the North American market.
The European region has seen remarkably strong demand across product lines, most notably in C&I and portable generators due to a heightened focus on energy independence and security.
Concerns over power security amid the conflict in Ukraine have continued to rise and we are providing backup generators to the region through our European sales branches.
Longer term demand trends are less certain however, as geopolitical and macroeconomic conditions in the region remain volatile, but end market awareness of the need for resiliency has increased across the continent in recent quarters.
The subsequent effect of the war on Europe's energy complex has highlighted the dependents on continuous power sources for homes and businesses around the globe.
Looking into 2023 for our global C&I products, given the strong demand fundamentals and existing backlog our preliminary view anticipates continued strong year over year growth throughout the entire year.
In closing this morning, we were disappointed that our third quarter results were below our prior expectations, but we believe we have action plans in place to address the underlying challenges in the business.
<unk> clean energy technology leadership has brought an increased emphasis on quality and innovation and we remain confident in the long term growth opportunity for this strategic area of our business.
Important initiatives to help ease home standby installation bottlenecks are well underway and as the home standby market normalizes, we are confident that the new and higher baseline of demand for the product category will become clear.
Hurricane Ian is the latest example of increasingly severe and more volatile weather patterns and we believe the power grids growing supply and demand imbalances far from resolved as we add intermittent renewable generation sources, while simultaneously pursuing the electrification of our homes, our businesses and our transportation.
The secular growth themes and megatrend supporting the company's powering a smarter world enterprise strategy remains firmly intact and as reliant on electricity around the world grows further we will continue to invest in innovative products and solutions to lead the evolution to the next generation grid.
And I want to turn the call over to Europe to provide further details on our third quarter 2000 to 2022 results our outlook for the year and our preliminary views on 2023.
Thanks, Eric.
Looking at third quarter 2022 results in more detail.
Net sales increased 15% to $1.09 billion during the third quarter of 2022 as compared to $943 million in the prior year third quarter. The combination of contributions from acquisitions and the unfavorable impact from foreign currency had an approximate 5% net impact on revenue growth during the quarter.
Briefly looking at consolidated net sales for the third quarter by product class.
Residential product sales grew 6% grew to $664 million as compared to 609 million in the prior year, representing a 9% increase over a strong prior year comparable.
Contributions from the <unk> acquisition, and a slight unfavorable 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 at a solid mid teens rate over the prior year.
This was partially offset by weakness in shipments of power cell energy storage systems.
Commercial and industrial product sales for the third quarter of 2022 increased 20% to $311 million as compared to 258 million in the prior year quarter.
Contributions from acquisitions and the unfavorable impact of foreign currency provided a net headwind of more than 2% to net sales growth during the quarter.
The strong core net sales growth was broad based across most regions internationally and across all channels domestically with particular strength in national rental equipment Telecom industrial distributor and energy management channels.
Net sales for the other products and services category increased 49% to $113 million as compared to $76 million in the third quarter of 2021.
Core sales growth for the category was 17% due to strength in aftermarket service parts and extended warranty revenue recognition along with strong growth in our services offerings in certain parts of our business both domestically and internationally.
Gross profit margin was 33, 2% compared to 35, 6% in the prior year third quarter as we continue to experience modest price cost headwinds during the quarter.
From a margin percent standpoint.
In addition, recent acquisitions and a less favorable sales mix, primarily driven by a lower proportion of home standby product sales also negatively impacted margins in the current year quarter.
Operating expenses increased $111 million or 68% as compared to the third quarter of 2021.
This increase includes $55 3 million of pre tax charges comprised of $17 9 million of bad debt expense related to a clean energy product customer that has filed for bankruptcy.
And a $37 3 million charge for clean energy product warranty related matters.
The remaining increase was primarily driven by higher recurring operating expenses from recent acquisitions and an increase in intangible amortization expense.
To a lesser extent higher employee costs and higher marketing spend also contributed to the increase.
Adjusted EBITDA before deducting for Noncontrolling interests as defined in our earnings release was $184 million or 16, 9% of net sales in the third quarter as compared to $209 million or 22, 2% of net sales in the prior year.
I will now briefly discuss financial results for our two reporting segments.
Domestic segment total sales, including intersegment sales increased 18% to $947 million in the quarter as compared to $802 million in the prior year with the impact of acquisitions contributing approximately 8% of the revenue growth for the quarter.
Adjusted EBITDA for the segment was $160 million, representing a 16, 9% margin as compared to 188 million in the prior year or 23, 4% of net sales.
The lower domestic EBITDA margin in the quarter was primarily due to continued price cost headwinds. In addition continued operating expense investments for future growth and the impact of acquisitions had an unfavorable effect on margins during the quarter as operating expenses as a percentage of sales came in higher than expected on the lower shipment volumes relative to.
<unk>.
International segment total sales, including intersegment sales increased 14% to $183 million in the quarter as compared to 160 million in the prior year quarter.
Our total sales.
Which excludes the impact of acquisitions and currency increased approximately 22% compared to the prior year.
Adjusted EBITDA for the segment before deducting for Noncontrolling interests was $24 million or 13, 2% of net sales as compared to $21 5 million or 13, 4% of net sales in the prior year.
This margin performance was impacted by a higher mix of lower margin intersegment sales, which was mostly offset by favorable operating leverage on significantly higher volumes.
Now switching back to our financial performance for the third quarter of 2022 on a consolidated basis.
As disclosed in our earnings release GAAP net income for the company in the quarter was $58 million as compared to $132 million for the third quarter of 2021.
The current year net income includes the pre tax charges totaling $55 3 million related to the clean energy bad debt and warranty related matters.
GAAP income taxes during the quarter.
GAAP income taxes during the current year third quarter was $11 6 million.
Or an effective tax rate of 16, 1%.
As compared to $32 6 million or an effective tax rate of 19, 7% for the prior year.
The reduction was due to multiple discrete tax items that drove the tax rate down versus prior year on a net basis.
Diluted net income per share for the company on a GAAP basis was <unk> 83 in the third quarter of 2020 to.
Compared to $1 93 in the prior year.
Adjusted net income for the company as defined in our earnings release was $112 million in the current year quarter or $1 75 per share.
This compares to adjusted net income of $151 million in the prior year or $2 35 per share.
Cash flow from operations was negative $56 million as compared to positive 74 million in the prior year third quarter.
And free cash flow as defined in our earnings release was negative $73 million as compared to positive 42 million in the same quarter last year.
The decline in free cash flow versus the prior year was primarily due to lower operating earnings increased tax payments and higher working capital levels in the current year quarter, partially offset by lower capital expenditures.
As of September 32022, we have approximately $1 four $8 billion of liquidity comprised of approximately $230 million of cash on hand, and $1 $5 billion of availability on our revolving credit facility.
Also total debt outstanding at the end of the quarter was $1 36 billion, resulting in a gross debt leverage ratio at the end of the third quarter of one six times on an as reported basis.
Additionally, during the third quarter, we repurchased $536 6000 shares of our common stock for $123 9 million, which exhausted our previously existing stock repurchase program.
In July 2022, our 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 updated outlook.
As previously disclosed two weeks ago within our pre release, we updated our net sales growth and adjusted EBITDA margin guidance for the full year 2022.
In line with the pre release, we still expect net sales in 2022 to increase between 22% to 24% as compared to the prior year on an as reported basis, which includes an approximate 5% to 7% in net.
<unk> from acquisitions and foreign currency.
This revenue outlook assumes sales of residential and C&I products, both increased at a similar rate in the low to mid 20% range during 2022 over the prior year.
Also in line with our pre release adjusted EBITDA margins before deducting for Noncontrolling interest are still expected to be approximately 18% to 19%.
This EBITDA margin expectation reflects a modest sequential improvement in gross margins in the fourth quarter compared to the third quarter levels.
With higher operating expenses as a percentage of sales partially offsetting the sequential gross margin improvement.
Now I'd like to provide some further comments regarding our initial framework for net sales growth in 2023.
Summarizing Aaron's earlier remarks, our preliminary view for 2023 anticipates that the first half of the year will experience year over year weakness on a consolidated basis.
We expect a return to solid growth in the second half of the year, resulting in overall net sales to only declined modestly for the full year 2023 as compared to 2022.
Again as Aaron previously discussed home standby generator sales growth is expected to face significant headwinds in the first half of 2023.
But as field inventories normalize we anticipate strong sequential sales growth and a much more modest decline in sales growth over the prior year in the second half of 2023.
Clean energy technology expect is expected to experience robust sales growth for the full year as we continue to expand our presence build out our distribution and launch new products into this market, resulting in sequentially improving results during 2023.
Our preliminary view for 2023, C&I product sales growth anticipates continued strong growth throughout the year.
This preliminary guidance assumes no.
Preliminary guidance assumes power outage activity that is in line with the long term baseline average and does not assume a prolonged recessionary environment that meaningfully impacts consumer spending during 2023.
Additionally, this is a preliminary early look into our 2023 forecast and we will provide a more detailed update when we report fourth quarter results in mid February February of next year.
Shifting back to 2022.
We will now provide additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2022.
Our GAAP effective tax rate is now expected to be approximately 24, 5% for the fourth quarter of the year, resulting in a full year 2022, GAAP effective tax rate of approximately 21, 5%.
For full year 2022, we now expect interest expense to be approximately 53% to $55 million in.
An increase from the previous guidance of $52 million to $54 million, reflecting higher than previously expected benchmark interest rates.
This assumes no additional changes in outstanding debt for the remainder of the year.
Depreciation expense is still expected to be approximately 54% to $56 million in 2020 to.
GAAP intangible amortization expense in 'twenty, two is still expected to be approximately $100 million to $105 million.
Stock compensation expense is still expected to be between 32 and $34 million for the year.
Our full year weighted average diluted share count is now expected to be approximately $64 5 million shares compared to the previous guidance of 65 to $65 5 million shares.
Our capital expenditures are now projected to be approximately two to two 5% of our forecasted net sales for the year compared to prior guidance of approximately two 5% to 3% of net sales.
Free cash flow conversion is expected to be closer to 100% of adjusted net income in the fourth quarter as the investment in working capital begins to level off.
Finally, this updated 2022 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.
As a reminder to ask a question you will need to press star one one on your telephone.
In the interest of time, we ask that you. Please limit yourself to one question and one follow up.
Please standby, while we compile the Q&A roster.
And our first question comes from Michael Halloran with Baird. Your line is now open.
Hey, good morning, guys.
Alright.
So just kind of want to talk to you what happened between second quarter to today is the first question.
In the second quarter, you talked about installation challenges potentially being a headwind, but I think the magnitude caught a lot of people by surprise and how quickly that change. So could you maybe talk about the dynamic there.
Got you misaligned with what was happening in the channel.
The first question.
Yes, Mike this is Darren.
Yes, it's a great question and one that.
Obviously.
Not only caught us by surprise, but even our channel partners I think we we had kind of our peak output levels with home standby, we've been working very hard over the last couple of years too we've quadrupled the output and we really hit our stride as we predicted we would kind of as we exited the second quarter.
And began in the third quarter.
And so we are producing at a really high rate and we thought that was.
Important because we wanted to bring our lead times down because we knew that that was having a negative impact on close rates as having a negative impact on our ability to sign new channel partners.
So we really were working hard to do that and so we kind of opened the floodgates on shipping to get all of that product out in the market.
And what we started to see at the end of the second quarter and we mentioned it as you said on the call was that our installation our activation rate, which is our our proxy for installations. It was up year over year, but it wasn't increasing at the same rate commensurate with our our output increase.
And so we could see field inventory building.
And we had been talking to our channel partners for several quarters about this coming.
And we were trying to get them prepared for that helping them hire people. We had a number of programs actually in place to get ahead of this.
But in the end it just.
We have 8500 channel partners dealers and then obviously a lot of non dealer contractors, who install these products.
And it's a ton of one off conversations and we just weren't able to.
Change that inflection point on the installation rate to the degree we thought we could so the flaw in the model. The simple answer is the flaw in the model here was that we we modeled unconstrained.
Installation bandwidth and that actually was not how it played out we had never had that happen before by the way.
I've seen probably six of these cycles in the past.
And successively as we kind of hit our peak rate with new output levels, we had never seen the installation bandwidth be a barrier.
So that was that was the problem and it Unfortunately stacked up really quick when you're shipping at those rates and only installing at kind of marginally higher rates.
So the field inventory starting to stack up and physically started to run out of room run out of credit.
And so what we saw is we saw cancellations and deferrals on orders from.
From those home standby dealers and other channel partners during the quarter and that accelerated through the quarter here in Q3, so and it became very clear very quickly and again Thats why we did the pre release because as soon as we put all this together and we can see what happened a couple of weeks ago, it's like okay.
It's information we wanted to get the folks so they understand it.
And we've redoubled our efforts tripled our efforts on what we can do to increase installation bandwidth. So anyway, that's kind of the answering your first question.
The issue in a nutshell, if you will for home standby.
That's super helpful and related if you think about the time, it's going to take to sync the channel up.
I guess I'm, having a hard time syncing up the idea that the underlying pieces are still pretty healthy and you gave a lot of good metrics in the prepared remarks in the press release around what's happening on the consultation side closures et cetera, with how long, it's going to take to right size the inventory and maybe it's just that.
And with conversation with where the installers are at but I'd love to have a sense for how I can kind of take that timeframe in sync with what you are calling is still pretty healthy underlying demand.
Yes, I think probably the best way to to maybe get your head around that is we believe that currently today field inventory levels are about double where they should be.
And so that's that's the bad news right that's the additional output.
That we've put into the market.
Head of the installation capacity increasing to the right levels.
We do we are modeling at installation capacity is going to increase next year. The challenge of course is that just seasonally where coming into as.
As we turn the page here and get into Q1 and Q2, we normally run into a seasonally low period of installations because parts of the country like the Midwest and the northeast.
Where.
Installations are much harder to do because of the cold weather because of winter.
So unfortunately, even though we.
We're targeting the installations are going to improve year over year. We have this seasonal challenge we've got to deal with it is just nature, we can't we can't really that's a hard one to fix.
And so it won't increase necessarily as quickly as we needed to in the first half now the good news is when we pull our dealers half of that field inventory Thats out. There today is spoken for meaning it's got a customer contract against that a customer has got a deposit on it and again, it's indicative of the installation challenge because.
Yeah.
We're now back to what we said in the prepared remarks is mostly normal lead times.
We still have backlog, we have a couple of models, we're still out there some liquid cooled product things like that so that's supportive of where we're going here in Q4, but what ends up happening is that.
We have.
It's mostly normal lead times for us to our channel partner, but if you are a homeowner and you call and you try and get a product you still are being quoted longer lead times.
Are these constraints, whether they be people constraints or permitting constraints.
Or component constraints gas meter upgrades.
There are localized issues all over the country.
There some off some of our channel partners are bumping up against just delays and so they are working through that and as those he's that'll help but we think that it's likely going to take the first half of next year to get through this and that's going to put pressure on the incoming order rate for home standby through the first half of next year.
And so that's really the challenge we think that again are in our prepared remarks, we said by the second half of the year, we're back to growing again in the category and really only down modestly.
For the year in total.
For the category so.
So anyway, so that's it.
I think when you put it all together, we feel pretty good about longer term that the end markets are supportive.
No that makes sense, so basically what youre, saying is relatively normal sequential is on the home standby category for the next few quarters from a couple of quarters from the run rate you are talking about in the back half of this year.
Before there is a potential inflection as things start catching up and normalizing.
<unk> returned to normal seasonality returned to growth in the second half.
And then again.
The first half's going to be down considerably second half will grow still down kind of moderately for.
The category only modestly for the company overall.
Our overall guide for next year, but just just to clarify that thanks.
It makes a lot of things thanks for that I appreciate it.
Thanks, Mike.
Thank you.
And our next question comes from.
Jeff Hammond with Keybanc. Your line is now open.
Hey, good morning, guys.
Morning, Jeff.
Hey, just.
Just kind of as you're thinking about the guide I just wanted to kind of understand how youre thinking about like Comping.
The backlog drawdown that youre seeing this year.
And then what that would imply for kind of under underlying.
Demand for the category.
Yes, I mean again.
Big part of the headwind for the first half of next year as the comp because were obviously, we were bringing that backlog down heavily in the first two quarters of this year and so we'll be comping against that without having the benefit of that backlog kind of as we get into next year. So that's a big thing.
And then Aaron's point about the home standby category being down.
Moderately in the second half Thats, because you are trying to comp like some of that back backlog headwind that we're bringing down here in the background of moderately in total up returning to growth in the second half, but yeah.
Three.
Yes, okay for the okay for standby if we're talking just standby yeah, we're just talking to standby, but that we've got and the headwind on the backlog that's driving that's what's driving that exactly.
And then just what are you guys doing with your production levels as you get this reset.
Just how should we think about.
Destock of your own and then it.
Looks like your own inventories are a bit elevated as well.
Yes, they are and you saw that read through just the working capital increase in.
In the third quarter alone driving.
Free cash flow negative for.
For the quarter, we see that coming back around and.
In Q4 so.
Basically slowed the factories down still have some material coming at us, but that's starting to slow as well.
We should basically get into a better position in Q4 and then.
We're really working hard through the first half of next year to bring down those inventory levels, both raw materials and finished goods as it relates to the home standby category in particular.
It's actually kind of a dichotomy because in our resident in our industrial business, where we're constrained still in certain components in our inventory levels are low.
And we are struggling too.
To kind of feed our factories with materials there on our industrial side.
And we would be able to in fact go even higher faster with our industrial business. If we could get more engines and breakers and other things that are in shorter supply, but on the home standby side, we're definitely we're definitely seeing.
A lot of material hitting our distribution centers as we as we slow production down.
Thank you and our next question comes from Brian Drab with William Blair. Your line is now gone.
Hi, Thanks for taking the questions.
Hey, Brian maybe shifting to clean.
Just shifting to clean energy for a minute so.
I think that the energy storage business in 'twenty, one was around $220 million to $225 million.
It looks like the guidance that you're <unk>.
Giving us now for 300 to 330 implies that that's down.
Something like 30% or so this year.
Is that if it is that about right.
What is the amount in the second handling yet can you clarify the market. The market is still growing although there are some mixed comments out there about the market growth but.
The loss of that major customer of ours.
In the second half of the year here, they really ceased operations in July so.
We've got to do the hard work that honestly, we should've been doing all along of continuing to expand our channel too.
To more channel partners.
And that but that hurts us definitely in the year, Brian So yes, Unfortunately, that's going to be down this year.
Looking for that to return to growth next year, but as we kind of fill in with new customers.
We kind of reset so 22 is going to end up being a reset year for us here on energy storage, which is disappointing but.
I think in.
Rather painful learning lesson for us on just some of the.
Some of the trials and tribulations of that market.
Some of the customers.
The dealer partners, they're having to pick your partners carefully.
Again, a lot of learning.
Turning cycles, we're going through there.
Okay. Thanks, and then.
For my second question can you just clarify exactly what you're saying about 2023, one more time in terms of.
I think that you said total company in the prepared remarks, it's all about total company and that you'd be down.
Yes.
Modestly for the full year up sequentially first half to second half but.
I'm just wondering is home standby expected to be up year over year in the second half.
Yes. This is York so yes, so total company to clarify.
We said weakness in the first half total company, mainly driven by by.
By the home standby discussion, we just had a little bit maybe a little bit of clean energy as we build growth there.
Second half I think important to note total company returned to solid growth for total company in the second half.
You put that altogether, then for full year that would only be.
A modest decline for full year 2023, that's total company. So then home standby, specifically again weakness first half.
Sequential growth from first half second half and then a much more modest decline in sales growth over the prior year in the second half of the year. Some so maybe down a little bit, but it's much more modest decline relative to the.
The first half.
For home standby.
Thank you. Our next question comes from Mark Strouse with Jpmorgan. Please proceed with your question.
Yes. Good morning, Thanks for taking my questions.
You're just curious if you can just talk about.
Our margins through the first half of next year.
Kind of the lower factory absorption with HSV, the lower mix of HSBC, and then kind of offsetting that.
Somewhat easing of.
Some of the supply chain issues that you've had.
Should think about margins going forward.
Yes, no I think.
I think Aaron mentioned.
Turning to seasonality.
For the home standby business, meaning Q1 is usually the lowest point in the curve once you.
Once you catch backlog then you return to normal seasonality Q1 is the lowest point so.
You would expect just from a mix standpoint.
That sequentially from Q4, 2022% of Q1 2023 that gross margins should should decline because mainly because of that mix element.
But.
I mean recall, we were facing some pretty heavy inflationary pressures in Q1 of 2022. So I would expect just from a price cost standpoint, we're going to see.
Some nice price cost benefit there.
<unk>.
But.
Yes, we're still putting our models together on how thats going to look, but I would expect just sequentially that given the mix.
The mix changes going into the first half of next year, you'd see maybe a slight decline in gross margins relative to the run rate.
Okay. Thanks, and then just just to clarify on the clean power business is is most of the reduction in the revenue outlook driven by needing to backfill for the customer that has gone bankrupt.
Or is there a.
A broader issue with the actual product itself that there are some actual reconfiguring of the of the solution.
Yes, the majority of the market is related to the loss of the customer that was a really important customer for us.
The diversification of our customer base is going to be the primary focus here going forward and obviously, we've got to restore trust two right in the market to some degree there is probably a spillover effect there too a bit but I will say this.
And like I said, we've got a lot to learn in this market.
So painful learning lesson, but in speaking with a lot of the kind of national companies that are well established national solar sales and installation companies.
<unk>.
Almost every OEM has had challenges over the course of the solar kind of markets existence and storage being the new the new <unk>.
Component here.
So.
Again, not I'm not trying to indicate that.
You should expect that but it's a pretty new market penetration rates are very low on these products the environment.
Being rooftop mounted electronics is.
<unk> is a severe environment the warranty periods of very long 25 year warranty periods for the rooftop mounted components 10 years on the batteries so you've got.
<unk> got a pretty.
There's a pretty high bar there quality wise.
And a lot of companies have unfortunately.
Struggled with that now I think.
We feel like we.
Well a couple of things one we're very committed to this we think it is the future and we think it's an important part of our strategy going forward I think it represents.
Some great opportunities for <unk> in terms of what can fit with our brand our distribution.
And our expertise in some of these areas.
So we're committed to it we've got a great balance sheet to be able to finance this.
The investment needed, obviously is going to be greater than we had originally thought.
You can't just take startup technology and try to scale. It that's clear based on our experiences here. So we're going to have to do a lot more work around that.
We're going to have to put.
More talent in the teams we started to do that we mentioned that in some of our prepared remarks. This morning, and we're going to continue to do that we think that this is again, it's an important part of the future.
We're committed to it and we are going to be a major player in it longer term, we're going to take our.
Our lumps here.
And the humility that comes with that but in the end I believe that we will have a lot of great success in this longer term.
Thank you.
And our next question comes from.
Joseph Osha with Guggenheim Partners. Your line is now open.
Thanks, Joe Good morning.
Hi.
I wanted to spend a bit more time on the clean energy business, we've talked a lot about stores, which is great.
Good good sized business.
I'm wondering as you look into <unk>.
Next year, obviously, you don't want to get too detailed but maybe if you could give us a little bit of a sense.
As to the roughly what the breakdown of that business might look like on a related note.
Now that you've got these couple of product we've talked about this before.
Given some of the challenges that you've talked about with some of the other stuff could we see you, perhaps pivot more to selling that decoupled product alongside other peoples and burgers.
Those are my two questions.
Yes, Joe Great questions I'll, just let me touch on the <unk> piece first and then I'll get to the AC coupled solution. So.
It could be there.
It's a great company really well run.
They really struggled this year with component availability in the first half of the year. So they are under delivered a bit to our our expectations on their own expectations just around that but things have really picked up here as they exited the third quarter Theyre looking at fourth quarter being our highest quarter ever as a company.
Looking at Big things I think a lot of that you can probably tie back to higher energy prices right homeowners I think are looking for solutions to mitigate those higher energy prices and a smart thermostats kind of.
A really cost effective way to go after that the paybacks are really strong and you buy one of these products.
Side of a year, you can pay that back in and Thats, even not even assuming the opportunity to connect that thermostat to our grid.
Our grid services type of program like a demand response program, which can enhance the payback even more so really excited about that business I think when we announced it something like a $125 million has grown nicely. This year and we will continue to grow and we're not gonna break down the pieces, because we don't want to I don't want to get into doing that every quarter here going forward. So.
But it is a great business, well run and a lot of upside there and I think one of the bigger opportunities within that is just the team that they have the expertise they have.
He is going to be central to this single pane of glass initiative that we see is sitting at the heart of the smart home energy system that we've talked about connecting whether it be generators or PV micro <unk> or storage devices or smart thermostats or water heater disconnect switches load management.
Ultimately EV charging things like that.
Think olive garden has been conducting are inherently.
I did hear you say a $125 million for this year right.
No that was what we said when we announced the deal back in December that was there okay alright.
Yeah, they've grown nicely since then and then on the AC coupled the AC coupling.
That.
<unk> is definitely a focal area and one of the things that we've been pushing to get into the market.
The micro inverter or excuse me the PV power cell with a firmware update can accept power from third party.
Our third party Inverters now so we feel really good about that and that's going to be a focus area for our commercial.
Our commercial teams as we go forward so looking forward to that getting some traction in the marketplace and we think that we will see success with that.
Thank you okay.
Thank you.
Our next question comes from.
Okay.
Jerry Revich with Goldman Sachs. Your line is now open.
Yes, hi, good morning, everyone.
And I Wonder if you could talk about.
The production rate for the standby business.
In the fourth quarter normal seasonality.
I think installs tend to be up low double digits can you just comment on.
Are we now.
Normalized run rate, where that business can be up sequentially in near term based on the visibility you have as of today.
Well production rates won't be because we're bringing those down because of the field inventory issue and we've got plenty of inventory as well so.
If the question is around peak production rates, we won't be we won't be up in the fourth quarter will be lower so we expect that that's built into our guide today.
But again installation capacity that normally seasonally does peak in the fourth quarter.
And we continue to see again, we added 300, new dealers in the quarter alone, which is helpful for that were pacing well again to add.
More dealers here in the fourth quarter.
And we need to be hitting our peak rates for installation by the end of the year, but that's all contemplated.
In the guidance I don't know if im answering your question, Jerry or not but.
Yes.
And earlier, you mentioned production would be down as normal seasonality.
In the first quarter.
As well and so I'm just trying to understand right. After every major outage event, there is a new and higher baseline, but that baseline is obviously down from a peak and I was just wondering are we going to be running up at baseline based on the order rates that you see today without making any assumptions on installation capacity.
Headed to call it $400 million standby revenue quarter in the first quarter does that match the incoming order rate or.
Is there a risk of an additional step down.
So what we've said is that the order rate is going to continue to be we're going to have headwinds there as they work their field inventory down so they've got.
Again field inventory, which is about double where we should be at this time of year.
And quote unquote normal in terms of days of field inventory is about double but about half of that.
So really the problem right. The doubling is is already sold.
So they just have to get it installed so because of that we're not the order rate is going to be artificially depressed until we get through that so.
I guess the hurricane logistic was increase the backlog of our dealers basically that actively.
Actively right exactly and could accelerate some of the drawdown of field inventory.
In the Florida regions in particular, where Ian Ian impacted but but no. We think that the the order rates that we're seeing today that will continue to see through the end of this year in the first half of next year are artificially low as we rightsize that field inventory and remember we have some backlog in the fourth quarter here that we're satisfying is exactly thats a good point.
Thank you.
Our next question comes from Mohit <unk> with Credit Suisse. Your line is now open.
Hey, Thanks for taking the question.
I mean.
Guidance on gross margin or the C&I.
The projects in.
In Q4 in the first half, but maybe if you could just opine on opex.
In Q4 in the first half.
All the data points, you're seeing on channel inventory.
Announced consolidations should we expect any changes there.
Im going to Sao Paulo.
Thanks.
Yes. This is York Opex I think I alluded to it a opex may tweak up a little bit here.
In the fourth quarter as a percentage of sales relative to Q3.
<unk>.
Just there's actually just some seasonality on some spend in Q4.
Some accrual reversals in Q3 that won't repeat so just.
A modest increase in Opex sequentially, both dollars and as a percentage of sales we were modeling and our guidance.
Any.
The guidance and how should we think about 2023.
Yeah.
No.
We're still we're just we gave the framework for the top line, we are still working on the framework for the.
For gross margins and Opex. So I think we're going to we're going to hold off on.
Discussions on the margin side.
For next year until next quarter.
Thank you.
Our next question comes from Kashi Harrison with Piper Sandler Your line is now open.
Good morning, and thank you for taking the questions. So just the first one from me.
So the C&I other segments, both quite strong can you maybe just dig into some detail on the strength in both of those segments in Q3, and then maybe speak to the specific indicators youre seeing right now that gives you the confidence.
A continuation of strong growth entering calendar 'twenty three so early and I have a follow ups.
Yes cash is that really the C&I business has been.
Ripping along here for a number of quarters and.
Really hitting its stride, we're taking share in the market. We're seeing you know in our industrial distribution channel.
It was up basically in C&I. So our telecom vertical that is a really important vertical for the company was up.
Our mobile business was up as the national rental accounts continue to re fleet and <unk>.
Top off their fleets.
Our business internationally, which is mostly C&I was also up very nicely.
Again, just a lot of the same.
Opportunities there.
Probably one area that I would call out that was up even more so than in past and I think as I think we can.
<unk> categorized it in the prepared remarks is early innings was this kind of we refer to it as beyond standby application. So.
Mainly natural gas generators large C&I natural gas generators that.
Would otherwise have normally been sold into emergency backup type of applications are being sold in applications, where they're still used as emergency backup power, but they can also be called upon to support the grid during times of significant stress, so heatwaves outages things like that.
That so think micro grids or kind of energy as a service types of programs demand.
Programs, where the generator can be switched on remotely.
By a grid operator utility oftentimes connected through our grid services software platform Concerto.
And we're seeing that that market was up really large in the quarter for US now, it's still pretty small in totality, but it's growing very quickly.
And the.
The quality conversations, we're having with people on projects potential projects in the future the pipeline here for that business looks really good so much so that yes, we are.
Oriented around adding capacity in our C&I factories to accommodate that growth.
So additional test capacity additional manufacturing capacity additional sheet metal fabrication capacity, we're making investments there. So that we can be ready for that business as it grows because we think it's a fundamental part of the.
The Mega trend that we've identified.
Kind of the the grid instability issues that are coming from the rapid de carbonization of utility scale sources and the on the demand side. The electrification of everything inclusive of transportation. This supply demand imbalance, many utilities and grid operators have really struggled here.
And had to scramble.
Over the summer in particular now they were able to avoid any major outages.
It was pretty remarkable but in the end the reserve margins Thats really kind of what it gets down to is the reserve margins as the excess.
Capacity or sources that they have over demand and those reserve margins have gotten compressed dramatically in certain markets out west even here in the north in the Midwest.
Where the reserve margins are down to kind of critical levels, where if you get a spike in demand or you get some kind of interruption in supply.
Major plant goes offline or theres. Some other disruption can cause significant challenges and this is really at the heart of what happened in February of last year in Texas.
The cold snap that happened there.
Was exacerbated the supply demand challenges that were underlying what was going on in the ERCOT region. The ERCOT.
Market and so the.
The opportunity to use generators.
Fossil fuel generators, but natural gas generators, which burn much cleaner, obviously than diesel generators.
It has really come into focus as a potential opportunity to use these assets for the purposes of grid support. So that was that was kind of what happened in C&I in a nutshell as you mentioned the other category was also up nicely.
That encompasses some of our monitoring businesses.
Encompasses some other.
Areas of the business that have been growing very nicely as well so between those two segments are not segments, but.
Product segment product classifications.
We saw really nice growth in the third quarter.
And just the indicators you're seeing that gives you the confidence for 'twenty three so early on.
Yes, so the C&I business is a backlog business I mean that always has been a backlog business. So we look at that you know that you've got lead times on products there that on some in some cases go out.
26, 36 weeks, depending on the size of the product it's custom built.
And it always has been this way this is not.
The new terminal in the story over the last two years is the fact that home standby, which has never been a backlog business became a backlog business, but but the C&I business has always been backlog provides great visibility for us. So we feel very good about that Youre also seeing kind of some of the public statements like if you look at the national rental account customers that we sell to they are indicating that they believe.
Their capex budgets and Capex spends are going to continue to grow into 2023.
As again some of these mega trends around the infrastructure invest.
Investments that need to be made around the country.
We had the investment the infrastructure Act that did get passed earlier. This year. There is a lot of spending that's going to come through.
For that for roads, and bridges and airports and ports.
All of those types of massive infrastructure areas.
Our rental customers are going to serve that the telecom business continues to our telecom customers continue to tell us that their midstream and the build out of there not only hardening their existing networks with the buildout of our fifth generation of <unk> networks, So that feels really good and then.
Again, the quality of the pipeline as I said around some of these newer things like the <unk>.
Beyond standby opportunities the micro grid opportunities in.
In C&I.
We think that there's those have a lot of legs, yet going into 2023. The fact that book to Bill remains strong is promising for next year.
Thank you.
And our next question comes from <unk> Satish with wells.
Wells Fargo. Your line is now open.
Thanks, Good morning, I guess, if we can just focus.
Only on the second half of 'twenty three for a second you mentioned that HSBC could.
It could be down, but I would've thought by then that the field inventory and the installation issues would have been resolved or normalize. So I'm just wondering what's kind of driving that view for HSBC in the second half of 'twenty three given that that demand is so strong and is there a scenario where it could be up.
Yes.
Yes, I think we alluded to before that I mean, there is some backlog that we're satisfying here in the second half of 2022 that won't repeat so theres a little bit of it.
I guess year over year headwind when youre looking at $23 versus 22. So it also doesn't contemplate any major outages, yes got that.
That would be upside so if youre looking for upside where can we grow we did have some outages. This year, yes things happen mother nature happens, so that would definitely be a scenario where things to grow.
But that's.
That's an inherent the backlog situations here in <unk>.
<unk> that backlog here in the second half of 'twenty two is an inherent headwind for second half of 'twenty three.
But.
No.
I think I think sequentially as we get through these field inventory challenges here in the first half you definitely would see.
Sequentially from first half to second half.
At least in terms of how we're seeing it in our framework here.
For 2000 throughout 2023.
Got it that's helpful. And then just switching gears on power cell <unk>.
You mentioned that a certain component needed to be upgraded and so youre enlisting kind of third party instead.
Installers for repairs can you elaborate on what that component is and then has that component in fixed and in new batteries that are being produced.
Yes, we are.
Have an upgrade path on that component, it's a rooftop mounted.
Start off device and that devices.
The previous generation of that device.
Has a higher failure rate than what we'd like to see so we're.
We're proactively replacing those devices for customers. So they don't see an interruption of the production of their systems.
But everything is we've got a path forward and have had a path forward here for some time, we just have to get the upgrades complete.
And so to speed that up we brought in a bunch of third party service companies, they're going to help us do that.
We were relying on some of our channel partners, but with the loss of that largest channel partner. It became obvious that we needed to enlist the help of others and that's why the third party folks are going to be in there in that upgrade.
The total.
Effort. There is what's reflected in that additional warranty reserve charge that we took here.
In the quarter.
Okay.
Thank you. Our next question comes from Donovan Schafer from Northland Capital markets. Your line is now open.
Hey, guys. Thanks for taking the questions.
Hi can you hear me yes.
Yes.
Okay great.
So on the home standby side I was just curious is there is there any kind of a pattern.
And the lower orders from the channel partners in terms of.
Is it more concentrated on the side of big box retailers like home depot, and lowes or maybe regional installers or even potentially kind of the longer tail of smaller installers I think the smaller sellers tend to be limited maybe more on warehouse space.
<unk> access or willingness to use credit.
So I'm just curious if youre kind of disproportionately in any one of those areas.
And then I have a follow up.
Not dramatically so down at <unk> I mean, it's pretty much fits the historical in terms of just the channel.
The mix if you will the channel mix within home standby Hasnt changed dramatically I mean, we do have.
Some of the quote unquote stocking channels right like if you look at a retailer or you look at.
A wholesaler for us those are traditionally stocking channels, where our non dealer contractor comes in or a homeowner comes in and buys one of the products out of stock.
Whereas our dealers.
Generally only buy from us when they have.
Our contracts signed.
Bye bye, a homeowner because and that's nothing's changed with that.
The way the business has paced.
I think to answer your question, there's nothing dramatically different about the mix channel the channel going on there.
Okay and then.
My next.
A follow up question is just.
Focusing on what's going on in Europe .
Because you guys and commercial and industrial and you really are kind of a global business and you've got a lot in Europe and India.
Other parts of Southeast Asia.
Just so much but.
When I look at what's going on in Europe . It feels like there are a lot of puts and takes that could be kind of both <unk> and headwinds because you've got.
The energy crisis, and all of those years and stability around there, but then simultaneously youre also going to have people, saying. This is why we shouldnt be using natural gas and so there might be a resistance against natural gas infrastructure.
Installing more generator sets to rely on that.
Maybe you and.
If theres any diesel that you've seen as much more of a short term thing and so they don't want to invest the capex for a longer term.
Backups. So it just seems like Theres a lot of potential puts and takes there and then sort of differences in eastern Europe versus Western Europe . So could you just a little bit more detail on what exactly you are seeing specifically in Europe , and how that's kind of unfolding for your businesses.
Yes, it's a good question I mean, Europe has and has always been a mostly diesel C&I generator market. So thats just to level set we had we have seen.
Growth in natural gas Gen sets in not only of the European market, but also India.
Here recently coming off a base of almost nothing.
There is nothing there so.
And I think on the margins maybe.
On the edges I should say not to confuse with gross margins or anything on the edges of the discussion yes. There are some pipeline.
If people want to limit gas connections natural gas isn't going away.
That is about the most foolish thing for people to think.
Is the right answer for anything here natural gas is needed for heating for cooking.
It's plentifully available at Burns cleanly.
We would do well as a society to continue to focus on and further.
<unk> and cleaning up the the.
The emissions that come from natural gas, whether it be the extraction emissions or it's the.
The consumption of emissions, but because.
Because I think it's a fuel that can really help us shift as it as a populous here as a global populous.
Further away from more carbon intense forms of energy generation like coal.
And other and other fuels so again.
It's not it might be on the edges youre going to see some natural gas limitations just like we are seeing here in the U S.
In places like California, Berkeley, other places like that where.
They have taken it on you've taken.
They've taken it upon themselves to close off new natural gas connections.
The reality of it is you can get a propane tank anyway. So I mean, it's kind of a fruitless effort.
Here's a run off of propane as well so you don't actually need pipeline. It is helpful. But you don't need pipeline gas. So again I think our view is theres going to be plenty of growth.
In the C&I generator, where all even the home standby generator world outside of North America, and natural gas gens are going to be part of that natural gas and propane Jens.
Thank you and our final question comes from sorry.
<unk> <unk> with Jefferies. Your line is now open.
Thanks for fitting me in so just going back to the home standby commentary you talked about only a modest decline in the second half of the year could you just help frame how youre thinking about the magnitude of the decline in the first half of the year.
No we didn't we didn't necessarily.
Frame that out I think.
I think what we're looking at is more when you look at the total company.
Returning to solid growth in the second half.
Resulting in only a modest decline for the total company for the full year, you can sort of get the magnitude of.
What that means for the first half on a total basis, you know that based on our comments that C&I is going to continue to be strong in the first half so you'll see growth there.
We will be will be sequentially, improving our clean energy business throughout the year in 2023.
And.
And and so that basically leaves yet sort of gives you some framework for how to how to.
How to put all the pieces together.
Okay, and then it seems like sales goes faster home standby than you anticipated. When you kind of gave at that time accounting for guidance could you provide us with an estimate on where that puts you from a penetration rate at the end of this year and then any thoughts on whether you go from there.
While our pen rate this year around 6% is where we anticipate ending so it doesn't it didn't change that dramatically.
And we're going to have to update update our guidance.
Long range guidance again, I would point out we did say at our Investor day that growth was not going to happen in a straight line.
I know.
We have.
People, who haven't been around the company that long in our learning kind of how the cycles work here, but we have in particular with home standby. We have the dramatic increase cycles, where you have the step functions up then growth kind of levels off comes off of the peak actually comes down off of a peak into and normalizes to a baseline level, a new baseline level that's material.
Higher than the previous baseline level, and then kind of as you increase awareness and distribution. Then you are ready for the next step up in growth. So it's more of a step function grower.
We will have to review.
The long term targets, we're not prepared to update on this morning.
But we are going to have we will have another investor day next year for sure if not before then in terms of updating the long range guidance.
Thank you.
Like to turn the conference 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 fourth quarter and full year 2022 earnings results with you in mid February . Thank you again and goodbye.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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Raise your hand during Q&A, you can dial star one one.
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