Q3 2023 Generac Holdings Inc Earnings Call

Okay.

Good day, and thank you for standing by.

Welcome to the third quarter 2023 General Rack Holdings, Inc. Earnings call at this time, all participants are in a listen only mode.

After the Speakers' presentation, there will be a question and answer session to ask question. During the session you will need to press star one on your telephone you will hear an automated message advisory. Your head is raised to withdraw your question. Please press star one again, please be advised that today's conference is being record.

<unk>.

I would now like to hand, the conference over to your Speaker today, Chris Roseman Senior manager of corporate development and Investor Relations. Please go ahead.

Good morning, and welcome to our third quarter 2023 earnings call.

Like to thank everyone for joining us. This morning with me today is Aaron <unk>, President and Chief Executive Officer, and York Ragen, Chief Financial Officer.

We will begin our call today by commenting on forward looking statements certain statements made during this presentation as well as other information provided from time to time by <unk> or its employees may.

Forward looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward looking statements.

We 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, Chris Good morning, everyone and thank you for joining us today.

Our third quarter results reflect improving operating performance led primarily by continued strength in C&I products shipments in sequential growth in home standby generator shipments.

Year over year overnight overall net sales decreased 2% to 1.07 billion with core sales declining 4% during the quarter.

<unk> product sales decreased 15% as compared to the prior year, representing a significant improvement in sales declined from the prior two quarters as field inventory levels of home standby generators continue to decline during the quarter and portable generator sales decreased from a strong prior year comparison that included the impact of Hurricane Ian.

Global C&I products sales increased approximately 24% to an all time quarterly record with growth across nearly all regions.

We returned to year over year margin expansion for gross and adjusted EBITDA margins in the quarter driven by lower input costs and continued production efficiencies.

In addition, we generated significant free cash flow during the quarter, allowing us to complete approximately $100 million of share repurchases.

Third quarter home standby shipments grew at a strong sequential rate, but declined on a year over year basis, as we continued our efforts to reduce field inventory levels.

Our outage activity in the U S was well above the long term baseline average during the quarter, despite not having the benefit of a major outage event, which we had experienced in the third quarter of each of the three previous years.

Against a strong comparable period, the higher outage activity combined with well publicized grid stability issues drove home consultations in the quarter meaningfully higher from the prior year and marked the second highest quarter on record behind only the third quarter of 2021, which included the impact of Hurricane Ida and was only months after the Texas Deepfreeze major event in February of 2000.

'twenty one.

Our residential dealer count was approximately 8700 at the end of the quarter, an increase of 200 from the prior year and over 2000 from pre Covid levels.

Additionally, we continue to make good progress in training non dealer contractors as our initiatives to grow installation capacity maintained positive momentum in the third quarter.

Activations, which are a proxy for installations improved at a solid sequential rate in the quarter, but declined from a strong comparable period in 2022 that marked an all time high for our third quarter.

Activations in the month of October continued the strong sequential improvement providing further confidence that the home standby market has formed and is holding a new and higher baseline level of demand.

The number of home standby generators in our distribution channels declined further in the quarter as we continue to make progress in reducing field inventories.

As previously disclosed certain regions and channels.

At healthier levels of field inventory than others and field inventory levels of certain models are declining more quickly than others.

Although we continue to under ship end market demand during the third quarter the gap between shipments and Activations narrowed meaningfully as compared to the first half of the year.

These factors together with the continued strength in leading indicators of demand during the third quarter support our projection for home standby generator sales returning to growth in the fourth quarter of 2023, while still working to reduce field inventory to more sustainable levels.

In addition to the positive near term momentum that is building within the home standby market. We remain confident in the long term outlook, we shared at our recent Investor day in September.

The megatrends that are driving awareness for backup power remain as compelling as ever as electrification trends drive demand forward and the adoption of intermittent renewable power generation accelerates, we expect that consumers will become even more reliant on an electrical grid that is increasingly susceptible to power outages caused by the combined threats of more severe and volatile weather and deteriorating.

Apply demand dynamics.

We believe home standby generators will remain the most effective and economical solution for whole home resiliency for many years to come as homeowners look for peace of mind to address the impact of increasingly frequent and longer duration of power outages.

In addition to the stronger than expected home standby shipments are residential energy technology products and solutions returned to year over year sales growth in the third quarter as continued strength in <unk> sales more than offset weakness in shipments of our power <unk> energy storage systems as broader market conditions for residential solar and energy storage deteriorated further in the quarter.

As a result of the softer end market conditions. We now expect full year 2023 gross sales for residential energy technology to be approximately 10% below our prior guidance of $300 million.

<unk> continues to take market share with strategic retail partners and the smart thermostat market and the team successfully launched our new smart smart doorbell camera in the month of October.

In addition to providing increased levels of homeowner engagement with our home energy management platform. The smart doorbell camera showcases <unk> ability to drive innovation and differentiated product development <unk>.

It'll be strong product development capabilities combined with our focus on creating an exceptional user experience are central to the continued build out of our home energy ecosystem.

Also during the third quarter, we announced the opening of a new Engineering center of excellence in Reno, Nevada.

This facility will house, the development and testing of batteries switches power electronics and other clean energy solutions as we continue to invest in the R&D infrastructure and World class talent that is required to develop and test the innovative residential energy technology solutions, we are bringing to the market in the years ahead.

Additionally, our grid services team was awarded a $50 million grant from the department of energy in the month of October as part of the grid resilience and innovation partnerships program to pursue a project demonstrating the efficient building electrification can be achieved while minimizing system overload reliability issues and the need for infrastructure upgrades, we're proud to receive this validation.

Our vision to utilize multiple energy technologies to support homeowners, while providing valuable products and services that benefit both the grid and homeowners.

And I want to provide commentary on our C&I products, which continued to outperform our expectations in the quarter.

Domestic C&I product sales grew at a robust rate compared to the prior year as strength in shipments to customers for beyond standby applications in industrial distributors more than offset weaknesses in the sale and the telecom channel during the quarter.

Shipments of natural gas generators used in applications beyond traditional emergency standby projects again grew at an exceptional rate during the third quarter.

We believe we are in the very early innings of this compelling new market opportunity as ongoing grid stability concerns and volatile energy markets drive interest in these solutions.

These emerging applications are just one of the many ways that we're leveraging our position as the leading provider of natural gas generators to support increased adoption of energy technology solutions in C&I end markets.

We also continue to build an increasingly comprehensive solution set to enable the deployment of our products in multi asset applications, such as pairing our smart grid ready generators with our emerging C&I storage connectivity advanced controls and grid services platforms.

Shipments of C&I generators through our North American distributor Channel also grew again at a strong rate quoting.

Quoting activity remained resilient in the quarter growing on a year over year basis, and supporting our expectations for continued growth in this important channel that serves a wide range of end markets.

As previously disclosed order patterns from rental companies have moderated after several quarters of exceptional performance.

And third quarter sales to our national and independent round equipment customers were approximately flat from the prior year.

Despite the expected near term softness we continue to expect that this historically cyclical end market has a substantially long term runway for growth given the critical need for future infrastructure related projects that leverage our products sold in this channel.

As expected sales to national Telecom customers declined during the third quarter as compared to a strong prior year comparison.

While we continue to expect shipment and order trends for these products to be softer in the coming quarters. We believe investment in telecom telecom infrastructure remains a secular trend as global tower and network hub counts further expand and the increasingly critical nature of wireless communications requires backup power for resiliency.

While we are seeing near term softness in the telecom and rental channels as previously expected the longer term growth opportunity for backup power and energy technology solutions in C&I end markets remains significant.

Unknown Executive: earnings call. At this time, all participants are in the listen only mode. After the speaker's presentation, there will be a question and answer session to ask question during the session.

Help serve the expected future demand growth, we recently announced an expansion project in Beaver Dam, Wisconsin, which is scheduled to be complete in early 2025, and we will expand our manufacturing capabilities and capacity for a range of C&I stationary products for the North American market.

Unknown Executive: You will need to press Tar 11 on your telephone. You will hear an automated message advising your hand is raised to withdraw your question. Please press Tar 11 again.

Sure.

Total sales for our international segment increased 14% year over year during the third quarter with the combined impact of acquisitions and favorable foreign currency effects contributing approximately 11% sales growth.

Unknown Executive: Please be advised that today's conference is being recorded.

Chris Rosemann: I would now like to hand a conference over to your speaker today, Chris Rosemann, Senior Manager Corporate Development and Investor Relations. Please go ahead. Good morning and welcome to our third quarter, 2023, earnings call. I'd like to thank everyone for joining us this morning.

Core total sales growth was driven by strength in important long term growth markets, such as India, Latin America, Australia, and the middle East, partially offset by lower portable generator sales in Europe as energy security concerns in the region have moderated from peak levels seen in prior quarters.

Chris Rosemann: With me today is Aaron Jagdfeld, President and Chief Executive Officer and York Reagan, 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 Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

International growth remains an important strategic focus as we replicate the <unk> playbook and a growing number of regions around the world.

Geographic expansion together with the increasing breadth of our product portfolio of backup power and energy technology solutions is expected to drive continued growth in the segment.

Power resiliency concerns related to increasingly severe and volatile weather and rising supply demand imbalances are not unique to North America.

Chris Rosemann: 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-gap measures during today's call. Additional information regarding these measures, including reconciliation to comparable US gap measures, is available in our earnings release and SEC filings.

And as a global energy transition accelerates amid rising geopolitical tensions we will continue to support businesses and homeowners in solving for their energy resiliency needs.

In closing this morning, our third quarter results and reiteration of our full year 2023, overall net sales and adjusted EBITDA guidance reflect improving operating performance and the hard work and strong execution by our teams.

Aaron Jagdfeld: I will now turn the call over to Aaron. Thanks, Chris.

Aaron Jagdfeld: Good morning, everyone, and thank you for joining us today. Our third quarter results reflect improving operating performance led primarily by continued strength and CNI product shipments and sequential growth and home standby generator shipments. Year over year, overall net sales decreased 2% to 1.07 billion with core sales declining 4% during the quarter. Residential product sales decreased 15% as compared to the prior year, representing a significant improvement in sales declined from the prior two quarters as field inventory levels of home standby generators continued to decline during the quarter and portable generator sales decreased from a strong prior year comparison that included the impact of Hurricane Ian.

We believe we are moving closer to more sustainable levels of field inventory for home standby generators as we experienced positive momentum in key fundamental metrics during the third quarter supporting our expectation for a return to year over year sales growth for these products in the fourth quarter and 2024.

These sales growth expectations together with the return to margin expansion and robust free cash flow generation validate our commitment to our long term focus on executing our powering a smarter world enterprise strategy.

We will continue to invest for future growth and position <unk> growing residential and C&I energy ecosystems to drive value for homes and businesses around the world as detailed at our Investor Day in September.

Aaron Jagdfeld: Global CNI product sales increased approximately 24% to an all-time quarterly record with growth across nearly all regions. We return to year over year margin expansion for growth and adjusted EBITDA margins in the quarter driven by lower input costs and continued production efficiencies. In addition, we generated significant free cash flow during the quarter, allowing us to complete approximately $100 million of share repurchases. Third quarter home standby shipments grew at a strong sequential rate, but declined on a year over year basis as we continued our efforts to reduce field inventory levels.

The megatrends that support the longer term demand for growth profile for backup power and energy technology solutions remain firmly intact and.

And we maintain our conviction that <unk> is uniquely positioned to lead the evolution to a more resilient efficient and sustainable energy future.

I'll now turn the call over to York to provide further details on our third quarter results and our remaining outlook for the year.

Thanks Aaron.

Aaron Jagdfeld: Our outage activity in the US was well above the long-term baseline average during the quarter, despite not having the benefit of a major outage event, which we had experienced in the third quarter of each of the three previous years. Against a strong comparable period, the higher outage activity combined with well-publicized grid stability issues drove home consultations in the quarter meaningfully higher from the prior year and marked the second highest quarter on record behind only the third quarter of 2021, which included the impact of Hurricane Ida and was only months after the Texas deep freeze major event in February of 2021.

Looking at our third quarter 2023 results in more detail.

Overall net sales decreased 2% to 1.07 billion during the third quarter of 2023.

As compared to 1.09 billion in the prior year third quarter.

The combination of contributions from recent acquisitions and the favorable impact from foreign currency had an approximate 2% net favorable impact on revenue growth during the quarter.

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

Residential product sales declined 15% to $565 million as compared to $664 million in the prior year.

Aaron Jagdfeld: Our residential dealer count was approximately 8,700 at the end of the quarter, an increase of 200 from the prior year and over 2000 from pre-COVID levels. Additionally, we continue to make good progress in training non-dealer contractors as our initiatives to grow installation capacity maintain positive momentum in the third quarter. Activations, which are a proxy for installations, improve at a solid sequential rate in the quarter but decline from a strong comparable period in 2022 that marked an all-time high for a third quarter.

As Aaron discussed in detail lower shipments of home standby and portable generators drove this decline in residential product sales.

To a lesser extent sure and clean energy products also contributed to the year over year decline, partially offset by growth in <unk> smart thermostat sales.

Commercial and industrial product sales for the third quarter of 2023 increased 24% to $385 million as compared to $311 million in the prior year quarter.

Aaron Jagdfeld: Activations in the month of October continued this strong sequential improvement providing further confidence that the home standby market has formed and is holding a new and higher baseline level of demand. The number of home standby generators in our distribution channels declined further in the quarter as we continue to make progress in reducing field inventories. As previously disclosed, certain regions and channels are at healthier levels of field inventory than others and field inventory levels of certain models are declining more quickly than others.

Contributions from recent acquisitions and the favorable impact of foreign currency contributed approximately 5% revenue growth in the quarter.

This strong core sales growth was driven by an increase in domestic shipments to industrial distributors and direct customers for beyond standby applications as well as a more modest growth in international shipments of C&I products.

As expected shipments to our telecom customers were down sharply compared to prior year.

Aaron Jagdfeld: Although we continue to undership and market demand during the third quarter, the gap between shipments and activations narrowed meaningfully as compared to the first half of the year. These factors together with the continued strength in leading indicators of demand during the third quarter support our projection for home standby generator sales returning to growth in the fourth quarter of 2023 while still working to reduce field inventory to more sustainable levels.

Net sales for other products and services increased 7% to $121 million as compared to $113 million in the third quarter of 2022.

Core sales growth of 6% was primarily due to growth in sales of parts and accessories.

Aaron Jagdfeld: In addition to the positive near-term momentum that is building within the home standby market, we remain confident in the long-term outlook we shared at our recent investor day in September. The mega trends that are driving awareness for backup power remain as compelling as ever. As electrification trends drive demand forward and the adoption of intermittent renewable power generation accelerates, we expect that consumers will become even more reliant on an electrical grid that is increasingly susceptible to power outages caused by the combined threats of more severe and volatile weather and deteriorating supply demand dynamics.

On industrial distributor project in service revenue.

In energy technology grid services revenue.

Gross profit margin was 35, 1% compared to 33, 2% in the prior year third quarter as a result of lower raw material and logistics costs production.

<unk> and marginally higher pricing compared to the prior year.

This was partially offset by the impact of unfavorable sales mix, primarily driven by lower home standby shipments in the current year quarter.

Operating expenses decreased $3 million or 1% as compared to the third quarter of 2022.

Aaron Jagdfeld: We believe home standby generators will remain the most effective and economical solution for whole-home resiliency for many years to come as homeowners look for peace of mind to address the impact of increasingly frequent and longer duration power outages. In addition to the stronger than expected home standby shipments, our residential energy technology products and solutions returned to year-over-year sales growth in the third quarter as continued strength in eco-be-sales more than offset weakness and shipments of our power cell energy storage systems as broader market conditions for residential solar and energy storage deteriorated further in the quarter.

As highlighted in our reconciliation schedules in the earnings release, the current year quarter included a $22 million provision for legal charges related to certain <unk> patent litigation matters.

The prior year includes $55 million of charges comprised of $18 million of bad debt expense related to our clean energy product customer that filed for bankruptcy.

And a 37 million charge for clean energy product warranty related matters.

Excluding these items in the current and prior year operating expenses increased by $31 million or 14%, primarily driven by increased employee and marketing costs in the current year period.

Aaron Jagdfeld: As a result of these softer end market conditions, we now expect full-year 2023 growth sales for residential energy technology to be approximately 10% below our prior guidance of $300 million. Eco-be continues to take market share with strategic retail partners in the smart thermostat market and the team successfully launched our new smart doorbell camera in the month of October. In addition to providing increased levels of homeowner engagement with our home energy management platform, the smart doorbell camera showcases eco-be-s ability to drive innovation and differentiated product development. Eco-be's strong product development capabilities combined with their focus on creating an exceptional user experience are central to the continued build-out of our home energy ecosystem.

And a favorable contingent consideration adjustment in the prior year period.

Adjusted EBITDA before deducting for Noncontrolling interests as defined in our earnings release was $189 million or 17, 6% of net sales in the third quarter as compared to $184 million or 16, 9% of net sales in the prior year.

This improved EBITDA percent was primarily driven by higher gross margins as compared to the prior year, partially offset by an increase in operating expenses as we continue to invest for future growth.

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

Aaron Jagdfeld: Also during the third quarter, we announced the opening of a new engineering center of excellence in Reno, Nevada. This facility will house the development and testing of batteries, switches, power electronics and other clean energy solutions as we continue to invest in the R&D infrastructure and world-class talent that is required to develop and test the innovative residential energy technology solutions we are bringing to the market in the years ahead.

Domestic segment total sales, including inter segment sales decreased 6% to $894 million in the quarter as compared to $947 million in the prior year with minimal favorable impact from acquisitions.

Adjusted EBITDA for the segment was $160 million, representing 17, 9% of total sales.

Aaron Jagdfeld: Additionally, our grid services team was awarded a $50 million grant from the Department of Energy in the month of October, as part of the grid resilience and innovation partnerships program. To pursue a project demonstrating the efficient building electrification can be achieved while minimizing system overload reliability issues and the need for infrastructure upgrades. We're proud to receive this validation of our vision to utilize multiple energy technologies to support homeowners while providing valuable products and services that benefit both the grid and homeowners.

As compared to $160 million in the prior year or 16, 9% of total sales.

International segment total sales, including intersegment sales increased 14% to $208 million in the quarter as compared to 183 million in the prior year quarter.

Core sales, which exclude the impact of acquisitions and currency increased approximately 3% compared to the prior year.

Adjusted EBITDA for the segment before deducting for Noncontrolling interests was $28 million.

Aaron Jagdfeld: I now want to provide commentary on our CNI products which continue to outperform our expectations in the quarter. Domestic CNI products sales grew at a robust rate compared to the prior year as strengthens shipments to customers for beyond standby applications and industrial distributors more than offset weaknesses in the sale in the telecom channel during the quarter. Shipments of natural gas generators used in applications beyond traditional emergency standby projects again grew at an exceptional rate during the third quarter.

Or 13, 6% of net sales as compared to $24 million or 13, 2% of net sales in the prior year.

Now switching back to our financial performance for the third quarter of 2023 on a consolidated basis.

As disclosed in our earnings release GAAP net income for the company in the quarter was $60 million as compared to $58 million in the third quarter of 2022.

Aaron Jagdfeld: We believe we are in the very early innings of this compelling new market opportunity as ongoing grid stability concerns and volatile energy markets drive interest in these solutions. These emerging applications are just one of the many ways that we're leveraging our position as the leading provider of natural gas generators to support increased adoption of energy technology solutions in CNI and markets. We also continue to build an increasingly comprehensive solution set to enable the deployment of our products in multi asset applications such as pairing our smart grid ready generators with our emerging CNI storage connectivity advanced controls and grid services platforms.

In addition to the items just discussed.

Current year net income includes approximately $9 million of additional interest expense compared to the prior year due to higher borrowings and interest rates.

GAAP income taxes during the current year third quarter were $19 million or an effective tax rate of 24, 3% as compared to $12 million or an effective tax rate of 16, 1% for the prior year.

Aaron Jagdfeld: Shipments of CNI generators through our North American distributor channel also grew again at a strong rate. Quoting activity remain resilient in the quarter growing on a year over your basis and supporting our expectations for continued growth in this important channel that serves a wide range of end markets.

The increase in the effective tax rate was primarily due to the prior year quarter, including certain favorable discrete tax items and a larger benefit from equity compensation as compared to the current year quarter.

Diluted net income per share for the company on a GAAP basis was <unk> 97.

In the third quarter of 2023 compared to 83 in the prior year.

Aaron Jagdfeld: As previously disclosed, order patterns from rental companies have moderated after several quarters of exceptional performance. And third quarter sales to our national and independent rental equipment customers were approximately flat from the prior year. Despite the expected near term softness, we continue to expect that this historically cyclical and end market has a substantially long term runway for growth given the critical need for future infrastructure related projects that leverage our products sold to this channel.

The strong year over year increase in GAAP earnings per share relative to growth in GAAP net income was primarily driven by a lower share count in the current year period, coupled with the redeemable noncontrolling interest redemption value adjustment that was recorded in the prior year period.

See our earnings per share footnotes for further information on our EPS calculations.

Adjusted net income for the company as defined in our earnings release was $102 million in the current year quarter.

Aaron Jagdfeld: As expected, sales to national telecom customers declined during the third quarter as compared to a strong prior year comparison. While we continue to expect shipment and order trends for these products to be softer in the coming quarters, we believe investment in telecom telecom infrastructure remains a secular trend as global power and network hub counts further expand and the increasingly critical nature of wireless communications requires backup power for resiliency. While we are seeing near term softness in the telecom and rental channels as previously expected, the longer term growth opportunity for backup power and energy technology solutions in CNI and markets remains significant.

Or $1 64 per share.

This compares to adjusted net income of 112 million in the prior year or $1 75 per share.

Cash flow from operations was $140 million as compared to minus 56 million in the prior year third quarter and free cash flow as defined in our earnings release was $117 million as compared to minus <unk> $73 million in the same quarter last year.

The increase in free cash flow was primarily due to a significant use of cash for working capital in the prior year period that did not repeat in the current year quarter.

Aaron Jagdfeld: To help serve the expected future demand growth, we recently announced an expansion project in Beaver Day in Wisconsin, which is scheduled to be complete in early 2025 and will expand our manufacturing capabilities and capacity for a range of CNI stationary products for the North American market. Total sales for our international segment increased 14% year over year during the third quarter, with the combined impact of acquisitions and favorable foreign currency effects contributing approximately 11% sales growth.

Partially offset by higher interest payments and capital expenditures.

Total debt outstanding at the end of the quarter was $1 five 8 billion, resulting in a gross debt leverage ratio at the end of the third quarter of two six times on an as reported basis.

Additionally, during the third quarter, we repurchased approximately 876000 shares of our common stock for $100 million.

There is approximately 178 million remaining on our current share repurchase authorization as of the end of the third quarter.

Aaron Jagdfeld: Core total sales growth was driven by strength in important long term growth markets such as India, Latin America, Australia and the Middle East, partially offset by lower portable generator sales in Europe as energy security concerns in the region have moderated from peak levels seen in prior quarters. International growth remains an important strategic focus as we replicate the Generac playbook in a growing number of regions around the world. Geographic expansion together with the increasing breadth of our product portfolio of backup power and energy technology solutions is expected to drive continued growth in the segment.

With that I will now provide further comments on our remaining outlook for 2023.

As disclosed in our press release. This morning, we are maintaining our overall net sales outlook for the full year 2023.

We continue to expect overall net sales for the full year 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.

Looking at the product class mix, given the outperformance of C&I products and softness in shore and clean energy products during the third quarter.

Aaron Jagdfeld: Power resiliency concerns related to increasingly severe and volatile weather and rising supply demand imbalances are not unique to North America. And as the global energy transition accelerates amid rising geopolitical tensions, we will continue to support businesses and homeowners in solving further energy resiliency needs.

We now expect the mix of C&I products shipments for the full year to be approximately 100 basis points higher relative to our previous guidance with the offset in residential product shipment mix.

Aaron Jagdfeld: In closing this morning, our third quarter results and reiteration of our full year 2023 overall net sales and adjusted EBITDA guidance reflect improving operating performance and the hard work and strong execution by our teams. We believe we are moving closer to more sustainable levels of field inventory for home standby generators as we experience positive momentum and key fundamental metrics during the third quarter supporting our expectation for a return to year over year sales growth for these products in the fourth quarter and 2024.

Yeah.

Our gross margin expectations for the full year of 2023 are also unchanged as we still anticipate approximately 100 basis points of gross margin improvement over 2022 levels.

Driven primarily by favorable price cost benefits, partially offset by the unfavorable mix impact, resulting from lower home standby generator sales for the full year.

Our adjusted EBITDA margins before deducting for Noncontrolling interest are still expected to be approximately 15, 5% to 16, 5% for the full year.

Aaron Jagdfeld: These sales growth expectations together with the return to margin expansion and robust free cash flow generation validate our commitment to a long term focus on executing our power in a smarter world enterprise strategy. We will continue to invest for future growth and position generac growing residential and CNI energy ecosystems to drive value for homes and businesses around the world as detailed at our investor day in September.

Implying that fourth quarter 2023, EBITDA margins would be over 20%.

A significant improvement over prior year fourth quarter.

We expect to generate strong operating free cash flow in the fourth quarter, resulting in adjusted net income to free cash flow conversion at well over 100% for the full year.

Aaron Jagdfeld: The mega trends that support the longer term demand for growth profile for backup power and energy technology solutions remain firmly intact and we maintain our conviction that generac is uniquely positioned to lead the evolution to a more resilient efficient and sustainable energy future.

As inventory levels are projected to further moderate.

This return to robust free cash flow generation allows for continued capital allocation optionality as we move through the remainder of the year.

We are also providing updated guidance details to assist with modeling adjusted EPS and free cash flow.

York Ragen: I will turn the call over to York to provide further details on our third quarter results and our remaining outlook for the year York. Thanks Aaron. Looking at our third quarter 2023 results in more detail overall net sales decreased 2% to 1.07 billion during the third quarter of 2023 as compared to 1.09 billion in the prior year third quarter. The combination of contributions from recent acquisitions and the favorable impact from foreign currency had an approximate 2% net favorable impact on revenue growth during the quarter.

For the full year 2023.

Importantly to arrive at appropriate estimates for adjusted net income and adjusted EPS AD 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%.

Interest expense is now expected to be approximately $95 million compared to the prior guidance of approximately 92 due to higher projected interest rates on borrowings.

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

York Ragen: Briefly looking at consolidated net sales for the third quarter by product class residential products they all declined 15% to 555 million as compared to 654 million in the prior year. As Aaron discussed in detail lower shipments of home standby and horrible generators drove this decline in residential product sales to a lesser extent. Sure and clean energy products also contributed to the year over year decline partially offset by growth in eco be smart thermostat sales commercial and industrial product sales for the third quarter 2023 increase 24% to 385 million as compared to 311 million in the prior year quarter.

Depreciation expense is still forecast to be approximately $62 million in 2023.

GAAP intangible amortization expense is now expected to be approximately $104 million during the year as compared to the previous guidance of $102 million.

Stock compensation expense is still expected to be between $40 million to $43 million for the year.

Given the share repurchases executed during the third quarter 2023, our full year weighted average diluted share count is now expected to decrease to approximately $62 3 million shares.

And finally, this 2023 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value.

York Ragen: Contributions from recent acquisitions and the favorable impact of foreign currency contributed approximately 5% revenue growth in the quarter. This strong core sales growth was driven by an increase in domestic shipments to industrial distributors and direct customers for beyond standby applications as well as a more modest growth in international shipments of CNI product. As expected, shipments to our telecom customers were down sharply compared to prior year Net sales for other products and services increased 7% to 121 million as compared to 113 million in the third quarter of 2022.

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

[laughter].

And I'll just ask a question. Please press star one on your telephone and wait for your name to be announced today withdraw. Your question. Please press star one again.

Please be advised that you're only taking one question no follow ups. Please.

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

And our first question comes from the line of Tommy Moll with Stephens, Inc. Your line is now open.

York Ragen: Core sales growth of 6% was primarily due to growth in sales of half of parts and accessories, company-owned industrial distributor project and service revenue, and energy technology grid services revenue. Gross profit margin was 35.1% compared to 33.2% in the prior year third quarter as a result of lower raw material and logistics costs, production efficiencies, and marginally higher pricing compared to the prior year. This was partially offset by the impact of unfavorable sales mix primarily due to room by lower home stand by shipments in the current year quarter.

Good morning, and thank you for taking my question.

Tommy.

Aaron maybe no big surprise here I wanted to start on your comments regarding the home standby field inventory I think I heard you say that units were lower quarter over quarter and so my related question was can you give us an update on the the times normal I think last quarter. It was one two to one three.

Where do we sit today and what additional commentary can you give us in particular on the wholesale and retail channels. Thank you.

York Ragen: Operating expenses decreased 3 million or 1% as compared to the third quarter of 2022. As highlighted in our reconciliation schedules in the earnings release, the current year quarter included a $22 million provision for legal charges related to certain eco-be-patent litigation matters. The prior year includes 55 million of charges comprised of 18 million of bad debt expense related to a clean energy product customer that filed for bankruptcy and a 37 million charge for clean energy product warranty related matters.

Thanks, Tommy Yes, we did say this morning that.

That inventories continue field inventories continue to come down and the way we phrase that reach.

<unk>, a more sustainable level, because we're definitely seeing areas as we as we noted I think not only at our Investor day, but maybe even on the last call.

We have certain regions.

And certain models.

Certain channels like our dealer channel in particular that R. R.

Our feeling like we're kind of abnormal.

And then you're back to the whole question of what is normal right.

York Ragen: Excluding these items in the current and prior year, operating expenses increased by 31 million or 14%, primarily driven by increased employee and marketing costs in the current year period, and a fairable contingent consideration adjustment in the prior year period. Adjusted EBITDA before deducting for non-controlling interest as defined in our earnings release was 189 million or 17.6% of net sales in the third quarter. As compared to 184 million or 16.9% of net sales in the prior year, this improved EBITDA percent was primarily driven by higher gross margins as compared to the prior year, partially offset by an increase in operating expenses as we continue to invest for future growth.

We picked a pre COVID-19 kind of average two to say what that is.

And so we continue to work towards that.

And making good progress we're still under shipping the market in terms of overall end market demand.

But it's but it is narrowing up.

Not nearly what it was earlier this year, we were severely under shipping the market earlier this year that's why.

The results were what they were and as we get closer to kind of that.

I would call it in line shipping to market end market demand youre seeing the impact of that in the results both in the gross margin level as well as EBITDA margins.

We're able to.

Really focus on.

York Ragen: I will now briefly discuss financial results for our two reporting segments. Domestic segment total sales, including inner segment sales, decreased 6% to 894 million in the quarter, as compared to 947 million in the prior year with minimal favorable impact from acquisitions. Adjusted EBITDA for the segment was 160 million, representing 17.9% of total sales, as compared to 160 million in the prior year or 16.9% of total sales.

Improving the efficiency in our factories, because we're taking up our production rates to.

To get closer to that end market demand. There really good news is we continue to see end market demand remained quite strong for home standby.

And Thats in spite of having.

It's really kind of a light season relative to.

The third quarter here outages in total were above average the long term average.

And of course, there were a lot of well publicized articles around potential outages with.

Some of the demand supply demand challenges that remain out there.

York Ragen: International segment total sales, including inner segment sales, increased 14% to 208 million in the quarter, as compared to 183 million in the prior year quarter. Core sales, which excludes the impact of acquisitions and currency, increased approximately 3% compared to the prior year. Adjusted EBITDA for the segment before deducting for non-controlling interest was 28 million, or 13.6% of net sales, as compared to 24 million, or 13.2% of net sales in the prior year.

But we feel really good about where the category is at and we feel like as we can.

As we've been saying all along as we finish up the year here and we get into 2024, we're going to be much much closer to normal at all channels. So the other part of your question on wholesale and retail.

We've said in the past.

If you look at all the kind of the three major channels as we think about them dealer wholesale and retail.

Dealer feels like it's closest to normal wholesale would be next in line and then retail would be a little bit further out, but they're all approaching a more normal level.

York Ragen: Now switching back to our financial performance for the third quarter of 2023 on a consolidated basis. As disclosed our earnings release, gap net income for the company in the quarter was 60 million as compared to 58 million in the third quarter of 2022 In addition to the items just discussed, the current year net income includes approximately 9 million of additional interest expense compared to the prior year due to higher borrowings and interest rates gap income taxes during the current year third quarter were 19 million or an effective tax rate of 24.3 percent as compared to 12 million or an effective tax rate of 16.1 percent for the prior year.

One moment for your next question.

Okay.

And your next question comes from the line of Michael Halloran with Baird. Your line is now open.

Yeah.

Hey, Mike.

Yes.

Yeah.

Okay.

We need to come back to Mike Yeah, you might have to come back to Mike.

Okay.

York Ragen: The increase in the effective tax rate was primarily due to the prior year quarter including certain favorable discrete tax items and a larger benefit from equity compensation as compared to the current year quarter. Diluted net income per share for the company on a gap basis with 97 cents in the third quarter of 2023 compared to 83 cents in the prior year. The strong year of year increase in gap earnings per share relative to growth and gap net income was primarily during by a lower share count in the current year period coupled with the redeemable non-controlling interest redemption value adjustment that was recorded in the prior year period.

Net.

Your next question.

Your next question comes from the line of Jeff Hammond with Keybanc capital markets. Your line is now open.

Jeffrey you there.

Hum.

Problematic.

Okay.

Okay.

And we may need to.

The next one when you try the next one.

York Ragen: See our earnings per share footnotes for further information on our EPS calculations. Adjusted net income for the company as defined in our earnings release was 102 million in the current year quarter or a dollar 64 cents per share. This compared to adjusted net income of 112 million in the prior year or a dollar 75 cents per share. Cash flow from operations was 140 million as compared to minus 56 million in the prior year third quarter and free cash flow as defined in our earnings release was 117 million as compared to minus 73 million in the same quarter last year.

Sure.

Alright, one moment.

Next question is from Christopher Glynn with Oppenheimer. Your line is now open.

Hey, Thanks. Good morning, guys can you hear me okay.

I'm, sorry, Chris like loud and clear.

So was just curious about dealer and close rate productivity I know you're doing a lot with dealer you had a bit of an explosion during the pandemic a little bit of a lack of training.

That youre catching up on so yes.

Just curious how that product <unk> selling commercial is playing out and what percent of HSBC sales go through the dealer channel, where I think you said inventories are now about normal in fact.

York Ragen: The increase in free cash flow was primarily due to a significant use of cash for working capital in the prior year period that did not repeat in the current year quarter. Partially offset by higher interest payments and capital expenditures total debt outstanding at the end of the quarters 1.58 billion resulting in a gross debt leverage ratio at the end of the third quarter of 2.6 times on an as reported basis. Additionally, during the third quarter we repurchased approximately 876 thousand shares of our comments back for 100 million dollars. There's approximately 178 million remaining on our current share repurchased authorization as of the end of the third quarter.

Yeah. Thanks, Chris So the majority of the sales as we said more than 50% go through that dealer channel is a really important channel for us.

Our wholesale and retail channels are important channels as well, but the dealer channel with 8700 dealers is clearly.

A critical area of focus for us.

And of course, the bandwidth in that dealer channel around sales and installation and service as the market grows we've got over 3 million units in the field.

York Ragen: With that, I will now provide further comments on our remaining outlook for 2023. As disclosed in our press release this morning, we are maintaining our overall net sales outlook for the full year 2023. We continue to expect overall net sales for the full year to decline between minus 10 to minus 12 percent as compared to the prior year, which includes approximately 2 percent net favorable impact from acquisitions and foreign currency. Looking at the product class mix, given the outperformance of CNI products and softness in shore and clean energy products during the third quarter, we now expect the mix of CNI product shipments for the full year to be approximately 100 basis points higher relative to our previous guidance, with the offset in residential product shipment mix.

That's a really important area as far as close rate on that is the channel that we can measure close rates on because we have our our powerplay sales system.

<unk>.

Is offered through that channel so it's a way for them to too.

Quote and and sell product and so we get really good visibility into close rates by dealer by product by region.

And as we said on the last call close rates have kind of flattened out and that's how they've kind of played out similar to that.

Actually I mean, we've seen some near term improvement here, but we're not ready to call. It a new trend up but the month of October has been has been relatively good. It's you have to think of in the context. This is a look back right. So when we talk about close rates, we have a window of time, we look back because it takes time for <unk>.

York Ragen: Our gross margin expectations for the full year 2023 are also unchanged as we still anticipate approximately 100 basis points of gross margin improvement over 2022 levels. Driven primarily by favorable price cost benefits, partially offset by the unfavorable mix impact resulting from lower home standby generator sales for the full year. Our adjusted EBITDA margins before deducting for non-controlling interests are still expected to be approximately 15.5 to 16.5% for the full year. Implying that fourth quarter 2023 EBITDA margins would be over 20%, a significant improvement over prior year fourth quarter.

Quotes to mature to a point of.

For us to make a call on whether it's a closed as a sale or not but but we are seeing some green shoots there but.

But we're we're ready we're not ready to quite call. It a trend yet so we've still kind of forecast the things here as being somewhat flat the consumer obviously as everybody is well aware.

There is some uncertainty out there looming around the consumer.

In certain big ticket discretionary purchase categories.

But as we've said in our category in particular outages tend to.

Help us overcome any general macro weakness in the consumer and that has been the historical case for us and I think that might be why we saw what we saw in the third quarter is outages were above the long term average and so we've seen the consumer performed quite well in our category of products, but we're keeping a very.

York Ragen: We expect to generate strong operating free cash flow in the fourth quarter, resulting in adjusted net income to free cash flow conversion at well over 100% for the full year as inventory levels are projected to further moderate. This return to robust free cash flow generation allows for continued capital allocation optionality as we move through the remainder of the year.

Close eye on it we want to see how things play out here for the balance of the year and into 2024.

York Ragen: We are also providing updated guidance details to assist with modeling adjusted EPS and free cash flow for the full year 2023. Importantly to arrive at appropriate estimates for adjusted net income and adjusted EPS, add back items should be reflected net of tax using the expected effective tax rate. For 2023 our gap effective tax rate is still expected to be approximately 25%. The interest expense is now expected to be approximately 95 million compared to the prior guidance of approximately 92 due to higher projected interest rates and borrowings.

But.

But we're encouraged by sales leads for sure I mean October was another strong.

The third quarter was another strong quarter for us second best.

<unk> best quarter ever for Us in terms of just sales leads and so that's that's been really encouraging to see.

In terms of just the interest the overall interest and awareness in the category close rates maintaining.

Good.

And the one line for your next question.

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

York Ragen: Our capital expenditures are still projected to be approximately 3% of our forecasted net sales for the year. Appreciation expense is still forecast to be approximately 62 million in 2023. Gap and tangible amortization expense is now expected to be approximately 104 million during the year compared to the previous guidance of 102 million. Stock compensation expense is still expected to be between 40 to 43 million for the year. Given the sharey purchases executed during the third quarter 2023, our full year weighted average diluted share count is now expected to decrease to approximately 62.3 million shares.

York Ragen: And finally, this 2023 outlook does not reflect potential additional acquisitions or sharey purchases that could drive incremental shareholder value.

[laughter].

Maybe not.

Yeah.

So I have to come back to Mike again.

Sure Scott.

Okay.

Ron Waldman.

Technology.

Next question is from Jeff Hammond with Keybanc capital markets. Your line is now open.

Over to.

[laughter].

Alright.

One moment.

Move on to the next question.

Okay.

Unknown Executive: This concludes our prepared remarks at this time we'd like to open up the call for questions. In order to ask a question, please press tar 11 on your telephone and wait for your name to be announced. To withdraw your question, please press tar 11 again. Please be advised that we are only taking one question and no follow-ups.

Your next.

Question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

Okay.

Yeah.

And the epic fail going here in the Q&A So Matthew.

Unknown Executive: Please stand by while we'll comply the Q&A roster.

Matt can move to another one operator.

Yes.

Alright next question comes from the line of Mark Strouse with Jpmorgan. Your line is now open.

Thomas Moll: And our first question comes for the line of Tommy Moll with Stephen Zink. Your line is now open. Morning and thank you for taking my question. Aaron, maybe no big surprise here. I wanted to start on your comments regarding the home standby field inventory. I think I heard you say that units were lower, quarter over quarter. And so my related question was, can you give us an update on the times normal?

Yeah, Hey, guys. Good morning can you hear me.

Harry Mark Thankfully right great.

Thanks for taking the question.

You touched on this a bit but im curious on the gross margin upside that was there was a bit higher than what you were guiding on the last call.

Can you just quantify how much of that was driven by by mix I mean, it's encouraging to see that higher despite the higher mix of C&I, but is there something about kind of the mix within the mix.

Thomas Moll: I think last quarter it was 1.2 to 1.3. Where do we sit today? And what additional comment, Terry, can you give us in particular on the wholesale and retail channels? Thank you. Yeah, thanks, Tommy. Yeah, we did say this morning that, you know, inventories continue, field inventories continue to come down. And the way we phrased it, you know, they're reaching a more sustainable level because we're definitely seeing areas as we, as we noted, I think not only at our investor day, but maybe even on the last call where we have certain regions and certain models, you know, certain channels like our dealer channel in particular that are, are, you know, are feeling like we're, we're kind of abnormal.

Versus just kind of a something more structural with your cost savings or pricing initiatives.

Yes, no I mean, I think in terms of year over year improvement there price cost has been.

A very nice tailwind really all throughout the year and I guess, the beginning part of the year, we were having I guess pretty pretty significant mix headwinds at the beginning this first part of the year that was offsetting that I think what we're seeing now in the third quarter is those those mix headwinds now.

Our starting to subside as as we're starting to get closer to Comping. Prior year. So the the positive price cost that that we've been recognizing.

Thomas Moll: And they're back to the whole question of what is normal, right? I mean, we, we picked a pre-COVID kind of average to, to say what that is. And so, you know, we continue to work towards that and making good progress. You know, we're still undershipping the market in terms of, you know, overall and market demand. So, but it's, but it's narrowing up, you know, it's, it's not nearly what it was earlier this year.

The vast majority of the gross margin increase is price cost with only a modest.

I would say slight.

Impact on mix year over year, So I think.

We're pleased to see some of those mix headwinds start to subside in.

Thomas Moll: We were severely undershipping the market earlier this year. That's why, you know, the results were what they were. And as we get closer to kind of that, you know, I would call it in line, you know, shipping to market and market demand, you're seeing the impact of that on results. But, you know, both in the gross margin level, as well as the Utah margins, we're able to, you know, really focus on improving the efficiency in our factories because we're taking up our production rates to, you know, to get closer to that and market demand.

And then when you flash forward to Q4 then.

We will obviously expect gross margins to continue.

Continue to improve as we could sequentially.

Increase those home standby shipments then we will get mixed positive there.

We'll see significant year over year improvements in gross margin at that point, because then you'll get.

You'll get the benefit of price cost and favorable mix. So so we're pleased with the trajectory of where margins are headed and just like we had guided earlier in the year.

Thomas Moll: The really good news is we're, we continue to see and market demand remain quite strong for home standards. And that's in spite of having, you know, it's really kind of a light season relative to, you know, the third quarter here. Outages in total were above average, the long-term average. And of course, there were a lot of well-publicized articles around potential outages with, you know, with some of the demand, supply demand challenges that remain out there.

Alright on women for your next question.

And the next question comes from the line of Brian Drab with William Blair. Your line is now open.

Thomas Moll: But we feel really good about where the category is at. And we feel like, as we, you know, as we've been saying all along, as we finish up the year here and we get into 2024, we're going to be much, much closer to, you know, normal at all channels. And so the other part of your question on wholesale and retail, as we've said in the past, you know, if you look at all, kind of the three major channels as we think about them, dealer, wholesale and retail, dealer feels like it's closest to normal wholesale would be next in line and then retail would be a little bit further out. But they're all approaching a more normal level. One moment for your next question.

Okay.

Okay.

Right.

Brian Your line is now open.

Can you hear me okay.

Yes got you Brian you got you, okay, well its not on our end I guess it sounds like because you Couldnt hear me at first.

Okay. So.

Bunch of questions.

Yes, California.

I'm curious.

Haven't been talking as much about California lately, but what are you seeing in terms of the longer term opportunity there.

It didn't feel like the utilities were shutting down power as much lately.

What's the penetration rate.

Penetration level in California, today, and what's the latest thinking on theirs.

Michael Halloran: And your next question comes from the line of Michael Holorin with Baird, your line's now open. Hey, Mike. Cute.

Theres a lot of rumblings around natural gas.

Bands in different cities and counties and how has that affected demand.

Unknown Executive: We need to come back to Mike. Yeah, we might have to come back to Mike. Okay, one moment for your next question.

Yeah, Brian, California was always a smaller small ish market for us in terms of home standby grew during the year.

Well publicized power safety shut off events or a couple of years ago.

But the penetration rates around 2% now so still quite underpenetrated relative to the <unk>.

Jeffrey Hammond: Your next question comes to the line of Jeff Hammond with key bank capital markets. Your line is now open. Jeff, are you there?

Full average was somewhere like five and three quarters percent.

Across the U S. So slightly below that for California, a little less than 2% so.

It still represents an area of potential growth.

Those gas bands are.

Pretty localized and in fact, some of them have actually been overturned.

Unknown Executive: Yeah, we may need to try the next one, we're going to try the next one, we'll do it for you. Alright, one moment.

In courts of law, So I don't know, where that's going to ultimately go we need natural gas as a bridge fuel.

Two to get to the other side of it.

The full transition to renewables gas is going to play in that Mark asked a great way to get there in.

In terms of just the cleanliness of that fuel source and the plentiful nature of it.

To help us.

Christopher Glynn: Next question is from Christopher Glynn with Often Timer, your line is now open. Hey, thanks, good morning guys, can you hear me? You don't hear any press lines loud and clear.

To make the transition to energy transition. So, yes, I think it'd be very shortsighted to band that gas, but thats I know that <unk>.

<unk> location to location, so but still opportunities. There you are right, though I would say in recent quarters for sure you Havent seen the high profile nature of our power safety shut offs as you maybe saw them a few years ago.

Christopher Glynn: Right, so it's just curious about dealer and close rate productivity. I know you're doing a lot with dealers, you had a bit of an explosion during the pandemic, a little bit of a lack of training that you're catching up on. So just curious how that productivity selling commercial is playing out in what percent of HSB sales go through the dealer channel where I think you said the inventories are now about normal in fact.

We did see some outage activity.

Coming out of the spring storms winter storms last year, and <unk> were pretty robust in California. So we continue to see growth there.

And again it was it was a lot less of 1% before so it's less than 2% now so still growing and represents obviously a huge market just in terms of the opportunity in terms of the number of homes in in that state.

Christopher Glynn: Yeah, thanks, Chris, so the majority of the sales, as we say, you know, more than 50% go through that dealer channel, it's a really important channel for us. Our whole sale and retail channels are important channels as well, but the dealer channel with 8700 dealers is clearly, you know, a critical area of focus for us. And of course, the bandwidth in that dealer channel around sales and installation and service as the market grows, you know, we've got over 3 million units in the field.

One moment for your next question.

And the next question comes from the line of George <unk> with Canaccord Genuity. Your line is now open.

Hey, guys can you hear me okay.

Christopher Glynn: That's, you know, it's a really important area. As far as close rates, you know, and that is the channel that we can measure close rates on because we have our power play sales system is offered through that channel. So it's a way for them to quote and sell product. And so we get really good visibility into close rates by dealer, by product, by region. And, you know, as we said on the last call, close rates have kind of flattened out.

Great. Thanks, I guess, George George <unk> as always powered on.

So.

Good to hear.

Quick question on clean energy.

Curious as to whether the upheaval in the market there with some of your competitors either accelerates.

Or maybe.

Delays some of the strategy points you talked about at your Analyst day, you seen up more of an opportunity here near term or does this give you kind of comfort in that.

Christopher Glynn: And that's how, you know, they've kind of played out similar to that. You know, actually, I mean, we've seen some near term improvement here, but we're not ready to call it a new trend up, but the month of October has been has been relatively good. But you have to think of in the context, this is a look back, right? So when we talk about close rates, we have a window of time we look back because it takes time for quotes to mature to a point of, you know, for us to make a call on whether it's closed as a sale or not.

You have your products coming out in the second half of next year. Thank you.

Thanks George.

It is interesting I mean with the and we said it. This morning in the prepared remarks, we're seeing softness in that solar plus storage the residential solar plus storage market.

Actually eco beef continue to just.

They are posting record quarter after record quarter here, which is pretty amazing.

New products come out and they're calling it actually.

We're doing really well with that business and there's a lot of great things around that.

Christopher Glynn: But we are seeing, you know, some, some green shoots there, but we're, we're ready, we're not ready to quite call it a trend yet. So we've still kind of forecasted things here as being somewhat flat. The consumer, obviously, is everybody's well aware. You know, there's some uncertainty out there looming around the consumer in certain big ticket discretionary purchase categories. But as we've said in our category in particular, outages tend to help us overcome any general macro weakness in the consumer.

But when it comes to this plus storage side of the market, which we're still bullish on long term.

Given.

The structural nature of the grid transition.

And the policy tailwind that should be there we feel like the current environment.

While negative is is that is kind of a.

I think more temporary than permanent and so but the good news for us is.

We have a lot of new product coming next year. So I don't feel like we're missing out on maybe what's going on in the market today.

Christopher Glynn: And that has been the historical case for us. And I think that might be why we saw what we saw in the third quarter is outages were above the long term average. And so we've seen the consumer perform quite well in our category of products. But we're keeping a very close eye on it. We want to see how things play out here for the balance of the year and into 2024. But we're encouraged by sales leads for sure.

By having.

Our product offerings fine today, but our next generation product offering.

Is going to.

It is really going to be.

I think set us apart from the competition I think it is going to establish us as the leader. We think we can be in that marketplace going forward, we're a leader.

Christopher Glynn: I mean, October was another strong, you know, the third quarter was another strong quarter for us. The second best quarter ever for us in terms of just sales leads. And so that's, that's been really encouraging to see in terms of just the interest, the overall interest and awareness in the category. Close rates maintaining. Yep. Good. And one moment for your next question.

I think we all know we struggled with our the acquired products initially.

And I think we've worked very hard and we will be working very hard over the next 12 months.

To bring the new products, we have to market. We've got a huge team working on that it's why the level of investment as we said at our Investor Day is so heavy and we do believe in it long term. So I don't think to answer your question directly I don't think it changes the trajectory necessarily of anything we're doing there, but I think it probably does soften maybe the <unk>.

Unknown Executive: Your next question comes from Michael Halloran with Baird. Your line is now open. Maybe not. I have to come back to Mike again. Yeah, I'll see you. And one moment.

Fear of missing out if you will the fomo around maybe not having leading products there today.

And we just.

Getting getting or a pause in the market here, maybe it's just the timing is just good for us, but we expect to be in the market.

Big way later next year with our new products and we're pretty excited about where we're going with that.

Brian Drab: Next question is from Jeff Hammond with Keyback Capital Markets.

And one moment for your next question.

Jeffrey Hammond: Your line is now open. Yeah, over two. All right. One moment.

The next one comes from the line of John Donovan Schafer with Northland Capital markets. Your line is now open.

Unknown Executive: We'll move on to the next question.

Hey, guys. Thanks for taking my questions.

Wanted to follow up.

On the <unk>.

Close rates. So one of the things that came across with talking to some dealers is with the kind of revamped the marketing campaign, you guys launched or talked about at Investor day.

Jerry Revich: Your next question comes from the line of Jerry Revich with Goldman Sachs. The line is now open.

And how you are trying to increase product category awareness among the next generation people maybe.

Unknown Executive: And epic fail going here on the Q&A. So we have to move to another one operator. All right.

<unk> kind of in the middle of family formation right now.

The dealers are saying theyre getting more IH sees that.

Mark Strouse: Next question comes from the line of Mark Strouse with JP Morgan. Your line is now open. Yeah. Hey guys, the morning. Can you hear me? We haven't heard you mark. Thankfully. Great. Thanks for taking the questions.

I used to like they used to get at it.

Before COVID-19.

I see that go out there and it was almost always someone six year older who has retired it was really easy to schedule because the person didn't have a day job.

Aaron Jagdfeld: Your key touch on this a bit, but I'm curious on the growth margin upside that was a bit higher than what you were guiding on the last call. Can you just quantify how much of that was driven by by mix? I mean, it's encouraging to see that higher despite the higher mix of CNI. But is there something about kind of mix within the mix versus just kind of something more structural with your cost savings or price.

And.

<unk>.

This retired individual would have.

Tons of peers, who have backup generators. So there was almost no education curve or anything like that so I'm. Just curious if you think this increasing amount of iac's coming from people in their Thirty's forty's.

Aaron Jagdfeld: Initiatives. Yeah, no, I mean, I think in terms of year over year improvement, their price cost has been a very nice tailwind really all throughout the year. And I guess the beginning part of the year, we were having, I guess, pretty, pretty significant mix headwinds at the beginning of the first part of the year. That was offsetting that. I think what we're seeing now in the third quarter is those mix headwinds now are starting to subside as as we're starting to get closer to comping prior year.

Where that actually schedule around work hours.

Aaron Jagdfeld: So the positive price cost that, you know, that we've been recognizing, you know, the vast majority of the gross margin increase is price costs with only a modest. I'd say slight. In fact, on mix year over year. So I think, you know, we're, we're pleased to see some of those mix headwinds start to subside. And, and then when you flash forward to queue for then, you know, we'll obviously expect gross margins to continue to improve as we could sequentially increase those home stand by shipments, then we'll get mixed positive there.

Other considerations and where they maybe don't know their product category as well.

Do you think that that's a material factor.

And close rates.

Still being a bit below where they were.

Historically, and if so does that mean it could be a longer process to get back to kind of historical highs.

So is there anything you can any color you can provide on that would be great. Yes.

Yes, it's a great line of questioning Donovan in an area that.

I would say that in the last 12 months, we've been focusing.

A lot more closely on.

The.

The <unk> that are coming through and that really goes hand in hand with the.

The pull down in the close rates, we saw happened during COVID-19.

Initially our explanation around that was all around the long lead times of the product and I do think that that had.

A material effect on coming off of the high point for close rates, you know, where we were to where we dropped down to.

In during Covid that was there was no doubt in our mind based on the information feedback that we had.

The close rates were being impacted negatively by long lead times for the products.

Aaron Jagdfeld: We'll see significant Eurovere improvements in growth margin at that point because then you'll get that a bit of price cost and feral mix. So we're pleased with the trajectory of where margins are headed and just like we had guided earlier in the year. All right.

Now as the lead times have recovered and close rates have recovered, but not to the level that not nearly to the level. They were at Thats, where you start to look at other factors and so I think you're onto something there and we have started as I said over the last 12 months to really dig into this with.

With more vigor and I think what we found one of the things that were concluding is that.

Unknown Executive: Long moment for your next question.

The category itself.

The buyers of the category.

Brian Drab: And the next question comes from the line of Brian Drab with Glynn, where your line is now open. Brian, your line is now open.

Largely remained fairly concentrated in the demographic that you highlighted over age 60.

People, who want to stay in their home as long as possible.

Power outages are.

More than just an inconvenience as you age in your home.

And I think that that had largely driven the category in the early days, but as the category expands and we reach different levels of penetration. We're now reaching different demographics that are interested in resiliency.

Unknown Executive: Can you hear me? Okay. Well, it's not on our end, I guess it's something because he couldn't hear me at first. Okay.

Brian Drab: So I have a bunch of questions. I guess California, you know, I'm curious. We haven't been talking as much about California lately, but what are you seeing in terms of the longer term opportunity there?

As much or more perhaps than some of the traditional demographics.

We all live in a very digital age today, and I think again, maybe owing to the pandemic people are that the way the nature of work the way. We live today is different right. I mean, we're all working in a more hybrid nature I'd wager to bet that some of the folks in the Q&A queue here today that we can here anyway.

Aaron Jagdfeld: I didn't feel like the utilities were shutting down power as much lately. What's the penetration rate for penetration level in California today? And what's the latest thinking on, you know, there's a lot of rumblings around natural gas bands and different cities and counties and how is that affected demand? Yeah. Brian, you know, California was always a smaller, you know, a small-ish market for us in terms of homestand by a grew during the, you know, that what all publicize power safety shut off events of a couple years ago.

Our working from home rather than sitting in an office somewhere.

And you can't do that if.

You can't do it well if you are in the dark so power outages have a bigger impact today on people and on your livelihood and maybe on your children's ability to be educated all of the things that we've we've taken for granted for many many years for doing those things from home today.

Aaron Jagdfeld: But, you know, that penetration rates around 2% now, so still quite under penetrated relative to the, I think the full average for somewhere like five and three quarters percent. You know, across the US, so slightly below that for California, a little less than 2%. So, you know, it still represents an area of potential growth. I think those gas bands are pretty localized. And in fact, some of them have actually been overturned in courts of law.

And we're doing it at a time when the grid has become.

Evermore.

Fraught with.

Challenges in terms of uptime.

And we see it there are some very high profile examples, but day in and day out.

There's a there's tens of thousands of people every day in this country that suffer outages.

And actually those numbers are bigger.

Anyhow outages are lasting longer and so as we reach deeper across in terms of penetration rate. We are seeing different demographics, but your point is well taken the learning curve or the education curve that process. The sales process is longer for different demographics that we have that theres more salesman ship if you will.

Aaron Jagdfeld: So, I don't know where that's going to ultimately go. We need natural gas as a bridge fuel to get to the other side of, you know, the full transition to renewables gas going to play. And that gas is a great way to get there in terms of just the cleanliness of that fuel source and the plentiful nature of it to help us to make the transition, the energy transition. So, you know, I think it'd be very short-sighted to ban that gas, but that's, I know that that varies location to location.

Has to be done to educate those consumers on the product category on the options that are available.

Sometimes financing is a bigger consideration for younger demographics right older demographics tend to have maybe more readily available funding that they can pay for a project like this whereas younger demographics may have too.

Unknown Executive: So, but, you know, still opportunity there. You're right, though. I would say in, you know, recent quarters for sure, you haven't seen the high profile nature of power safety shutoffs as you maybe saw them a few years ago. We did see, you know, some outage activity coming out of, you know, the spring storms, winter storms of last year. And IHC's were pretty robust in California. So, we can see the growth there.

Arrange for that in a different way so in that can elongate the sales process. So we do think that that is part of what's going on today as we dig and continue to dig deeper a man.

Peter our executive VP of marketing that spoke at the Investor Day is incredibly focused on that she comes from a consumer product marketing background and understanding very deeply who the who the potential buyers are and the buyers are of our products.

Unknown Executive: And again, it was a lot less than 1% before. So, it's less than 2% now. So, it's still growing and represents, obviously, a huge market just in terms of the opportunity, in terms of, you know, the number of homes in that state.

Is central to not only the messaging around marketing, but just the process of selling and also the process of nurturing right. We talked about how we nurture sales leads we've had to adapt our nurturing processes to to adjust for some of the newer demographics. We're seeing so anyway, a lot of a lot of cool things coming there.

George Gianarikas: One moment for your next question. And the next question, cost of the line of George Gianarikas with a quick question on clean energy. Curious as to whether the upheaval in the market there with some of your competitors either accelerates or maybe delays, some of the strategy points you talked about at your analyst day. Do you see enough more opportunity here near term? Or does this give you kind of comfort and that you know you have your products coming out in the second half of next year.

Putting a lot of science behind it.

And I feel I feel like we've got an appropriate level of calorie burn against it but.

I think these are these are good problems to have I think longer term I think what we're going to figure them out and its going to.

Potentially continue to widen out the category as we as we grow and the penetration rate grows.

[laughter].

One woman, Florida next question.

And your next question comes from the line of Jon <unk> with UBS. Your line is now open.

Perfect. Thanks, Congrats on the good result, I wanted to dive back into it could be a little bit.

George Gianarikas: Thank you. Yeah, thanks, George. You know, it is interesting. I mean, with the and we said it this morning in the prepared remarks, you know, we're seeing softness in that solar plus storage, the residential solar plus storage market. Actually, equal fees continue to just, you know, they're posting record quarter after record quarter here, which is pretty amazing. And new products come out and they're they're killing it actually. We're doing really well with that business and there's a lot of great things around that.

So I'd say it's a.

Product, that's having quite some success I'm just curious if you could talk through.

How far along you are on pulling the levers to incentivize the team.

Advised installers to sell the value proposition of that product is there still more things you can do to incentivize installers, there or do you feel thats pretty rolled out already thanks.

Yes, Thanks John.

George Gianarikas: But when it comes to this plus storage side of the market, which we're still bullish on long term, given you know that the structural nature of the grid transition and, you know, the policy tailwinds that should be there. What we feel like, you know, the current environment while negative is, you know, is a is kind of a I think more temporary than permanent. And so, but the good news for us is, you know, we have a lot of new product coming next year.

<unk> been having.

A lot of success here recently.

I think a lot of that.

I don't want to be overly basic about the explanation here, but obviously energy costs continue to rise and as energy costs go up I think homeowners are.

I think they are in search of ways too.

To save money and there's a very strong payback on an eco be smart thermostat you can save upwards of 40% of your energy costs annually by using a smart thermostat and this is not is not a product that you basically just set a regular schedule for that you can remotely check the temperature on I mean, that's those are basic features you know there are there are T stack companies out there that are offering those features.

George Gianarikas: So I don't feel like we're missing out on maybe, you know, what's going on in the market today. By, you know, by having our product offerings fine today, but our next generation product offering is going to is really going to be I think set us apart from the competition. I think it's going to establish us as the leader. We think we can be in that marketplace going forward or a leader. You know, I think we all know we struggled with our the acquired products initially.

Calling themselves Smart thermostats. These are these are those are not smart thermostats ego thermostat is <unk>.

Different in that date that it actually.

<unk> youre patterns in terms of when your home when you're not there sensors in the home that give it context around occupancy.

And it can adjust for different variables, both heating and cooling preheating pre cooling.

George Gianarikas: And I think we've worked very hard and we'll be working very hard over the next 12 months to bring the new products we have to market. We've got a huge team working on that. It's why, you know, the level of investment as we said at our investor day is so heavy. And we do believe in it long term. So I don't think to answer your question directly. I don't think it changes the trajectory necessarily of anything we're doing there.

Some really cool things that it does and it looks at energy costs senior in your market to make some of the decisions, it's making on your behalf or with your input.

And so these are I think really strong and important considerations for why we think the smart thermostat category in particular is growing and while <unk> solution.

George Gianarikas: But I think it probably does soften maybe the fear of missing out, if you will, the FOMO around maybe not having, you know, leading products there today. And, you know, we just getting a pause in the market here maybe is just the timing is just good for us.

Is the best offering in that.

In that category and that's something that.

When you think about to your question about installers.

I think installers.

They they do.

Aaron Jagdfeld: But we expect to be in the market in a big way later next year with our new products and we're pretty excited about where we're going with that. And one moment for your next question.

They try to offer I think the value property or to extend the value prop in their sales process, but.

I think it really comes down to the homeowner requesting that right and I think what what installers. Appreciate mostly is the ease of installation and the level of technical support that they get from Eagle would be the level of support for me could be whether you're a homeowner or whether you are a contractor installing the product is phenomenal and thats what wins the day with an installer.

Jonathan Schafer: The next one comes from the line up, Jonathan Schafer, with Northern Capital Market, still on his now open Hey guys and thanks for taking the questions. I want to follow up on the on close rates so one of the things I came across with talking to some dealers is with the kind of revamped marketing campaign you guys launched or talked about investor day and you know how you're trying to increase product category awareness among you know that the next generation people maybe you know their 30s to 40s kind of in the middle of family formation right now.

It can win the day with a homeowner as well, but I think for installation.

From an installer standpoint, and time is money. So if youre dealing with a product that doesn't have great support and you have challenges with that youre not able to get answers to the questions you need in a timely fashion, you're wasting time, you're wasting money. If you have an EW thermostat.

And you have a problem.

I have a technical question you can get a response.

Very quickly and a high quality response at that and so they get incredibly high marks for technical support and I think thats why installers largely are choosing the product over other options in the marketplace.

Jonathan Schafer: The dealers were saying you know they're getting more IHCs that you know they used to like they used to get IHC you know before COVID they get an IHC that go out there and it was almost always someone you know 60 year older who was retired.

Yes.

One moment for the next question.

Aaron Jagdfeld: It was really easy to start schedule because the person didn't have a day job and you know this you know this retired individual would have tons of peers who have backup generators so you know there was almost no education curve or anything like that so I'm just curious if you think this increasing amount of IHCs coming from you know people in their 30s and 40s you know where they have to actually schedule around work hours and other considerations and where they maybe don't know the product category as well you know is that using the that's a material factor in close rates you know still being a bit below where they were historically and if so you know did that mean it could be a longer process to get back to kind of historical highs just anything you can any color you can provide on that would be great. Yeah it's a great line of questioning Donovan and an area that I would say that you know in in the last 12 months we've been focusing a lot more closely on you know the the the IHCs that are coming through and that really goes hand in hand with the you know the pull down in the close rates we saw happened during COVID we you know initially our our explanation around that was all around the long lead times of the product and I do think that that had you know a material effect on the coming off of the high point for close rates you know where we were to where we drop down to in during COVID you know that was there was no doubt in our mind based on the information feedback that we had that close rates were being impacted negatively by the long lead times for the products.

And we have a question from Jeff Hammond with Keybanc capital markets. Your line is now open.

Uh huh.

Third time is not a charm I guess, it's not sure.

God I don't think it's on are on the.

'cause it I don't know.

The conference call for it.

Well, we'll follow up with you ask Jeff sorry about that.

Moving on to the next question. Your next question comes from the line of Stephen <unk> with Stifel. Your line is now open.

Alright. Thanks.

Thanks, Good morning.

Good morning.

Yeah.

My my John there's been a lot more reliable than some of these questions. So far.

<unk>.

So I was just curious you talked about.

Under selling demand.

So far as you work through the inventory channels.

As we think about the dynamics I know, it's early to tell but as we think about dynamic.

Each year.

You can get back to kind of onboard normalize annual growth rate of 24.

Yes, I mean, obviously you won't have the headwinds that we've had with bringing field inventory down we'd been under shipping that standpoint, it will be more normalized but.

Ed.

I mean, just in terms of Ross shipments will we should see growth that way and that isn't that home standby business. Your question, maybe is more like we'll activations grow installations grow which is our proxy for I guess <unk>.

<unk> sales in terms of the end market that way.

Obviously are you know we're evaluating.

Market conditions IH sees again second best on record so that obviously, the leading indicators. So you know.

Aaron Jagdfeld: Now as the lead times have recovered and close rates have recovered but not to the level that not nearly to the level they were at that's where you start to look at other factors and so I think you're you know you're on to something there and we've started as I said over the last 12 months to really dig into this with more vigor and I think what we found one of the things that we're concluding is that you know the category itself. You know the buyers of the category have largely remained fairly concentrated in the demographic that you highlighted you know over age 60 people who want to stay in their home as long as possible.

We've got but let's be clear I mean over the categories history over the last 20 years is growing 15% on a compounded basis. So it just hasn't been a straight line in this this time around it definitely wasn't a straight line because of the field inventory challenge that we've had as a persistent headwind this year, it's getting better but.

It's really last at the full year, so I mean, I'm confident longer term that categories going to continue to grow it is still by far the most cost effective way to deal with the power outage.

Aaron Jagdfeld: Power outages are you know are more than just an inconvenience as you age in your home and you know I think that that had largely driven the category in the early days but as the category expands and we reach different levels of penetration we're now reaching different demographics that are interested in resiliency as much or more perhaps some of the traditional demographics. You know we all live in a very digital age today and I think again maybe owing to the pandemic you know people are the way the nature of work the way we live today is different right I mean we're all working in a more hybrid nature.

And outages are.

You can look at the long term baseline average and these are numbers that are readily available from.

Third party.

[noise] collectors the government data.

Darcy <unk> and others, who focus on reliability.

You know the statistics don't lie.

Our outages are on the rise and there are lasting longer.

We hear it from customers who are frustrated.

Theres another outage in Michigan today.

Michigan has just been hammered by outages and that's one of the reasons why it's a that's a really good market for us penetration wise I mean Penn rates in Michigan are over 15%, which is a.

15% of all single family homes over $150000 in value have a have a home standby generator installed which is when you think about that for a second you put that in context and I think it tells you where the pen rate can go right I mean pen rate nationally is five and three quarters percent and where it states like Michigan, which is a major state it's at 15% So and every one.

Aaron Jagdfeld: I'd wager to bet that some of the folks in the Q&A Q here today that we can hear anyway are working from home rather than you know sitting in an office somewhere and you can't do that if or you can't do it well. If you're in the dark so you know power outages have a bigger impact today on people and on your your livelihood and maybe on your children's ability to be educated all the things that you know we've you know we've taken for granted for many many years for doing those things from home today.

1% of pen rate is it is a $3 billion market opportunity. So you start adding that up in the numbers get really big really fast.

We're at 75% share there, maybe even a little better than that and that's something that I think from a focal area is is obviously something we put a lot of effort against as we as we look forward, but in terms of just whether that's going to happen next year or not in terms of normalized growth rate.

Aaron Jagdfeld: And we're doing it at a time when the grid has become ever more fraught with you know with challenges in terms of up time and we see it there's some very high profile examples but day in and day out you know there's there's tens of thousands of people every day in this country that that suffer outages and actually those numbers are bigger and the outages are lasting longer. And so as we reach deeper across you know in terms of penetration rate we are seeing different demographics but your point is well taken the learning curve or the education curve that process the sales process is longer for different demographics that you know we have that there's more salesmanship if you will that has to be done to educate those consumers on the product category and the options that are available.

There's a lot of factors that go into that but longer term it's definitely.

Category that that is going to continue to growth. Yeah. We typically short term guide without any major events those happen. So that's always a catalyst for for growth over the longer term so.

But those are those are obviously the drivers and then all the mega trends around that we've talked about for a while that are driving the demand for the category.

Those are still intact.

Yeah.

One moment for the next question.

Aaron Jagdfeld: You know sometimes financing is a bigger consideration for younger demographics right older demographics tend to have maybe more readily available funding that they can pay for a project like this whereas younger demographics may have to you know arrange for that in a different way. So and that can elongate the sales process so we do think that that is part of what's going on today as we dig and continue to dig deeper you know we Amanda teeter are our executive VP of marketing that spoke at the investor days incredibly focused on this she comes from a consumer product marketing background and you know understanding very deeply you know who the who the potential buyers are and the buyers are of our products is central to you know not only the messaging around market.

And the next question comes from the line of Jordan Levy with Jewish Securities. Your line is now open.

Hi, Henry on for Jordan here.

Wondering if you could dig dig a bit deeper into some of the different dynamics, you're seeing between the U S and the international C&I segments in the business and then how some of the segment you are looking for 2024.

Yeah, So great great question. Thanks.

In the U S.

We have outsized.

Outsized.

Market verticals, I would say in telecom and the national rental channels, as well, which all roll up in that C&I. So in the U S. As we've said.

National accounts National rental accounts have last couple of quarters have have cooled off they were they were.

Aaron Jagdfeld: But just you know this this process of selling and and also the process of nurturing right we talked about how we nurture sales weeds we've had to adapt our nurturing processes to to adjust for some of the newer demographics we're seeing so anyway a lot of a lot of cool things coming there we're putting a lot of science behind it and I feel you know I feel like we've got an appropriate level of calorie burn against it but it's I think it's these are these are good problems to have I think longer term I think we're going to figure them out and it's going to you know potentially continue to widen out the category as we as we grow and the penetration rate growth.

Heavy buyers of equipment.

Last year and even earlier this year.

It's cooled off as you know I think there's there's some broader slowdowns and just some of the C&I markets overall, I think owing to some of the higher interest rate environment that we're in today.

Our new construction you know you look at the architectural Billings index last month being our like a couple of weeks ago being.

Quite a bit softer.

I think youre, starting to see that and feel that certainly we are in the rental markets as we as we as we said and then the other large vertical for us is telecom, which.

Unknown Executive: One moment for the next question.

He has also slowed down considerably here the capex spend for the large telcos.

John Rida: And your next question comes through the line of John Rida with UBS. Your line is now open. Perfect, thanks, congrats on the good result. I wanted to dive back into ECOB a little bit. So see, it's a product that's having quite some success. I'm just curious if you could talk through how far along you are in pulling the levers to incentivize installers to sell the value proposition to that product. Is there still more things you can do to incentivize installers there?

I think he's been reined in a bit just as they wait to see what the end markets look like for the.

The wireless side.

Consumer and I think youre going to see that it's not a long term basis both of those.

Verticals are are going to be growing long term. They just in the short term here. It pull back. So that's that's a dynamic that differs from I would say the rest of the world, we do sell into telecom and we sell equipment rental companies as well, but in terms of just their outsized nature of the size of those verticals here in the U S.

John Rida: Do you feel that's pretty rolled out already? Thanks. Yeah, thanks, John. Yeah, ECOB has been having a lot of success here recently. I think a lot of that owes, I don't want to be overly basic about the explanation here, but obviously energy costs continue to rise. And as energy costs go up, I think homeowners are, you know, I think they're in search of ways to save money. And there's a very strong payback on an ECOB smart thermostat.

They are bigger outside of when you get outside the U S. I would say one of the areas that.

For C&I that.

We've seen.

Great interest for backup power has been in Europe with I think some of the.

The war with Russia, Ukraine, and just the concerns around energy security.

John Rida: You can save upwards of 40% of your energy costs annually by using a smart thermostat. And this is not a product that you basically just set a regular schedule for, that you can remotely check the temperature on. I mean, those are basic features. You know, there are peacetack companies out there that are offering those features and calling themselves smart thermostats. These are, those are not smart thermostats. The ECOB thermostat is different in that.

In the C&I space that impacts businesses that may have had.

Concerned about power interruptions last winter, that's abated a bit I think in recent quarters.

We're heading into winter and that's something that could pick back up but we're watching that but I would say that's a unique consideration when you get outside the U S. And then there are some markets that are when we call them out. This morning on the call in our prepared remarks, but theres a couple of markets that are growing in their importance, India being one of those where.

John Rida: You know, it actually learns your patterns in terms of when you're home when you're not. There are sensors in the home that give it context around, you know, occupancy. And it can adjust for different variables, both heating and cooling, preheating, pre-cooling. There are some really cool things that it does. And it looks at, you know, energy costs in your market to make some of the decisions it's making on your behalf or with your input.

We're a leader in natural gas Gen sets, we have a factory there in our business there in India, that's been doing quite well, we continue to see demand in the middle East for our products, which are you know theres quite a bit of.

I think around higher energy prices I think the middle East has continued to move move forward in terms of their economies and that's reflected in our order rates from that part of the world.

John Rida: And so these are, I think, really strong and important considerations for why we think the smart thermostat category in particular is growing and why ECOB's solution is the best offering in that category. And that's something that, you know, when you think about to your question about installers, you know, I mean, I think installers, you know, they do. They try to offer, I think, you know, the value proper or to extend the value prop in their sales process.

And so those I think there are some specific areas Australia is another area of market that we continue to see nice improvements in.

Our our growth rates, so I think that kind of just some of the dynamics give you a little flavor of that.

I think that.

The business outside the U S for US is highly concentrated in Europe, though we don't have as much exposure to Africa, we have some limited exposure to Asia.

John Rida: But I think it really comes out of the homeowner requesting that, right? And I think what installers appreciate mostly is the ease of installation and the level of technical support that they get from ECOB. The level of support from ECOB whether you're a homeowner or whether you're a contractor installing the product is phenomenal. And that's what wins the day with an installer. It can win the day with a homeowner as well, but I think for installation from an installer standpoint, time is money.

South America is a nice market for us and a growing market as well.

John Rida: So if you're dealing with a product that doesn't have great support and you have challenges with that and you're not able to get answers to the questions you need in a timely fashion, you're wasting time, you're wasting money. If you have an ECOB thermostat and you have a problem or you have a technical question, you can get a response very quickly and a high quality response at that. And so they get incredibly high marks for technical support. I think that's why installers largely are choosing the product over other options in the market.

But it's relatively small relative to the size of Europe.

But that I think that's probably the most color unless.

I'm missing anything there I think the ITC have been hanging in there.

Domestic or industrial distributors have been doing quite well here in the U S and good Howard Weil gaining market share there.

Yeah.

And your next question comes from the line of Keith Hoffman with North Coast Research. Your line is now open.

Okay.

Hello.

Ooh.

We had a good string.

Oh, we're not two in a row.

Yes.

Keith Your line is now open.

Yep.

It's worth volatile Keith.

Unknown Executive: One moment for the next question, and we have a question from Jack Hammond. We'll see that. The third time is not a charm. Well, we'll follow up with you, Jeff. Sorry about that. Moving on to the next question.

Okay.

Moving on.

Next question is from Chip Moore with Roth Kim Your line is now open.

Hey, everybody. Thanks for taking the question can you hear me.

Sure Yes.

Fantastic.

Wanted to follow up on some of the Green shoots you talked about for consults and close rates.

As it relates to the current housing market, just I guess I'm curious if you'd expect to see any impacts from a slowdown there in this higher rate environment.

Stephen Gengaro: Your next question comes to the line of Stephen Gengaro. It's too full. Your line is now open. All right. Thanks. Your morning. I'll play in my jet. My generator has been a lot more reliable than some of these questions so far. So I was just curious. You talked about underselling demands still so far as you work through the inventory channels. As we think about the dynamics, I know it's it's early to tell us we think about dynamics in the next year.

Just maybe.

Situations, where people might does that stay in their houses longer and pull the trigger just just curious what youre seeing there.

Yeah. Thanks, Jeff.

Obviously.

There's puts and takes I think with that.

With housing first of all.

It's really less than 20% of our sales go into new housing. So I would say with housing starts.

It does slow and as they slow not as big of an impact on US most of what we do is is to as retrofitting existing housing with products and then that gets to the question of.

Stephen Gengaro: You think you get back to kind of a board normalize annual growth rate in 24. Yeah, I mean, obviously, you won't have the headwinds that we've had with bringing field inventory down. We've been undershipping that. It'll be more normalized. And so just I mean, just in terms of raw shipments, we should see growth that way in that in that home span by business. Your question maybe is more like will I will activations grow installations grow, which is our proxy for, I guess, sales and sales in terms of the end market that way. We obviously are, you know, we're evaluating market conditions, IHC's again, second best on records. So that obviously is a leading indicator. So, you know, we got.

For most people how long do you stay in your house.

And if if housing turnover slows down because of the higher rate environment.

Does that mean that people are going to start to look at projects in their house.

And think about that or is there some dampening of the enthusiasm around that even because of the higher cost of money for borrowing.

Against your house or just the concerns over.

They're all economic concerns of consumers might have.

Those things have to play out yet I would say that again kind of consistent with our previous remarks on this is that when outages happen. The one thing we do know is that.

Homeowners generally have a list in their head of like things they want to do to their house and generators, probably on that list somewhere for most people depending on how many outages they've had on how long outages have lasted.

Aaron Jagdfeld: But let's, but let's be clear. I mean, over the categories history or last 20 years, it's grown 15% on a compound basis. So it just hasn't been in a straight line. And this this time around, it definitely wasn't a straight line because of the field inventory challenge that. You know, we've had as a persistent headwind this year, it's getting better, but it's really lasted the full year. So I, I mean, I'm confident longer term, the category is going to continue to grow.

But when they get an outage.

That category of product tends to move up on their list.

And outages tend to Trump some of the other.

Macro things that you might see around housing or the consumer as the economy cycles and we've seen this time and time again in our in our history in the business as if we get the outages.

Aaron Jagdfeld: It is still by far the most cost effective way to deal with a power outage. And outages are, you know, you can look at the long term baseline average. And these are numbers that are readily available from, you know, third party. The collectors that government data, you know, FERC and NERC and others who focus on reliability. You know, statistics don't lie. I mean, power outages are on the rise. And they're lasting longer.

People will re prioritize their spending maybe they wont hold off on that kitchen, remodel or putting in a pool or doing a bath remodel or taken a family vacation even in some cases they reallocate their.

Consumer dollars they are spending to other categories that they deemed more important and so as outages.

Aaron Jagdfeld: We hear it from customers who are frustrated. You know, there's another outage in Michigan today. You know, Michigan has just been hammered by outages. And that's one of the reasons why it's a, you know, it's a really good market for us penetration wise. I mean, pen rates in Michigan are over 15%. Which is, you know, 15% of all single family homes over $150,000 in value have a home stand by generator installed, which is, you think about that for a second, you put that in context.

And again this is that underpinning all of this is you have to have a belief that power outages are going to be on the rise and they're going to last longer they're happening more frequently and they're gonna last longer the data bears that out everything else that we've been talking about here would indicate that that is going to be the case for the next several decades, just as the grid goes.

Through a transition.

And as that happens I.

I think that even though we may run into some economic cycles here that could put pressure on the consumer I think as long as the outages happened, we feel pretty good about where our where we're gonna be.

Aaron Jagdfeld: Now, I think it tells you where the pen rate can go, right? I mean, pen rate nationally is five and three quarters percent. And where it states like Michigan, which is a major state, it's at 15%. So, and every one percent of pen rate is a, you know, it's a $3 billion market opportunity. So you start adding that up. And the numbers get really big, really fast. And, you know, where it's 75% share there.

And we have no further questions at this time I will now turn the call back over to Chris Rosman.

Aaron Jagdfeld: Maybe even a little better than that. And that's something that, you know, I think from a focal area is, is, is obviously something we put a lot of effort against as we, as we look forward. But in terms of just whether that's going to happen next year or not in terms of normalized growth rate, there's a lot of factors that go into that. But longer term, it's definitely, you know, the category that is going to continue growth.

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

This concludes today's conference call. Thank you for your participation you may now disconnect.

Aaron Jagdfeld: And we typically short term guide without any major events. And, you know, those happen. So that's always a catalyst for growth over the longer term. [inaudible] You know, those are obviously the drivers and then all the mega trends around that we've talked about for a while that are driving the demand for the category higher those are still intact.

Okay.

[music].

Okay.

Good.

Okay.

[music].

Okay.

Okay.

[music].

Unknown Executive: Security, your line is now open. Hi, I'll Henry Young for Jordan here. I was just wondering if you could dig a bit deeper into some of the different dynamics you're seeing between the US and the international C and I segments in the business and now some of those segments are looking for 2024.

Yes.

[music].

Aaron Jagdfeld: Thanks. Yeah, so that's a great question. Thanks. You know, in the US, you know, we have outsized market articles, I would say, in telecom and the national rental channels as well, which all roll up in that C and I. So in the US, as we've said, national accounts, the national rental accounts have, you know, last couple of quarters have cooled off. They were, they were heavy buyers of equipment last year. And even earlier this year, that's that's cooled off as, you know, I think there's there's some broader slowdowns in just some of the C and I markets overall, you know, I think owing to some of the higher interest rate environment that we're in today.

Aaron Jagdfeld: New construction, you know, you look at the architectural buildings index last month being or like a couple of weeks ago being quite a bit softer. You know, I think you're starting to see that and feel that certainly we are in the rental markets as we, as we, as we said, and then the other large vertical for us is telecom, which, you know, is also slowed down considerably here. The CapEx spend for the large telcos, I think has been, you know, rained in a bit just as they wait to see what the end markets look like for the wireless, you know, consumer.

Aaron Jagdfeld: And, you know, I think you're going to see that it's not a long term basis. This, both of those verticals are going to be growing long term, they just in the short term here, pull back. So that's, that's a dynamic that differs from I would say the rest of the world. We do sell into telecom and we sell equipment rental companies as well, but in terms of just their outsized nature of the size of those verticals here in the US, they're bigger outside of, you know, when you get outside the US.

Aaron Jagdfeld: I would say, you know, one of the areas that for C&I that, you know, we've seen, you know, great interest for backup power has been in Europe with, you know, I think some of the, the war with Russia Ukraine and just the concerns around energy security, you know, in the C&I space that impacts businesses. It may have had to, you know, concerned about power interruptions last winter. That's abated a bit, you know, I think in recent quarters.

Aaron Jagdfeld: But, you know, we're heading into winter and that's something that could pick back up, but we're watching that. But I would say that's a unique consideration when you get outside the US. And then there's some markets that are, when we call them out this morning in the call on our prepare remarks, but there's a couple of markets that are growing in their importance India being one of those where we're a leader in natural gas gents sets.

Aaron Jagdfeld: We have a factory there and a business there in India that's been doing quite well. We continue to see demand in the Middle East for our products, which are, you know, there's quite a bit of, you know, I think around higher energy priorities. I think the Middle East has continued to move forward in terms of their economies and that's reflected in our order rates from that part of the world. And so those, you know, I think there's some specific areas Australia is another area of market that we continue to see nice improvements in our growth rates.

Aaron Jagdfeld: So I think that, you know, kind of just some of the dynamics give you a little flavor of that. You know, I think the business outside the US for us is highly concentrated in Europe, though, we don't have as much exposure to Africa. You know, we have some limited exposure to Asia. South America is a nice market for us in a growing market as well, but it's relatively small relative to the size of Europe.

Aaron Jagdfeld: But I think that's probably the most color unless York I'm missing anything there. I think IDC has been hanging in there too. Our industrial distributors have been doing quite well here in the US. And we're gaining market share there. Yeah.

Keith Housum: And your next question to come to the line of Keith Housum, with North Cat Coast Research, Caroline is now open. Oh, we had a good string. We did.

Unknown Executive: Now we're not doing a row. Keith, here line is now open. That's Paul with Keith.

Chip Moore: Moving on. Next question is from Chip Moore, with Roth on KM, here line is now open. Hey, everybody. Thanks for taking the question. Can you hear me? Fantastic. One of the follow-up on some of the green shoots you talked about for consults and close rates. Is it related to the current housing market? Just I guess I'm curious, if you'd expect to see any impacts from a slowdown there in the higher rate environment, or just maybe a situation where people might affect stay in their houses longer and pull the trigger, or just curious what you're seeing there?

Chip Moore: Yeah, thanks, Chip. There's puts and takes, I think, with housing. First of all, it's really less than 20% of our sales going to new housing. I would say with housing starts at those slow and as they slow, not as big of an impact on us. Most of what we do is retrofitting existing housing with products. And then that gets to the question of, for most people, how long do you stay in your house?

Chip Moore: And if housing turnover slows down because of the higher rate environment, does that mean that people are going to start to look at projects in their house? And think about that, or is there some dampening of the enthusiasm around that, even because of the higher cost of money for borrowing, or against your house, or just the concerns, overall economic concerns that consumers might have?

Aaron Jagdfeld: Those things have to play out yet. I would say that, again, kind of consistent with our previous remarks on this, is that when outer just happened, the one thing we do know is that homeowners generally have a list in their head of things they want to do to their house. And a generator is probably on that list somewhere for most people, depending on how many outages they've had, and how long outages have lasted.

Aaron Jagdfeld: But when they get an outage, that category of product tends to move up on their list. And outages tend to trump some of the other macro things that you might see around housing or the consumer as the economy cycles. And we've seen this time and time again in our history in the business, is if we get the outages, people will reprioritize their spending. Maybe they won't hold off on that kitchen remodel, or putting in a pool, or doing a bathroom model, or taking a family vacation, even in some cases.

Aaron Jagdfeld: They reallocate their consumer dollars, their spending, to other categories that they deem more important. And so as outages, and again, this is the underpinning all of this, is you have to have a belief that power outages are going to be on the rise, and they're going to last longer. They're going to be happening more frequently, and they're going to last longer.

Aaron Jagdfeld: The data bears that out, everything else that we've been talking about here would indicate that that is going to be the case for the next several decades, just as the grid goes through a transition. And as that happens, you know, I think that even though we may run into some economic cycles here that could put pressure on the consumer, I think as long as the outer just happened, we feel pretty good about where we're going to be.

Chris Rosemann: And we have no further questions at this time. I will now turn the call back over to Chris Rosemann. We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter and full year 2023 earnings results with you in mid-February. Thank you again and goodbye.

Unknown Executive: This concludes today's conference call. Thank you for your participation and may not disconnect.

Thank you.