Q2 2023 Generac Holdings Inc Earnings Call
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Good day and thank you for standing by welcome to the second quarter 2023 General Rack Holdings, Inc. 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 on your telephone you will then hear an automated message advising you had as waste to withdraw your question. Please press star one once again please.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Mike Harris SVP corporate development Investor Relations. Please go ahead.
Good morning, and welcome to our second quarter 2023 earnings call I'd like to thank everyone for joining US. This morning with me today is Darren Jan Valcke, 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.
But generally its employees may contain forward looking statements and involve risks and uncertainties that could cause actual results to differ materially from those 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.
Certain non-GAAP measures during today's call additional information regarding these measures, including reconciliations to comparable U S. GAAP measures is available in our earnings release, and our 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 net sales were in line with our prior expectations of stronger than expected C&I products shipments offset residential products, which were lower than expected as a result of a softer consumer spending environment that impacted shipments of home standby generators and chore products.
This had an unfavorable mix effect on gross margins, resulting in slightly lower adjusted EBITDA margins than previously expected.
Year over year overall, net sales decreased 23% to $1 billion and core sales declined 26% during the quarter.
Residential product sales decreased 44% as compared to a strong prior year quarter that benefited from significant excess backlog reduction for home standby generators.
Current year quarter continued to be impacted by elevated levels of field inventory for home standby generators as well as a decline in clean energy product shipments year over year.
Global CNI product sales increased approximately 24% to an all time quarterly record with broad based growth across nearly all regions and channels adjusted EBITDA margins were negatively affected by the significant.
Unfavorable sales mix as well as reduced operating leverage driven by lower home standby shipments and continued investments for future growth.
Continued favorable price cost dynamics.
The meaningful margin tailwind, providing a partial offset to the unfavorable sales mix.
Second quarter home standby shipments grew at a strong sequential rate declined significantly on a year over year basis as the second quarter of 2022 included the reduction of excess backlog and we continued to meaningfully under ship and market demand in the current quarter as we focused on further reducing field inventories of home standby generators.
Baseline power outage activity in the U S was well above the long term average, but meaningfully weighted towards the final weeks of the quarter.
Home consultations or sales leads were roughly flat from the prior year period, an increase sequentially off an unseasonably strong first quarter.
Additionally, home consultations during the second quarter was still more than four times higher than the second quarter of 2019 further supporting our view that consumer interest in the product category has achieved a new and higher baseline level.
Our residential dealer count returned to sequential growth in the quarter ending at approximately 8700, an increase of 500 dealers from the prior year.
We continue to invest in growing installation capacity of our channel partners and we are making good progress towards our initiatives to increase dealer count train non dealer contractors streamline the installation process and raised home standby category awareness across trade groups. We believe these efforts are important to the longer term growth trajectory of the product category at the Mega trends that support that demand grow.
The outlook remains firmly intact.
Activations, which are a proxy for installs improved sequentially over the first quarter, but declined from a strong comparable period in 2022 that included the benefit of a backlog of installations in certain regions during the prior year.
Activations were also below our prior expectations for the quarter, primarily due to the weaker consumer spending environment for home improvement. Despite this relative softness activations during the quarter were more than double second quarter 2019 levels.
Close rates were flat sequentially and remained meaningfully higher than the comparable period of 2022, but underperformed our expectations as a result of the shift in consumer spending patterns.
The number of home standby generators and field inventory further declined in the quarter, while days of field inventory relative to historical norms also decreased sequentially.
However, with close rates and activation of lower than expected in the quarter, but field inventory normalization process is now expected to extend further into the second half of the year.
As a result, we expect the elevated field inventory levels to further impact home standby shipments in the second half relative to our prior expectations with a return to year over year growth in home standby shipments now anticipated in the fourth quarter.
We believe the stronger outage environment in the final weeks of the second quarter and the resulting strengthen IAC support this expected return to growth later in the year.
Longer term the megatrends that are driving awareness for backup power solutions are as compelling as ever.
Owners and business owners are becoming increasingly sensitive to the growing frequency of power outages driven by extreme weather and grid operators are struggling to solve the growing supply demand imbalances that are a byproduct of the accelerated energy transition that is underway.
Importantly, these are not short term issues as the transition to the next generation power grid will be an uneven process and is expected to take decades to complete.
We believe our unparalleled suite of solutions is well positioned to solve many of the energy related challenges that consumers and businesses will inevitably face.
I'd now like to provide some commentary on our chore products, which consist of a broad lineup of outdoor specialty power equipment used for property maintenance and large residential and light commercial applications.
These products, which are increasingly shifting towards battery powered solutions experienced significant growth in recent years as homeowners have been spending more time and money on property maintenance since 2020.
However shipments in the second quarter declined from the prior year and were below our prior expectations as higher channel inventories in the industry unfavorable weather trends and shifting consumer spending patterns impacted demand for <unk> products.
This weaker than previously expected demand environment is expected to persist in the second half of the year also contributing to our lower outlook for residential product sales.
Now moving to our residential energy technology products and solutions second quarter sales were in line with our prior expectations and grew at a strong rate sequentially as shipments of our power solar energy storage systems improve and E. <unk> sales hit an all time record per quarter.
<unk> drove strong sales growth over the prior year and continue to take share in the smart thermostat market by strong positioning with professional contractors and new placement with key retailers and <unk> team is progressing towards the launch of our smart doorbell camera in the second half of this year, which will which will provide for increased homeowner engagement with our home energy management platform.
As the central hub of our home energy ecosystem, we firmly believe that eco vs feature rich devices and significant expertise in user experience. We will provide to be will prove to be key differentiators for <unk> residential energy technology efforts.
Although we are making progress in our future product roadmaps and building the confidence and rebuilding the confidence of solar installers, the broad residential solar and storage market in the U S is showing signs of slowing.
As a result, we now expect our suite of residential energy technology products and solutions to deliver gross sales at the low end of our previous range between 300 $350 million for the full year 2023, as weaker solar and storage industry demand dynamics are expected to persist throughout the balance of the year.
To better compete in these large and growing market opportunities. We are continuing to invest heavily in the world class talent and R&D infrastructure that is required to achieve next level quality, while developing and commercializing innovative solutions.
We believe our competitive advantages when we built around the combination of these ongoing investments differentiated monitoring and management capability and a unique and seamless user experience combined with our core competencies around sales and marketing lead generation distribution customer support and global sourcing.
I would now like to provide commentary on our C&I products, which once again outperformed our expectations global C&I products sales grew 24% over the prior year to an all time quarterly record as multiple mega trends continue to support demand for backup power and mobile products around the world.
Domestic C&I product sales grew at a robust rate in the second quarter highlighted by strength in shipments to a number of key customers for beyond standby applications industrial distributors and national rental equipment companies.
Shipments of natural gas generators used in applications beyond traditional emergency standby projects continued to see tremendous growth during the second quarter.
We believe we are in the very early innings of this exciting new market opportunity as grid stability concerns and volatile energy markets are expected to further drive demand for these solutions.
Leveraging our position as the leading provider of natural gas generators. We are building an increasingly comprehensive solution set to enable the deployment of our products and multi asset applications, such as pairing our smart grid ready generators with our emerging C&I storage connectivity advanced controls and grid services solutions.
Shipments of C&I generators through our North American distributor channel grew once again at a strong rate and channel backlog also increased sequentially during the quarter.
Quoting activity for C&I products remains robust highlighting the ongoing strength and demand for backup power in this important channel that serves a wide range of end markets.
In addition, we experienced another quarter of robust growth against a strong prior year comparison, with our national and independent rental equipment customers as they continue to refresh and expand their fleets.
While order patterns from rental companies have moderated after several quarters of exceptional performance. This end market has substantial runway for growth supported by the critical need for future infrastructure related investments.
As the leading provider of backup power to the North American Telecom market sales to national Telecom customers increased slightly during the second quarter as compared to a strong prior year comparison.
Although we continue to expect shipments in order trends for these products to be uneven during the second half of the year. We believe investment in telecom infrastructure remains a secular trend as global tower and network hub counts further expand and the increasingly critical nature of wireless communications requires backup power for resiliency.
Positive momentum also continued during the second quarter for our international segment as total sales increased 10% year over year with the combined impact of acquisitions and favorable foreign currency effects contributing approximately 4% to sales growth.
Core total sales growth was driven by strength in nearly all regions as well as global sales of our controls and automation solutions from our deep Sea and motor Tech acquisitions.
While energy security concerns in Europe have moderated from peak levels seen in prior quarters. We continue to see positive momentum in important long term international growth markets, including India, The Middle East and Australia as.
As the global energy transition accelerates demand for electricity around the world growers and the threat of increasingly severe and volatile weather persists. We believe that the demand. We are seeing in these markets supports our view that the need for power resilience is a global issue accordingly.
Accordingly, we are continuing to invest and build out our international product and distribution capabilities to serve these large and diverse growth opportunities.
As disclosed in our press release. This morning, we are raising our full year sales growth guidance for global C&I products to mid teens range from prior expectations for a mid to high single digit increase.
In addition to the strong second quarter performance. The increased guidance is being primarily driven by continued strong backlog and operational execution for our domestic C&I products.
In closing this morning, our C&I products category has continued to perform extremely well as our global teams have driven strong execution, but a softer than previously expected consumer environment impacted second quarter results and is the main driver in the reduction in our second half outlook for residential products, we view that.
The headwinds in our residential product categories is temporary and we remain confident in the robust longer term outlook for our broad portfolio of backup power products in energy technology solutions.
This confidence combined with our history of strong cash flow generation and healthy financial profile allows us to maintain a long term focus on executing our powering a smarter world enterprise strategy.
We will continue to make the necessary investments to capitalize on the megatrends that drive the future growth opportunities inherent in this strategy.
Look forward to providing more detailed update on our longer term strategic vision at our upcoming Investor day in late September .
I'll now turn the call over to York provide further details on second quarter results as well as the outlook for 2023.
Thanks, Eric.
Looking at second quarter of 2023 results in more detail.
Overall net sales decreased 23% to $1 billion during the second quarter of 2023.
Fair to <unk>, two 9 billion in the prior year second quarter.
The combination of contributions from recent acquisitions and the favorable impact from foreign currency and an approximate 3% net favorable impact on revenue growth during the quarter.
Briefly looking at consolidated net sales for the second quarter by product class.
Residential product sales declined 44% to $499 million as compared to 896 million in the prior year.
As Aaron discussed in detail lower shipments of home standby generators power cell energy storage systems and <unk> products drove this decline in residential product sales in.
In particular for home standby the year over year declines were due to a tough prior year compare comparison, where we were working down excess backlog combined with the current year that is impacted by field inventory destocking.
Commercial and industrial product sales for the second quarter of 2003 increased 24% to $384 million as compared to 309 million in the prior year quarter.
Contributions from recent acquisitions and the favorable impact of foreign currency contributed approximately 2% revenue growth in the quarter.
This very strong core sales growth was driven by broad based growth across nearly all regions and channels highlighted by an increase in domestic shipments to direct customers for beyond standby applications industrial distributors and the national rental equipment channel.
In addition international shipments of C&I power generation products and controls and automation solutions also contributed to this growth.
Net sales for other products and services increased 37% to $117 million as compared to $86 million in the second quarter of 2022.
This increase was primarily due to the acquisition of electronic environments given their additional service capabilities called this acquisition closed last year on June 30.
Gross profit margin was 32, 8% compared to 35, 4% in the prior year second quarter due to the significant impact of unfavorable sales mix given the sharp decline in home standby mix compared to the prior year.
This was partially offset by previously implemented pricing actions and lower input costs from improved commodities logistics and plant efficiency plant efficiencies that are providing an important tailwind to margin trends that are expected to continue in the second half of 2023.
Operating expenses increased $2 million or 1% as compared to the second quarter of 2022.
This increase was primarily driven by increased employee costs to drive and support future growth higher marketing and promotion spend and the impact of recurring operating expenses from recent acquisitions.
This was mostly offset by lower variable operating expenses on the lower sales volumes.
Adjusted EBITDA before deducting for Noncontrolling interests as defined in our earnings release was $137 million or 13, 6% of net sales in the second quarter.
As compared to the $271 million or 21% of net sales in the prior year.
This lower EBITDA percent was primarily driven by the higher operating expenses as a percent of sales given the lower sales volumes compared to prior year and to a lesser extent the lower gross margins.
I will now briefly discuss financial results for our two reporting segments.
Domestic domestic segment total sales, including inter segment sales decreased 28% to $8 $115 million in the quarter as compared to $1 1 billion in the prior year with the impact of acquisitions contributing approximately 3% revenue growth for the quarter.
Adjusted EBITDA for the segment was $103 million, representing 12, 7% of total sales as compared to $242 million in the prior year or 21, 5% of total sales.
The lower domestic EBITDA margin in the quarter was primarily driven by the significant impact of unfavorable sales mix and reduced operating leverage on the lower shipments.
The impact of acquisitions and continued investments in future growth also negatively affected margins during the quarter.
These margin headwinds were partially offset by favorable price and cost benefits.
International segment total sales, including intersegment sales increased 10% to $224 million in the quarter as compared to $203 million in the prior year quarter.
Core sales, which excludes the impact of acquisitions and currency increased approximately 6% compared to the prior year.
Adjusted EBITDA for the segment before deducting for Noncontrolling interests was $33 million or 14, 9% of net sales as compared to $30 million or 14, 5% of net sales in the prior year.
This stronger margin performance was primarily driven by favorable price and cost benefits.
Now switching back to our financial performance for the second quarter of 2023 on a consolidated basis as disclosed in our earnings release GAAP net income for the company in the quarter was $45 million as compared to $156 million for the second quarter of 2022.
Current year net income includes approximately $15 million of additional interest expense compared to the prior year due to higher borrowings and interest rates.
In addition, GAAP income taxes during the current year second quarter was $16 million or an effective tax rate of 25, 9% as compared to $46 million or an effective tax rate of 22, 5% for the prior year.
The increase in effective tax rates was primarily due to a lower benefit from equity compensation in the current year quarter.
Diluted net income per share for the company on a GAAP basis was <unk> 70 in the second quarter of 2023 compared to $2 21 in the prior year adjusted.
Adjusted net income for the company as defined in our earnings release was 68 million in the current year quarter were $1 eight per share. This compares to adjusted net income of a 185 million in the prior year or $2 86 per share.
Cash flow from operations was $83 million as compared to 24 million in the prior year second quarter and free cash flow as defined in our earnings release was $54 million as compared to 6 million in the same quarter last year.
The increase in free cash flow was primarily due to significantly lower working capital investment in the current year quarter as inventory levels have stabilized.
The offset by lower operating earnings higher interest payments and higher Capex.
Total debt outstanding at the end of the quarter was $162 billion, resulting in a gross debt leverage ratio at the end of the second quarter of two eight times on an as reported basis.
Which is expected to moderate in the second half of the year as LTM EBITDA begins to increase.
With that I will now provide further comments on our outlook for 2023.
Okay.
As disclosed in our press release. This morning, we are updating our outlook for the full year 2023.
Softer than previously expected consumer spending environment for home improvement has impacted our outlook for residential products, most notably for shipments of home standby generators.
As a result of the softer consumer we're seeing lower close rates and activations relative to prior expectations, which is causing higher field inventories and lower distributor sentiment sentiment compared to our previous guidance commentary.
As a result of these factors, we now expect residential product sales for the full year 2023 to decline in the mid 20% range compared to the prior year.
Compares to our prior expectation for a decline in the high teens range.
Partially offsetting this incremental weakness in residential products, we're raising our outlook for C&I product sales, which are now expected to grow at a mid teens rates during the year as compared to our prior guidance of a mid to high single digit rate.
Overall net sales for the full year are now expected to decline between minus 10 to minus 12% as compared to the prior year, which includes approximately 2% net favorable impact from acquisitions and foreign currency.
This compares to the previous guidance range of a decline between minus six to minus 10%.
From a quarterly pacing perspective, we now expect a slight year over year decline in overall net sales for the third quarter with a return to year over year growth in the fourth quarter.
This guidance assumes a level of power outage activity during the remainder of the year that is in line with the long term baseline average.
And consistent with our historical parts. This outlook does not assume the benefit of a major power outage event during the year.
Looking at our gross margin expectations for the full year 2023, we now anticipate approximately 100 basis points of gross margin improvement over 2022 levels.
We still expect sequential quarterly improvements.
And gross margins in the third and fourth quarters with third quarter gross margins projected to be approximately 150 to 200 basis points higher than the second quarter of 2023.
The anticipated sequential improvement in gross margins in the second half is expected to be driven by improved sales mix with higher shipments of home standby generators lower input costs and the realization of cost reduction initiatives as compared to the first half of the year.
Given the significant megatrends that support our long term growth opportunities, we remain focused on driving innovation executing our strategic initiatives and investing for the future. As a result of these ongoing investments we expect operating expenses as a percentage of net sales to be approximately 20% to 21% for the full year 2023.
Given these gross margin and operating expense and expense expectations adjusted EBITDA margins before deducting for Noncontrolling interests are now expected to be approximately 15, five to $16, 65% for the full year 2023 compared to the previous guidance range of 17% to 18%.
From a quarterly pacing perspective, we still expect adjusted EBITDA margins to improve throughout the remainder of the year, primarily driven by sequentially improving gross margins as previously discussed and to a lesser extent improved leverage of operating expenses, an unexpected higher sales volumes.
Accordingly, we now expect third quarter adjusted EBITDA margins to be approximately 300 to 350 basis points higher than the second quarter of 2023.
And exit EBITDA margins for the fourth quarter of 2023 are expected to be in the low 20% range.
Okay.
Additionally, as Aaron discussed we continue to make significant operating expense investments and our residential energy technology products and solutions to capitalize on the signet significant opportunities presented by the rapidly growing solar storage and energy management markets.
As a result, we currently expect these investments to unfavorably impact our EBITDA margins by approximately 400 basis points for the full year 2023.
We continue to expect operating and free cash flow generation to follow historical seasonality of being disproportionately weighted towards the second half of the year in 2023.
For the full year, we expect adjusted net income to free cash flow conversion to be strong well over 100% as working capital moderates off of peak levels.
We're also providing an updated guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2023 <unk>.
Importantly to arrive at appropriate estimates for adjusted net income and adjusted earnings per share add back items should be reflected net of tax using the expected effective tax rate.
For 2023, our GAAP effective tax rate is still expected to be approximately 25% as compared to the 19, 6% full year GAAP tax rate for 2022.
The year over year increase was driven primarily by expectations for lower share based compensation deductions.
Increased mix of income in higher tax jurisdictions.
Tax on foreign income in 2023 compared to 2022.
Interest expense is now expected to be approximately $92 million compared to the prior guidance of approximately $90 million assuming no additional term loan principal prepayments during the year and current expectations for sulfur rates throughout 2023.
Interest expenses is expected to moderate in the third and fourth quarters as cash as cash flows on our interest rate swaps become more favorable as we expect to pay down a portion of our outstanding revolver indebtedness.
Our capital expenditures are still projected to be approximately 3% of our forecasted net sales for the year.
Depreciation expense is now forecast to be approximately $62 million compared to the previous guidance of approximately $60 million in 2023.
GAAP intangible amortization expense is now expected to be approximately $102 million during the year as compared to the previous guidance of approximately $100 million.
Stock compensation expense is still expected to be between $40 to $43 million for the year.
And our full year weighted average diluted share count is still expected to approach 63 million shares as compared to $64 7 million shares in 2022, which reflects the share repurchases that were completed in 2022.
Finally.
As 2023 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value.
As a reminder, we have $278 million of authorization remaining on our current share repurchase program.
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. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again thank you.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Tommy Moll with Stephens, Inc. Your line is now open.
Good morning, and thanks for taking my questions.
Hey, Tommy.
Aaron I wanted to start on the topic of channel inventory for the home standby product category.
Quarter I think you were at about one five times normal where do you sit now and am I hearing you correctly that embedded in your outlook is that that converges to the normal level by the fourth quarter.
Yeah, Tammi its I mean, thats, obviously the central.
Question here and has been a topic as we've discussed over the last several quarters Youre right. We said I think somewhere in the one four to one five times range is where we were last time, we talked in April .
Today, we believe that number is closer to one two to one three times as we exit as we exited the first half.
And with the assumption of a softer consumer spending environment in particular around kind of residential investment these types of projects home improvement projects.
We're really looking at a more moderated close rate it's interesting because we actually are seeing a lot of inbound activity.
In terms of sales leads they're just not that close rate on those leads is not growing at the rate that you thought it would and that's really the kind of that.
And then it just becomes a math problem from there we're just not going to drain the inventory as quickly because we're not going to convert those leads to activations.
At the rate that we thought we would here in the second half and that is that's going to create basically a situation where that elevated field inventory is going to persist a bit longer than we had originally thought so through.
It really kind of through the year here it will start to taper off and.
There is definitely and I think you've done this with channel checks, we do our own channel checks and we know what field inventory looks like really with a high degree of accuracy.
Region to region and dealer to dealer wholesale our wholesale retailer retailer and so we see regions, where actually there isn't a field inventory issue anymore. We see other regions, where field inventories are still higher than normal. So it's become more of a mixed bag. If you will.
Around the field inventory story, whereas I would say you wind the clock back two or three quarters. It was two or three quarters ago. It was everywhere. So.
Was that was full of inventory in all regions. So now we're starting to see some of that normalization will be achieved in certain regions in.
In fact go beyond that we've got a couple of regions you can get up into Canada, and Quebec markets, where in particular, where they've had number of outages.
And you can't get them in a product they don't have the installation bandwidth. So we get back to that issue and that's obviously another area. We've been focused on so hopefully that hopefully that gives you the answer to your question.
For your next question.
The next question comes from the line of Michael Halloran with Baird. Your line is now open.
Hey, good morning, everyone.
Following up a little bit on that.
Hello.
Awesome.
Mike We've lost Mike.
Yes.
The destock comps.
Hello.
Houston channels growing too can you hear me.
Mike We lost you there for a second can you repeat your question.
Yes, no problem, there's a lot of moving pieces here.
A channel perspective.
In the home standby side and kind of tagging along to the inventory question, but high inventory you've taken your outlook down a little bit slower consumer conversion with the IH cheese or higher regaining distribution inventory.
Normalizing a little bit.
Can you help think from a forward commentary how you think the demand curve starts playing out maybe just a little behind the hood on the sell out from a channel perspective, how you think those sequential kind of work from a sellout perspective versus what normal might look like and just kind of any context, what the true underlying run rate.
Look like if you.
Try to normalize for these moving pieces.
Yes, Mike there are a lot of moving pieces as you said and when you think about the sell in versus sell out.
Yes again.
Channel the channel.
When we look at kind of the different metrics that we look at in every channel.
We see some different things going on channel the channel we do see.
Our dealer channels, which are more of a turnkey project channels.
Seal like they're in.
Metrics bear this out but they are in better shape than some of the other channels. So when we look at our wholesale channels and in particular, our retail channels retail would be.
Is lagging for US right now so when we look at.
When I look through it at sell through at retail.
And we look at the kind of the foot traffic at retailers and I think you guys have those.
Those on the call here I've heard.
Some of the more recent commentary from some of the larger retailers.
I think the foot traffic is it.
Has slowed and we are definitely seeing that in our residential product categories that we sell through retail.
With maybe the notable exception being <unk> as we called out in our prepared remarks, this morning, which is interesting.
And that really has probably more to hire higher energy prices.
Opportunity to use those products to reduce your energy costs.
Omni.
The moving pieces that are in this and kind of thinking about the pacing of that.
Your question Mike.
What we see here is as the kind of fog clears up the steel inventory issue.
We think that the dealers are kind of first to recover here followed by likely by wholesale and then we've got a little bit further to go with retailers are the ones that are probably at the.
When we talk about normalization at one two to one three times, it's across everything right. So and we sell kind of on an omnichannel basis, so dealers are better than that.
Wholesalers are probably somewhere in maybe a little worse than that and retailers are quite a bit worse than that at this stage.
We do believe this will start to normalize here as we go throughout the third quarter and as we get into the fourth quarter in particular, we should start to see.
We should start to see that abate.
The end market demand part of your question is is interesting because as we said sales leads Ics remained strong and in fact, they were even up sequentially from Q1.
Dave Theyre, just not converting quite at the same level now what we're not sure at this point is if that conversion is just delayed or if that conversion is more the result, primarily of the consumer just saying theyre not going to buy.
It all right or they just talking about today or they're not going to buy it all and so as we continue to work on that we stood up an entire group here, we call. It our nurturing team for lack of a better.
For lack of a better terminology, but these are a team of dedicated salespeople that reach back out to enclose leads we've got quite a house file that we built here.
Unclosed leads.
The number of leads we generate over the last several years is tremendous and as you can imagine a high percentage don't close so the opportunity to reengage with those homeowners at the right time with perhaps the right offer.
<unk> is growing and we think that that represents.
An area of opportunity for us and one that we're leaning into that.
That's something that.
We're still kind of in development phase on I would tell you its not we havent perfected it yet, but we're doing a ton of work around that to see how we can.
To stimulate demand in particular around those customers that have already gone through in home consultation process. So I don't know if im getting to the heart of your question or not but we see end market demand as strong at least at this point awareness is strong we need to see conversion improve.
To help us accelerate.
The clearing of the field inventory levels, but we are making good progress there. It's just not as quickly as we had hoped.
Yes, I think the key is.
Seasonally we do expect the home standby category to pick up in the second half of the year versus the first half.
Especially as inventory.
To normalize towards the <unk>.
The second half.
I think it's the Aaron's point, though it is just maybe it's not going to improve as much as we thought relative to three months ago because of the softer consumer that we're seeing.
One moment for your next question.
And the next question comes from the line of Jeff Hammond with Keybanc Capital Markets, Inc. Your line is now open.
Hey, guys.
Just one just back on this this close rate dynamic I'm, just wondering if youre getting feedback from your dealer network on.
Kind of why the close rates are lower or is it is it financing costs or the higher cost because I know you had been contemplating.
Lead time.
The closer it is getting better as lead times shortened so that seems to be the big surprise and just looking for more more feedback color.
Yes, sure Jeff that that is a surprise to us as well although.
As we look at I would say kind of maybe comparable industries, where you have got bigger ticket types of home improvement projects pools.
Patios furniture things of that nature.
We're maybe not seeing I think youre hearing commentary.
We're all not seeing maybe the consumer step up to the same level that we all expected.
That I think is indicative of perhaps just.
The work that the federal reserve is doing here.
To tamp down inflation with with higher rates I think it's starting to bite in some of these areas and particularly on these bigger ticket type of purchases so that for the for the home anything tied to residential investment.
Yes, I would tell you that.
We did see to get to the point that we've made in the past and that you are making here, we thought that close rates previously had come down because of the long lead times on the product, which we believe we're kind of alluded that they bounced off the bottom kind of Q1 of 2022 and improved nicely sequentially up until this quarter.
And this quarter, they kind of flattened out and we're basically our guidance here contemplates that they don't go up any further this year that's really the that's the change right we had.
Previous guidance had contemplated that close rates would continue to improve albeit not dramatically so but as we said on the last call. It's going to take some time to return to those pre COVID-19 close rates, but the feedback from the channel around close rates is that homeowners are theyre struggling too.
Two again with bigger ticket types of purchases and they're just they're taking more time to.
Think through that and so we just think that that that that phase of the project and again I think the good news is we've got we've got a sales lead even if it didn't close we have the opportunity to re engage with that customer and friction in the in the past when you look at re engagement our close rates are better if we choose the right time to Reengage right I E.
If another outage moves through a local market and our team engages with all those unclosed IHS was unclosed opportunities in that market, perhaps over the last 12 24, even 36 months, we see a much higher close rate. The second time around so it was kind of like the friction is lower because of that process.
In home sales consultation has already been has already taken place and so that just leads to an easier time to get to closure at.
At least historically so we're going to next really why we're putting a lot of our efforts here in the second half of this year is into that nurturing effort that I talked about before to really work on how do we get more enclose Ics to closure.
One moment for your next question.
And your next question comes from the line of Mark Strouse with Jpmorgan. Your line is now open.
Yes, good morning, thanks for taking our questions.
Sorry to beat a dead horse here I just wanted to ask.
Field inventory levels again.
A different way of looking at it just how youre thinking about what normal inventory levels are the one two to one three.
Talking about today.
Your outlook kind of assume that that goes back to 1.0 R.
On the channel checks that you mentioned earlier is there a chance that that potentially it was even lower at least temporarily given kind of what youre talking about with the with the macro and then can I can I sneak up sneak in a quick follow up just.
Just to be clear what I'm hearing.
The margin issues are.
At least the margin headwinds that youre talking about.
Guidance that is a mix issue you're not signaling any changing in pricing I just want to make sure that that's clear. Thank you.
Yes, Mark Thanks for the question so I'll take the first part.
Which is the field again, just kind of expanding on the field inventory. We said one two to one three our assumption is that at one point I always quote unquote normal I think the key question there is.
One point out of the right number right so and what is the one point based on what it is is we went back I think it was around 2019 levels for.
Pre COVID-19 if you will.
Level of field inventory just to kind of pick our point of normal right and Thats a debatable point.
Could the channel decide that their normal as lower potentially recall, though that.
In our world.
Field inventory.
It's very it's not a ton of field inventory at the dealer level, especially when you get into smaller dealers. They just don't have the financial capacity or even the physical space to put product in so in their world, maybe maybe normal was zero.
That would be contemplating of course in the and the one point out it is going to be the other channel players the retailers. The wholesalers that are generally more stocking channels and then our larger dealers.
Regionally, we will also stock product just to keep it.
Constant flow to their teams and in particular their install teams just to keep product moving.
And so we.
We do this on a days adjusted basis, though just to be clear because there is seasonality to this so as we think about this the second half of the year is seasonally our stronger period for home standby generators. So we would see velocity typically pick up in the second half of the year Ergo. When you look at it on a on a days basis.
That field inventory calculation.
We will adjust accordingly.
Then in the first half of the year in particular first quarter, which typically is our seasonally low period, that's when you'd see kind of that days of field inventory adjust to reflect lower installation pace.
But the key question is not lost on us in terms of what's normal is there a risk there around the fact that maybe.
Channel partners decide that normal is something less potentially.
Potentially I don't think it would be I don't think it would be long lived probably short length. If that's the case, but we're trying to be I think balanced in how we're viewing this and we think that that kind of one <unk> times as a good reflection point of is reflective of a good point in the curve in terms of what's normal and then on margin on the margin side yet in terms of the.
The EBITDA.
Percent guidance down on the gross margin side, it's all mix. So yes, there is no pricing reduction assumptions in our guidance. So it is all mix and then you get the Opex is a little bit of operating deleverage on the lower sales so thats.
A smaller piece of the puzzle but.
There is no there is no reduction in price in our guidance.
One moment for your next question.
And the next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.
Yes, hi, good morning, everyone.
Gerry I Wonder if you could just hi.
Margins are going to be at about 16% this year.
<unk> targets for 2024.
We're in the mid twenties.
Obviously, a lot has changed since I.
I'm wondering is there an opportunity for margin expansion off of current levels. How would you bridge, what's reasonable to expect compared to that 24%, 25% margin target you laid out at analyst day, I think you alluded to it in terms of 400 basis points of drag from the solar investments, but can you expand on that.
What do you folks do.
It was a reasonable margin expectation in the medium term.
Yes, a couple of things I know I did mentioned in my prepared comments that Q4 exit rate.
Q4, EBITDA margins are expected to be in that low 20% range. So we expect obviously things to pick up from here, especially as home standby shipments normalize.
I guess.
If you think about that.
That previous Investor day target for 2024.
I know that our energy technology business things are just taking a little bit longer than maybe we originally laid out back in 2021 September 2021 for that business. Thats. This is more of a reset year for our clean energy business and it will grow from here. So I think we're.
We're going to level set.
Those I guess revised expectations are going to look like on September 27, when we have our investor day.
Next month.
On September 27th next month.
And I think we will be able to give.
Clear updated targets for the long term at that point, but I.
Those are some data points that.
You can use for now.
Our next question.
Our next question comes from the line of Kashi Harrison with Piper Sandler Your line is now open.
Good morning, and thank you for taking the questions.
So.
Hey, just a few quick ones here.
Thanks Monty.
Can you maybe just.
Give us sorry.
The revenue gap between.
Sales into the channel and sales out of the channel are you under selling this year by 100 million to 100 $300 million.
And then.
On the C&I side of the business.
How do you think about the repeat of Italy.
Looking into 2024.
Giving some of these cross currents surrounding construction from the infrastructure Bill maybe.
Abi maybe later.
Just how do you think about what you see.
Thank you.
Yeah. Thanks, Kashi, so yes, we haven't disclosed the kind of gap between sell in and sell out so.
But we are significantly under shipping the market here market demand here in the first half as we worked through that field inventory and that really is the pull down in guidance here.
On the residential side is can we also then we can continue we can see field inventory coming down in all of our data. So we are very clear I know, we're under shipping the market. We know we're under shipping the market.
Pretty pretty dramatically at this point so.
And Thats why we think that.
We're going to continue to grow here sequentially through the year, because that field inventory drag will reduce as we get to the back half of the year. So again haven't put up haven't put a fine number on it just just kind of from a disclosure standpoint, but but we definitely see that and then on C&I I think the question. It was a little broken up for sorry about that but I think.
The question was just kind of about the sustainability of C&I and and what we're seeing there I think as we said kind of in our remarks, obviously, we are starting to come up against tougher comps. We've been the C&I business has been very strong for a long time. It was another great quarter for our C&I business.
Some of our national account customers in particular on the rental side.
We're starting to see some moderation those order patterns here.
But what we've heard from that largely from our large rental customers is that utilization rates and equipment are still doing quite well, they're holding in there.
Said I think proactively a couple of those larger customers have cut their capex guidance for the year.
We're pretty well locked and loaded for this year in terms of orders just in terms of our backlog so not expecting much to change. There are question will be 2024 and is that does that rollover.
Or does it does that is there a significant change that we don't have great visibility into that yet and wouldn't be in a position to provide that guidance on the telecom side as we talked in the last call and as we mentioned in our prepared remarks. This morning are large national telecom customers.
That demand tends to be.
Referred to it sometimes in the past is lumpy I think we use the term uneven this morning.
But from quarter to quarter, it can accelerate and decelerate quite quickly which.
It seems surprising but.
Because they.
The way they manage projects and certain things can come and go in terms of.
<unk> <unk>.
Capex spending capabilities. It can be turned on very quickly and turned off very quickly and so we've seen some of that kind of manifest itself here in what's expected in the second half of the year, So nothing unexpected there but.
I think the long term setup, when we talked to all the telecom customers.
We're in kind of a multiyear up cycle for telecom spending we think just near term kind of unevenness in the way that capex is going to be deployed but they have a lot of hardening to do with their networks here yet over the next several years. So we think that that's a run that's that's going to be it's going to continue and then I would.
Tell you that within our core C&I products domestically and globally.
In particular, where our products are now being deployed for what we refer to as beyond standby application. So.
Generator it could be used to be.
We called upon at times of stress for the grid right. So you've got very.
High temperature extremes, low temperature extremes or other points in the curve, where the greatest under duress. The generator can be called into action by perhaps a local utility or grid operator.
And can that power than can be flowed into the grid.
<unk> support and that is those products are becoming much more popular in fact, we had we had a really good run there. We think we're in the early innings of the use of these products. So really what it is.
It allows customers who would otherwise be looking at a generator strictly from when you look at it from an economic standpoint, its about risk mitigation either loss of revenue loss of inventory loss of process something like that you have to weigh that against.
The initial capital cost of the equipment and the ongoing maintenance of the equipment.
Life.
You can now essentially buy down that first piece cost, which has always been a barrier to ownership for the category.
By allowing for that product to be used in these beyond standby applications and thereby monetizing that asset in a way that didn't exist. Previously so we think that as the grid continues to transition that these assets that were formerly stranded basically I'd say, we're not connected to the grid necessarily only connected.
For emergency backup purposes for a property that they can be they can be monetized in a way they couldnt before and that's I think an exciting opportunity for us and we're seeing more of that manifest itself here.
In the C&I markets.
One moment for our next question.
And your next question comes from the line of George <unk> with Canaccord Genuity. Your line is now open.
Hey, good morning, and thanks for taking my question.
I think I heard.
Yes.
As part of your strategy to close.
Increased close rates you did not contemplate.
Price reductions across the residential portfolio. My question is why not why isn't that an option. That's on the table to help improve close rates, particularly in an environment, where your input costs are going down. Thank you.
Yes. Thanks for the question George actually we do have when we talk about price you probably need to talk about net price, but the promotion dollars ended up down in kind of operating expense in some cases. So it's not really just from an accounting of technical accounting standpoint, it's not always price, but we are we are using more promotion than we use maybe a year ago.
Certainly more than two or three years ago and that's included in our <unk> and that is included in the guidance. So I think to maybe put a finer point on it those teams that we've we've unleashed here on our enclose IFC file.
To work on different types of promotional activities, we're doing a lot of testing around what works what doesn't work we've run some national promos. We ran one earlier this year.
And we will have one on our schedule here.
At some point later this year.
Those things are.
Certainly included in the guidance. There is a question of course is do we need to do more.
At this point, we believe we've got the right level in there too to support the close rates that we've built into the most recent guidance at some level you. Just you can't you can't promote perhaps too.
Your way to a consumer that if the consumer is going to be.
Stubborn and it's going to be painful for them to spend.
Because they're concerned about obviously a lot of things around inflation.
Round there.
Yes.
Our employment status I mean, there's so many things that go into that that makeup.
Why and when a consumer feels confident to do that certainly power outages.
And historically for us softer consumer environment, we generally have been able to break away from when you get when you get outages and so that still exists here as an opportunity our guidance contemplates kind of a normal outage environment and we have been experiencing kind of above normal outage activity here.
<unk> through at least through late in the second quarter, we saw that.
Kick up and.
And actually July in and of itself has been somewhat active as well so continue to watch that and see what impact that will have on close rates, but we do have a level of promotion in our guidance.
Around around trying to improve close rates for the balance of the year.
And your next question comes from the line of Jonathan Schaffer with Northland Capital markets. Your line is now open.
Hey, guys. Thanks for taking my questions.
Donovan.
Hey, I wanted to talk about chore and portable so chart, usually doesn't get much attention, but this quarter did you guys actually called it out and highlight.
Oh of course.
Of course, it just be that was the main driver, but as you think these smaller pieces can unfold in ways that kind of nudge things I remember I think with the polar vortex in Texas at a time.
A lot of folks thought that's great news, but you won't be in that quarter, because you were.
Supply constrained.
Many of you are considering that manufacturing HSBC, but you did end up beating and it came down to the portables, because you had that ready and all that.
So these can add up in ways that matter.
So talking about your products.
The California ban on small sized gasoline engines under 25 horsepower backup.
That goes into this into effect at the end of this year I think old mowers and everything get grandfathered in and it's not like if you.
On a gasoline lawnmower you got a ditch.
January one, but any new purchases I believe needs to be electric.
So I'm curious.
If.
It's a smaller piece of the revenue mix something like this has to almost like double or something to really become meaningful in with portables. When the polar vortex hit, Texas Thats kind of like what happened is you had this.
Massive surge in portables and getting shipped to that state.
So in the case of something like this I don't think come January 1st Youre going to suddenly you get like a sudden doubling in <unk> products.
With mean green mowers and the other clean energy chore products you have in this California law going into effect.
Is that something where you see.
Jumping to a 10% 20% growth or a two X three acts over a number of years kind of a broader magnitude there and then same thing on portables, because you've launched.
Portable battery product.
Larger portable generator in a dual fuel generator, which those are all.
Significant future additions in those product categories, so anything on kind of.
The next year or so growth rate you would expect around those.
Proximate, yes, yes.
Yes, Thanks Donovan so.
Obviously that the regulatory environment continues to change.
An outright ban on small engines in California.
You are spot on with that.
California is pushing ahead with that.
Yes, I think that.
Like all.
Kind of regulatory action, sometimes there are unintended consequences of that whether they be.
<unk>.
Maybe advanced purchases pull in of demand around that we're not seeing anything today for people who are loading up on kind of internal combustion engine, driven Charles will generate a products.
Just to be clear by the way it would only impact.
The.
Portable generators and chore products home standby is not part of that and.
At this point, so just to be clear.
And Youre right. Its a smaller part of our business I mean, we did call out sure. This time, because frankly, they had a terrible second quarter and the terrible first half very much in line with the residential portions of many of the other public companies that serve that market I will say, it's part of our strategy there the strategy behind the mean Green acquisition.
<unk> is those are electrified zero turn radius commercial mowing piece of equipment and we have seen.
A dramatic rise in interest around those products.
But they're expensive and so conversion is more difficult now the IRA.
That inflation reduction Act.
He has provided for some subsidy for those products and we expect that that will be clarified through treasury here over the back half of this year, which will certainly help we are the leader in that commercial segment when it comes to electrified commercial mowers.
And that is going to be an exciting part of the business to watch and we're electrifying the rest of our chore products platform using the technology that we acquired with mean green.
Again part of what were the brush cutting platforms and things that are so important to us there and so our products are being electrified as well. So we think we'll be prepared as these bans take place.
The one in California.
Certainly as you said end of this year.
And we'll have to see how it plays out California also has on top of the federal subsidy. Some state level subsidies for the purchase of those types of products to incentivize the <unk>.
<unk> from internal combustion engine driven products to two electrified products. So we will continue to watch that portable generators different type of category.
And this is where I think the unintended consequences of regulation, which do you have a multi day outage.
You can't buy a battery to get you through that sorry to California regulators theyre not thinking that through.
They should've left open.
Alex that are used for emergency use and.
They are infinite wisdom, they probably will create.
Waivers when they run into problems like they've done in the past for other areas.
The market. They have these strict regulations and then they waive them when there are emergencies and I wouldn't be surprised to see the same happen here.
Generating power is different and storing power at all there is to it that said, we do have storage products portable storage products that we're introducing in the marketplace.
That are good for temporary short duration outages outage protection, but they also are expensive relative to the cost of internal combustion engine, driven generators, which again for emergency use like those products are used.
Primarily.
That is the most cost effective way to serve the market and unfortunately those types of regulations only heard part of the market that.
It has less flexibility with their with their pocketbook and their checkbook around buying a product during an emergency so that's unfortunate and hopefully.
Regulators will use their heads and clearer heads.
Prevail, there if emergencies do present.
As we believe will be the case long term here as the grid in particular in California goes through a transition.
One moment for your next question.
And your next question comes from the line of Amit.
Sure.
With Wells Fargo. Your line is now open.
Thanks, Good morning, maybe I just wanted to get an update on the on the international market and I guess, where do you stand on rollouts into into countries like India.
What are the competitive dynamics look like overseas and are you introducing.
Our new.
New <unk> new products C&I product offerings for these regions and then I guess finally, when do you think we could see maybe an acceleration of.
Revenue contributions in the international segment.
Yes, I think thanks for the question. So internationally today, it's mainly the C&I market for us.
And internationally, we've done very well our <unk> subsidiary.
Very well respected brand very well run company covers.
Our geographies really outside the U S and Canada for us.
And.
I mean, they've been on a tear.
And they continue to gain market share the EBITDA margin profile of that company has improved dramatically over the course of our ownership here.
I think stands now something on the order of eight years nine years something like that.
And so we continue to make really good progress there and we're actually getting quite a good benefit out of our global scale with C&I products here, even domestically so the ability to.
Consolidated purchases on engine platforms some of the alternator platforms.
Obviously be able the ability to use our deep sea controls across our global platforms and get the.
Again, the benefit of scale there as well.
That said.
That market internationally as I said, it's primarily C&I and it's primarily diesel so diesel powered generators are still at least outside the U S and Canada. The primary kind of legacy solution for emergency backup and.
Those products and in fact, I would say like in the U S. Natural gas backup power represents for C&I anyway about 40% of the market here, we are about 60% diesel outside the U S and Canada, its more like 98% diesel 2% gas so the opportunity that exists as to introduce gas products of which we're the leader globally and introduce those gas.
Product into new regions and into the hands of new customers that we believe could benefit from connecting those products to natural gas pipelines as opposed to reliant on diesel refueling there are benefits there.
Far beyond just the continuity of fuel supply, but also the emissions profile of those products on gas is.
<unk> tends to be cleaner than that of diesel and so you see some some real benefits. There you see customers who are now focused more on that.
Regionally, we really focused here I would say the last few years on India in particular through an acquisition of a company called Captiva.
<unk> acquired Captiva several years ago, and we've continued to invest heavily in that market and we're seeing very nice growth.
Albeit off a small base, but very nice growth there.
That's an area that.
We're going to continue to focus on I think we mentioned Australia is another great opportunity for us in the Middle East has been a great market in terms of growth.
On the home standby side, if you look at residential sales, we actually have an interesting level of HSBC.
We're shipping into all parts of the World, which is really interesting we see this in our activation data, we can see exactly where products are being installed.
And it's just overshadowed by.
Two things one by the size of the Hsp business here in North America, but to the growth rates of C&I internationally I'm just kind of.
So good you just we haven't talked a lot about.
It kind of growing hsp base sits underneath all of that but it is growing we've introduced we just introduced the product in HSV product in India.
That is getting some nice traction already.
Continuing to introduce those products.
Again, we've now got products that are compliant with very strict gas codes in Australia.
And so we're really kind of when you say.
He only.
Kind of company that serves Australia, that's true because the gas codes are very strict there.
None of our competitors are able to meet the strict code requirements in Australia, and we see that as a as a wide open market and opportunities for good growth and then the Latin American markets, which represent.
We believe a really good opportunity for us getting good penetration in places like Argentina.
Even places like Brazil, where we're seeing the product.
We get start to get the awareness levels start to increase that's really what we have to focus on we're kind of back to the early days of HSV back in North America. If you wind the clock back. So we got a lot of work to do but we are seeing pockets of that I don't think it will be anything that will.
Kind of contribute meaningfully to our international segment results here in the near term, but longer term, we believe the gas product guests C&I products and HSV products.
We see higher growth rates for those products than we do for the traditional C&I products.
One moment for your next question.
And your next question comes from the line of Stephen <unk> with Stifel. Your line is now open.
Thanks, and good morning, everybody. Thanks.
Thanks for taking the question.
So.
Just one from me when we look at the inventory the hsp inventories at that everybody has been talking about.
Is there any detail you can give us on sort of location of inventory relative to recent power outages.
Yes, I mean, we haven't we haven't talked about field inventories at that level of granularity but.
I think I may have mentioned in my response to a previous question that we are seeing evidence where there are regions certainly pockets locally where field inventories are at normal levels or frankly are quite a bit below what we might say would be normal because of elevated activity. So Canada has been.
Dan.
Really.
Interesting market here as of late with a lot of outage activity and we see field inventories in Canada quite low versus other areas of the country.
We see we see some other areas of the country, particularly like the Midwest is another area.
Michigan is just to state that continues to get pummeled by both.
Both summer weather and winter weather in this as well.
Just the thing is I think there's this misconception somehow that are best home standby markets are in Gulf Coast States or areas, where you are more prone to hurricanes and that of course.
Those kinds of demand drivers of course are important for the category, but actually where we see greatest kind of penetration.
<unk> and growth rates are in those states that have.
Kind of two seasons of weather, both winter and summer have other kind of factors that play into.
An elevated level of outages in Michigan is just one of those areas I'd say it has.
A lot of outages.
Cause by different extremities of weather, but also the grid is is mainly above ground in Michigan. Its older was built around the automotive industry. So it was built out over 100 years ago.
It's underinvested in a more significant way than in other areas because it's much more fragmented there are many more independent grid operators in the state of Michigan and you would imagine.
And so the grid doesn't doesn't kind of heal itself well when you do run into outages and Theres a lot of trees in Michigan. So trees are part of the equation with.
With outages. So you put all that together and some of the states that we see the best growth and the best penetration are in states like Michigan States like Maine, We see Ohio, Pennsylvania. Those sites those types of areas are are actually very strong in the context of our.
Our growth rate so again.
As you would expect where we're seeing stronger rates of growth. Those are the areas that are getting to a normalization of field inventory quicker and again without providing more detail. That's how I give you some context around the questions.
One moment for your next question.
And the next question comes from the line of Blake Keating with William Blair. Your line is now open.
Hi, Good morning. This is Blake on for Brian .
Just quickly.
I wanted to ask about you've previously mentioned that your largest pizza.
Pizza customers in home standby are generally older and less.
Less affected by the macro environment I'm, just looking to get some additional color. There are they actually in fact impacted by the macro environment and just trying to understand what's causing the slowdown.
And the consumer the consumer outlook for home standby.
Yes, Thanks Blake.
We have seen the demographic overtime as the category has grown.
The category used to skew much older when you.
Kind of wind the clock back and over time as it's broadened out we have seen the average age of buyers come down but it is still it's still indexes.
To an older demographic.
People, who have in homeownership tends to skew that direction as well and yes. They may in fact be somewhat more.
Resilient, if you will to changes in the economy, but I think nonetheless, they also.
Inflation does impact.
People that are on a fixed income, perhaps even more likely you could make an argument that.
Perhaps a portion of that segment is maybe a little more vulnerable to certainly trends in inflation.
We haven't seen I wouldn't say like from this point last year to this year, we haven't seen any major shift in the demographic underpinning kind of the buyers are the category at this point, we'll continue to watch that as as the as time goes on here certainly this year and into the future, but I think right now we're just.
What we're seeing is that.
More broadly the consumer spending environment around home improvement is softening right and I think that we're getting a little bit caught up in that and Thats. What I think is impacting again close rates aren't dropping.
That's an important point here they are just not growing back to the levels that we saw pre pandemic.
We do think they'll get back there eventually, but it kind of flattened out here. So I think that the challenge is that we thought they would continue to grow and that's the perhaps a new piece of information this morning.
One moment for your next question.
Your next question comes from the line of Keith <unk> with Northcoast Research. Your line is now open.
Hey, good morning, guys I know, we're running long so I'll skip that one question here just in terms of the clean energy solution set in the redesign of the product portfolio going into 2024 access will provide an update on if you guys are up to date on that are on track and then some of the challenges that that segment is facing right now in terms of.
Dropping demand.
Yes, thanks Tristan.
Category of product for us well documented we.
Entered that market had some struggles we have a lot of growth. We had a lot of success early on hit kind of R. R.
Our challenges with the loss of a major customer last Q3 and then.
Some of the product quality challenges with the snap Rs device it was real.
The product that we've talked about here.
We are going through our we're on a next generation roadmap for our battery solutions, our storage solutions I'm very excited about.
That product, we're going to talk more about that at our upcoming Investor day, we're going to talk.
Talk about some of those products, we won't be able to get too granular there because we don't want to tip, our hat maybe to some of our our competitors in the market, but we.
We have some really exciting things we have been as we said on the call kind of in the prepared remarks, we're investing very heavily to 400 basis point drag on EBITDA margin right now, which is challenging of course, especially as the residential business is going through its cycle here that becomes even more challenging to stomach, but we're very excited about the future of those products.
The market in general.
You're indicating and as we've seen from other participants in the market is a tougher market right now than it has been again higher higher interest rates being probably at the root cause of that and then maybe more recently the NIM 3.0 decision in California, specifically those two things are weighing on kind of solar and storage solar plus storage demand here.
<unk> and are reflected in our updated guidance this morning.
We have been targeting a $300 million to $350 million range for those that portfolio of products for for the year. We now are thinking were going to come in on the low end of that range, primarily because of the softening dynamics demand dynamics that are going on that we're seeing in the industry.
But we still are very optimistic long term and thats why we are spending.
Heavily against this this opportunity we think that we know that it's going to take a different level of investment to become <unk>.
Proficient and excellent in these products, we now know that after going through our experience.
And we are dedicated to doing that and where.
We're going to see those results you should see some of those products as we'll talk in September really start hitting in 2024.
We're pretty excited about the future there without getting too specific.
And your next question comes from the line of <unk> <unk> with Citigroup. Your line is now open.
Good morning, everyone, we're talking about margin improvement.
Talked about better product mix cost cuts and lower input costs and the absence of promotions to clear the inventory was not a driver. So it seems like you plan on continuing promotions give.
Given persistently high inventories and your.
Your target of improving the conversions.
Can you one sort of give us directionally what the impact of these promotions will is on gross margins and operating margins.
And as a percentage terms and then two how long or what's sort of the magnitude of promotions do you plan on running.
To achieve those targets improving the conversion rates and inventories.
Inventories.
No. This is York, yes, no the promotions that we're talking about again, we run promotions in the ordinary course, when we're not in backlog and.
Just again to drive awareness of the category and help help.
Homeowners over the.
Over the tipping point.
Go ahead and make the purchase of a home standby generators.
Wouldn't say it's.
I would say, it's a modest impact to margins overall.
Again. These are our are our highest margin products. So you.
Sort of as you sell more of these products.
Mix.
A significant mix benefit, which sort of overshadows whatever promotion, we may be offering so I think thats the key there.
And what promotion, we do have layered into the guidance as it is not a significant part of the story of a significant impact to our margins I think.
When you think about.
The cadence of EBITDA margins over from first half the second half.
Just mixing.
Getting a higher level of home standby shipments out the door.
That will have a significant impact the additional operating leverage on our fixed SG&A will have a big impact.
And then we'll just going to continue to realize improved input costs as we sort of work through our inventory levels.
And we'll start seeing the realization of lower commodities and logistics costs and whatnot. So.
That's really what's going to drive the sequential improvement in EBITDA margin for first half second half.
And promotions will only have a slight drag relative to that.
Performance.
And we have no further questions at this time I will now turn the call back over to Mike Harris.
We want to thank everyone for joining us. This morning, we look forward to discussing our third quarter 2023 earnings results with you in early November as well as providing an update on our longer term strategic vision at our upcoming Investor Day on September 27, Thank you again and goodbye.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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Okay.
Yes.
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Okay.
Mhm.
Okay.
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