Q4 2023 Generac Holdings Inc Earnings Call

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Operator: Good day, and welcome to Generac Holdings' fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen-only mode.

Speaker Change: And welcome to General Holdings' fourth quarter and full year 2023 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you will need to press star one one on your tongue.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Chris Roseman, Senior Manager, Corporate Development and Investor Relations. Please go ahead.

The phone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.

Be advised today's conference is being recorded.

Speaker Change: I'd now like to hand, the conference over to Christopher Erdman Senior manager corporate development and Investor Relations. Please go ahead.

Chris Roseman: Good morning, and welcome to our fourth quarter and full year 2023 earnings call. I'd like to thank everyone for joining us. With me today is Aaron Jagdfeld, 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 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. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors.

Christopher Glynn: Good morning, and welcome to our fourth quarter and full year of 2023 earnings call I'd like to thank everyone for joining US. This morning with me today is Aaron <unk>, President and Chief Executive Officer, and York Ragen, Chief Financial Officer.

Christopher Glynn: We will begin our call today by commenting on forward looking statements certain statements made during this presentation as well as other information provided from time to time by <unk> or its employees may contain forward looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward looking statements.

Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors.

Chris Roseman: 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... Chris. Good morning, everyone, and thank you for joining us today. Happy Valentine's Day.

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

Eric: Thanks, Chris Good morning, everyone and thank you for joining us today happy Valentine's Day, I think I can say that our fourth quarter results reflect continued improvement in operating performance as shipments of home standby generators returned to strong year over year growth in the quarter, despite a softer than expected power outage environment.

Aaron Paul Jagdfeld: I think I can say that our fourth-quarter results reflect continued improvement in operating performance as shipments of home standby generators returned to strong year-over-year growth in the quarter, despite a softer-than-expected power outage environment. We also experienced significant margin expansion in the quarter driven by favorable mix and price-cost tailwinds on both a year-over-year and sequential basis. In addition, we generated record-free cash flow in the quarter on the continued reduction of our inventory levels.

Christopher Glynn: We also experienced significant margin expansion in the quarter, driven by favorable mix and price cost tailwind on both a year over year and sequential basis.

Christopher Glynn: In addition, we generated record free cash flow in the quarter on the continued reduction of our inventory levels.

Aaron Paul Jagdfeld: Year over year, overall net sales increased 1% to $1.06 billion, and core sales were approximately flat during the quarter. Residential product sales increased 1% from the prior year as growth in home standby generator shipments offset lower portable generator sales in the quarter. C&I product sales were approximately in line with the strong prior year fourth quarter as softness in the domestic telecom and rental channels was offset by continued strength in broader C&I and retail. Before discussing our fourth quarter results in more detail, I want to provide some highlights for the full year 2023. Global C&I product sales in 2023 reached an all-time record of approximately $1.5 billion, our third consecutive year of strong double-digit growth in the category, resulting in a nearly 30% compounded annual sales growth rate over those three years. This included record full-year performance in our international segment for both net sales and adjusted EBITDA.

Christopher Glynn: Year over year overall, net sales increased 1% to 1.06 billion and core sales were approximately flat during the quarter residential.

Residential product sales increased 1% from the prior year as growth in home standby generator shipments offset lower portable generator sales in the quarter.

Christopher Glynn: The ni product sales were approximately in line with a strong prior year fourth quarter as softness in the domestic telecom and rental channels was offset by continued strength in broader C&I end markets.

Speaker Change: Before discussing our fourth quarter results in more detail I want to provide some highlights for the full year 2023.

Christopher Glynn: Global C&I product sales in 2023 reached an all time record of approximately one $1 $5 billion, our third consecutive year of strong double digit growth in the category, resulting in a nearly 30% sales compounded annual sales growth rate over those three years.

Christopher Glynn: This included record full year performance in our international segment for both net sales and adjusted EBITDA.

Aaron Paul Jagdfeld: The strength in our C&I products has helped offset the headwinds in our residential product categories related to elevated levels of home standby generator field inventory in 2023 and a strong comparable period that included the benefit of excess backlog reduction. Although our shipments to the market were impacted by these factors during the year, home consultations, or sales leads, increased for the full year despite not having the benefit of a major outage event in 2023. Additionally, our return to improving margin performance in the second half of the year, together with the continued reduction in our inventory levels, helped drive cash flow from operations to an all-time record for full year 2023. This robust cash flow generation provided additional flexibility with respect to our capital deployment as we completed $252 million of share repurchases while also continuing to invest in advancing our products and solutions roadmaps during the year.

Christopher Glynn: The strength in our C&I products has helped to offset the headwinds in our residential product categories related to elevated levels of home standby generator field inventory in 2023, and a strong comparable period that included the benefit of excess backlog reduction.

Christopher Glynn: Although our shipments to the market were impacted by these factors during the year home consultations or sales leads increased for the full year, despite not having the benefit of a major outage events during 2023.

Christopher Glynn: Additionally, our returned to improving margin performance in the second half of the year together with the continued reduction of our inventory levels helped drive cash flow from operations to an all time record for full year 2023.

Christopher Glynn: This robust cash flow generation provided additional flexibility with respect to our capital deployment as we completed $252 million of share repurchases. While also continuing to invest in advancing our products and solutions roadmaps during the year.

Aaron Paul Jagdfeld: We continued to make significant investments in our engineering and manufacturing capabilities in 2023 as we opened an engineering center of excellence in Reno, Nevada and broke ground on a new manufacturing facility in Wisconsin to increase capacity for CNI stationary products. We also continue to launch compelling new products during the year, including the introduction of stationary CNI energy storage solutions for the domestic market to help decentralize, digitize, and decarbonize the future electrical grid with advanced microgrid applications. In addition, the Ecobee team launched a smart doorbell camera product line helping to drive engagement to their platform.

Christopher Glynn: We continue to make significant investments in our engineering and manufacturing capabilities in 2023, as we opened an engineering center of excellence in Reno, Nevada and broke ground on our new manufacturing facility in Wisconsin to increase capacity for C&I stationary products.

Christopher Glynn: We also continue to launch compelling new products during the year, including the introduction of stationary C&I energy storage solutions for the domestic market to help decentralized digitize and decarbonize the future electrical grid with advanced micro grid applications.

Christopher Glynn: In addition, the Eagle team launched the smart doorbell camera product line, helping to drive engagement to their platform. We also made important progress toward our vision of building a common platform and user interface for our suite of residential solutions through the integration of our home standby generators and propane tank monitoring devices using <unk> as the central hub to manage our products and solutions.

Aaron Paul Jagdfeld: We also made important progress toward our vision of building a common platform and user interface for our suite of residential solutions through the integration of our home standby generators and propane tank monitoring devices using Ecobee as the central hub to manage our products and solutions. Additionally, we introduced our new It's a Power Move advertising campaign to help drive incremental consumer awareness of the home standby generator category to a broader demographic range. We made further strategic investments in 2023 that helped to accelerate our Powering a Smarter World enterprise strategy as we acquired Reifu Storage Systems, a provider of stationary CNI energy storage solutions for European markets, and made a minority investment in Wallbox, a leading provider of EV charging solutions for both residential and commercial applications.

Christopher Glynn: Additionally, we introduced our new it's a power move advertising campaign to help drive incremental consumer awareness of the home standby generator category to a broader demographic range.

Christopher Glynn: We made further strategic investments in 2023 that helped to accelerate our powering a smarter world enterprise strategy as we acquired <unk> storage systems, a provider of stationary C&I energy storage solutions for European markets and made a minority investment in wallboard.

Christopher Glynn: Leading provider of EV charging solutions for both residential and commercial applications.

Aaron Paul Jagdfeld: Our investment in Wallbox is expected to result in global commercial collaboration, as well as the addition of a Generac seat on the Wallbox Board of Directors. We're excited to partner with an innovative technology leader in the EV charging industry and look forward to integrating Wallbox's solutions with our broader energy technology portfolio to further expand the value proposition of the energy ecosystems that we are building for homes and businesses. Importantly, throughout 2023, the megatrends that we believe will drive our longer-term growth were on full display, as increasingly severe weather coupled with the continued evolution of the energy grid in the U.S. further demonstrated the important role that our products and solutions can provide to the market. Although the U.S. did not experience any major power outage events during 2023, and despite the fourth quarter being the lowest fourth quarter for outage hours since 2015, there were In addition to the increasingly frequent and higher-magnitude weather-related power disruptions, legislative and regulatory reactions to climate change are also impacting the power grid.

Christopher Glynn: Our investment in Wall box is expected to result in global commercial collaboration as well as the addition of a general exceed on the wall box board of directors.

Christopher Glynn: We're excited to partner with an innovative technology leader in the EV charging industry and look forward to integrating wall box of solutions with our broader energy technology portfolio to further expand the value proposition of the energy ecosystems that we're building for homes and businesses.

Christopher Glynn: Importantly throughout 2023 Mega trends that we believe will drive our longer term growth were on full display as increasingly severe weather coupled with the continued evolution of the energy grid in the U S. Further demonstrated the important role that our products and solutions can provide to the market.

Christopher Glynn: Although the U S did not experience any major power outage events during 2023, and despite the fourth quarter being the lowest fourth quarter for outage hours. Since 2015, there were numerous smaller scale severe weather events that did occur throughout the year across a number of regions in the in North America, which drove monthly power outage activity above the long term average baseline.

Christopher Glynn: In addition to the increasingly frequent increasingly frequent and higher magnitude weather related power disruptions.

Christopher Glynn: Ladies and regulatory reactions to climate change are also impacting the power grid as well.

Aaron Paul Jagdfeld: On the supply side, utility-scale solar and wind power are being incentivized relative to traditional baseload thermal sources, but they are intermittent in nature and continue to face growing siting and permitting challenges. At the same time, demand is increasing as electrification trends are accelerating around heating, cooking, and transportation, and power-hungry data center and telecom infrastructure continues to rapidly build out. These changes are creating significant challenges as utilities and grid operators are struggling to reliably match supply and demand, particularly during periods of extreme heat during the summer and cold during the winter.

Christopher Glynn: On the supply side utility scale solar and wind power are being incentivized relative to traditional baseload thermal sources, but they are intermittent in nature and continue to face growing sighting and permitting challenges at.

Christopher Glynn: At the same time demand is increasing as electrification trends are accelerating around heating cooking and transportation and power hungry data center and telecom infrastructure continues to rapidly build out.

Christopher Glynn: These changes are creating significant challenges as utilities and grid operators are struggling to reliably match supply and demand, particularly during periods of extreme heat during the summer and cold during the winter.

Aaron Paul Jagdfeld: In its 2023 Long-Term Reliability Assessment, the North American Electric Reliability Corporation, or NERC, continued to warn of the elevated risk of resource shortfalls across the majority of the U.S. and Canada, as key forecasts around supply availability and future electricity peak demand are creating a higher risk of imbalance, leading to potential outages, more so than at any time in recent history. As a result of these factors, we expect there will continue to be significant opportunities for our portfolio of power resiliency and energy efficiency solutions well into the future. Specifically, for the Home Standby Generator category, we believe a massive penetration opportunity still remains, as only 6.25% of the addressable market of single-family, unattached homes greater than $150,000 in value in the U.S. will have a Home Standby Generator installed at the end of 2023. Furthermore, every 1% of incremental penetration is worth approximately $3 billion in market value.

Christopher Glynn: And it's 2023 long term reliability assessment, the North American Electric reliability Corporation of our Newark continue to warrant the elevated risk of resource shortfalls across the majority of the U S and Canada as key forecasts around supply availability and future electricity peak demand or creating a higher risk of imbalance leading to potential outages.

Christopher Glynn: More so than any time in recent history.

Christopher Glynn: As a result of these factors we expect it will continue to be significant opportunities for our portfolio of power resiliency and energy efficiency solutions well into the future.

Christopher Glynn: Specifically for the home standby generator category, we believe a massive penetration opportunity still remains at only $6 two 5% of the addressable market of single family unattached homes greater than $150000 in value in the U S had a home standby generator installed at the end of 2023.

Christopher Glynn: Furthermore, every 1% of incremental penetration is worth approximately $3 billion of market value and with a market share of greater than 70%. We believe <unk> is incredibly well positioned to continue to lead the commercialization of this important product category.

Aaron Paul Jagdfeld: And with a market share greater than 70%, we believe Generac is incredibly well positioned to continue to lead the commercialization of this important product category. These same megatrends create significant opportunities for our global C&I products and solutions, as businesses are also concerned about navigating power reliability issues and volatile energy prices. Near term, we're focused on further executing our strategic vision, which we believe puts Generac in a unique position to help home and business owners solve for the energy-related challenges that lie ahead. Now discussing our results in more detail, fourth-quarter home standby shipments increased approximately 10% from the prior year, despite continued field inventory destocking and softer than expected power outage activity, which also weighed on home consultations during the quarter.

Christopher Glynn: These same mega trends create significant opportunities for our global C&I products and solutions as businesses are also concerned about navigating power reliability issues and volatile energy prices.

Christopher Glynn: Near term, we're focused on further executing on our strategic vision, which we believe puts <unk> in a unique position to help home and business owners solve for the energy related challenges that lie ahead.

Speaker Change: Now discussing our results in more detail.

Speaker Change: Fourth quarter home standby shipments increased approximately 10% from the prior year. Despite continued field inventory destocking and softer than expected and a softer than expected power outage activity.

Christopher Glynn: Which also weighed on home console patients during the quarter.

Aaron Paul Jagdfeld: However, in early 2024, severe winter storms pushed outage activity to record levels for the month of January. Power conservation notices sent to homeowners in select markets driven by unseasonably cold temperatures and the related spike in power demand also contributed to consumer awareness of the vulnerability of the electrical grid. As a result of these factors, home consultations in January of this year were an all-time record for the month.

Christopher Glynn: However, in early 2024 severe winter storms pushed outage activity to record levels for the month of January.

Christopher Glynn: Power conservation notices sent to homeowners in select markets driven by unseasonably cold temperatures and the related Spike in power demand also contributed to consumer awareness of the vulnerability of the electrical grid as.

Christopher Glynn: As a result of these factors home consultations in January of this year were an all time record for the month.

Aaron Paul Jagdfeld: Our residential dealer count ended the fourth quarter at approximately $8,700, in line with the prior year count. Dealer productivity trends further improved in the quarter, and we continue to execute on our initiatives to train non-dealer contractors, helping to increase overall installation capacity. Notably, close rates improved moderately during the fourth quarter, helping to offset the impact of lower power outage activity and softer home consultations. More importantly, activations, which are a proxy for installations, were at an all-time quarterly record in the fourth quarter, increasing slightly from the previous record in the fourth quarter of 2022, providing further support for our belief that the home standby category is holding a new and higher level of baseline demand. The record activations in the fourth quarter helped to further reduce the number of home standby generators in our distribution channels as we continue to undership end market demand in the quarter.

Christopher Glynn: Our residential dealer count ended the fourth quarter at approximately $8700 in line with the prior year count.

Christopher Glynn: Dealer productivity trends further improved in the quarter and we continued to execute on our initiatives to train non dealer contractors, helping to increase overall installation capacity.

Christopher Glynn: Notably close rates improved moderately during the fourth quarter, helping to offset the impact of lower power outage activity and softer home consultations.

Christopher Glynn: Importantly, activations, which are a proxy for installations were at an all time quarterly record in the fourth quarter, increasing slightly from the previous record in the fourth quarter of 2022, providing further support for our belief that the home standby category is holding a new and higher level of baseline level of demand.

Christopher Glynn: The record Activations in the fourth quarter helped to further reduce the number of home standby generators in our distribution channels as we continue to under ship end market demand in the quarter.

Christopher Glynn: As certain regions and channels of the home standby market have returned to normal order ordering patterns the gap between shipments and Activations further narrowed as we exited 2023 and we continue to expect overall shipments and activations to align later in the first quarter of this year.

Aaron Paul Jagdfeld: As certain regions and channels of the home standby market have returned to normal ordering patterns, the gap between shipments and activations further narrowed as we exited 2023, and we continue to expect overall shipments and activations to align later in the first quarter of this year. For 2024, we expect home standby sales to increase at a rate approximately in line with the mid-teens residential sales growth guidance disclosed in our press release this morning. Additionally, we expect home standby generator sales to increase on a year-over-year basis in each quarter throughout the year, assuming that power outage activity is in line with the historical baseline average. In addition to home standby generator shipments returning to growth, sales of our residential energy technology products and solutions also increased during the fourth quarter as compared to the prior year, led by continued growth at Ecobee as our team there continued to gain share in the smart thermostat market by driving momentum with professional contractors and further expanding their presence with key retail partners. The fourth quarter launch of Ecobee's smart doorbell camera was well received by consumers and industry experts and continued to showcase their expertise in delivering consistently positive customer experiences.

Christopher Glynn: For 2024, we expect home standby sales to increase at a rate approximately in line with the mid teens residential sales growth guidance disclosed in our press release this morning.

Christopher Glynn: Additionally, we expect home standby generator sales to increase on a year over year basis in each quarter throughout the year, assuming that power outage activity is in line with the historical baseline average.

Christopher Glynn: In addition to home standby generator shipments returning to growth sales of our residential energy technology products and solutions also increased during the fourth quarter as compared to the prior year led by continued growth at <unk> as our team there continued to gain share in the smart thermostat market by driving momentum with professional contractors and further expanding their presence with key retail partners.

Christopher Glynn: The fourth quarter launch of eco be smart doorbell camera was well received by consumers and industry experts and continued to showcase their expertise in delivering consistently positive customer experiences.

Christopher Glynn: <unk> finished 2023 with more than $3 5 million connected homes, giving us a large installed base of satisfied customers that we can cross sell our products and service capabilities to as we work towards rolling out our residential energy technology ecosystem.

Christopher Glynn: We experienced another important event during the fourth quarter as we were awarded grants from the department of energy to utilize our residential energy technology solutions for resiliency focused programs in Puerto Rico, and Massachusetts over the next several years.

Aaron Paul Jagdfeld: Ecobee finished 2023 with more than 3.5 million connected homes, giving us a large installed base of satisfied customers that we can cross-sell our products and service capabilities to as we work towards rolling out our residential energy technology ecosystem. We experienced another important event during the fourth quarter, as we were awarded grants from the Department of Energy to utilize our residential energy technology solutions for resiliency-focused programs in Puerto Rico and Massachusetts over the next several years. The program in Puerto Rico is expected to utilize our energy storage systems to provide clean energy independence for residents.

Christopher Glynn: The program in Puerto Rico is expected to utilize our energy storage systems to provide clean energy independence for residents. The program in Massachusetts is expected to include our energy storage systems eco be smart thermostats and grid services capabilities, demonstrating our ability to integrate multiple technologies to support our homes energy needs, while also providing additional value for grid.

Christopher Glynn: Operators by aggregating and managing these distributed energy resources in a virtual power plant setting.

Christopher Glynn: As previously mentioned, we made an important minority investment in wall box during the fourth quarter, which provides for a future seat on the wall box board of directors and creates the opportunity for global commercial collaboration across our residential and C&I distribution networks. The.

Aaron Paul Jagdfeld: The program in Massachusetts is expected to include our energy storage systems, Ecobee smart thermostats, and grid services capabilities, demonstrating our ability to integrate multiple technologies to support a home's energy needs while also providing additional value for grid operators by aggregating and managing these distributed energy resources in a virtual power plant setting. As previously mentioned, we made an important minority investment in Walbox during the fourth quarter, which provides for a future seat on the Walbox Board of Directors and creates the opportunity for global commercial collaboration across our residential and C&I distribution networks. The partnership also brings future access to industry-leading bi-directional charging development, which we believe will play an increasingly critical role in our emerging residential energy technology ecosystem as the penetration of electric vehicles increases in the future.

Christopher Glynn: The partnership also brings future access to industry, leading bidirectional charging development, which we believe will play an increasingly critical role in our emerging residential energy technology ecosystem as the penetration of electric vehicles increases in the future.

Christopher Glynn: For 2024, we expect gross sales for residential energy technology products and services, including energy storage energy management devices and services connectivity and home EV charging solutions to be in a range of $325 million to $350 million a year over year growth rate of approximately 25%.

Christopher Glynn: We continue to make meaningful investments in building out our residential energy ecosystem, including our next generation energy storage system, which is expected to be commercially available later in the second half of this year.

Aaron Paul Jagdfeld: For 2024, we expect gross sales for residential energy technology products and services, including energy storage, energy management devices and services, connectivity, and home EV charging solutions, to be in a range of $325 to $350 million, a year-over-year growth rate of approximately 25 percent. We continue to make meaningful investments in building out our residential energy ecosystem, including our next-generation energy storage system, which is expected to be commercially available later in the second half of this year. I would now like to provide some commentary on our commercial and industrial products. Global C&I product sales were approximately flat on a year-over-year basis in the fourth quarter and increased 19% for the full year 2023 to approximately $1.5 billion. Domestic C&I product sales declined modestly during the fourth quarter as softness in shipments to the telecom and rental channels offset continued strength in sales to our industrial distributors and other direct customers for applications beyond standby.

Christopher Glynn: I would now like to provide some commentary on our commercial and industrial products.

Christopher Glynn: Global C&I product sales were approximately flat on a year over year basis in the fourth quarter and increased 19% for the full year of 2023 to approximately $1 $5 billion.

Christopher Glynn: Domestic C&I product sales declined modestly during the fourth quarter as softness in shipments to the telecom and rental channels offset continued strength in sales to our industrial distributors and other direct customers for beyond standby applications.

Christopher Glynn: Shipments of C&I generators through our North American distributor channel again grew at a robust rate in the fourth quarter.

Christopher Glynn: Although order patterns in the second half of the year were impacted by extended product timelines quoting activity remained resilient despite being off the peak levels experienced earlier in 2023.

Christopher Glynn: Shipments of natural gas generators used in applications beyond traditional standby projects increased at a very strong rate during the fourth quarter.

Christopher Glynn: As the leading provider of natural gas generators, we continue to pioneer new market opportunities for beyond standby generator applications and other energy technology solutions in C&I end markets.

Christopher Glynn: We are working to facilitate the development of our increasingly comprehensive products and solutions and multi asset applications, such as pairing our smart grid readiness gas generators with our emerging C&I storage connectivity advanced controls and grid services platforms.

Aaron Paul Jagdfeld: Shipments of C&I generators through our North American Distributor Channel again grew at a robust rate in the fourth quarter. Although order patterns in the second half of the year were impacted by extended product timelines, quoting activity remained resilient despite being off the peak levels experienced earlier in 2023. Shipments of natural gas generators used in applications beyond traditional standby projects increased at a very strong rate during the fourth quarter.

Christopher Glynn: While we believe this is an important long term growth opportunity today's higher interest rates are putting pressure on project timelines and as a result, we expect shipments of products for beyond standby related applications to be negatively impacted in 2024.

Christopher Glynn: Sales to our national and independent rental equipment customers in the fourth quarter declined from the prior year as order patterns remained weaker than a stronger prior year comparisons despite.

Aaron Paul Jagdfeld: As the leading provider of natural gas generators, we continue to pioneer new market opportunities for beyond standby generator applications and other energy technology solutions in C&I and markets. We are working to facilitate the development of our increasingly comprehensive products and solutions in multi-asset applications, such as pairing our smart grid-ready natural gas generators with our emerging CNI storage, connectivity, advanced controls, and grid services platforms. While we believe this is an important long-term growth opportunity, today's higher interest rates are putting pressure on project timelines, and as a result, we expect shipments of products for beyond-standby-related applications to be negatively impacted in 2024. Sales to our National and Independent Rental Equipment customers in the fourth quarter declined from the prior year as order patterns remained weaker than the prior year comparison.

Christopher Glynn: Despite the normal cyclical softness in this vertical that is impacting our overall 2024 expectations. We continue to believe that this end market has substantial runway for growth given the critical need for future infrastructure related projects that leverage our products sold into the rental equipment channels.

Christopher Glynn: As expected shipments to national Telecom customers declined again during the quarter, particularly when compared to the very strong prior year fourth quarter level as these customers further reduced capital expenditures.

Christopher Glynn: Given our current visibility, we expect shipments to telecom national accounts will remain soft in the coming quarters weighing on our overall 2024 outlook. However, we have experienced these capex spending cycles over the 40 years, we've been serving this market and we believe the near term cyclicality will not change the longer term secular trend of increasing global tower network hub counts.

Christopher Glynn: And the increasingly critical nature of wireless communications and related services that are requiring significantly greater power reliability.

Aaron Paul Jagdfeld: Despite the normal cyclical softness in this vertical that is impacting our overall 2024 expectations, we continue to believe that this end market has substantial runway for growth given the critical need for future infrastructure-related projects that leverage our products sold into the rental equipment channels. As expected, shipments to national telecom customers declined again during the quarter, particularly when compared to the very strong prior year fourth quarter level, as these customers further reduced capital expenditures. Given our current visibility, we expect shipments to telecom national accounts will remain soft in the coming quarters, weighing on our overall 2024 outlook. However, we've experienced these CapEx spending cycles over the 40 years we've been serving this market, and we believe the near-term cyclicality will not change the longer-term secular trend of increasing global tower and network hub counts and the increasingly critical nature of wireless communications and related services that are requiring significantly greater power reliability.

Christopher Glynn: Internationally total sales were pressured by lower intersegment sales primarily related to declines in intercompany shipments from our Mexican operations to the domestic telecom market as well as lower shipments of portable generators in Europe as energy security concerns, resulting from the Russia, Ukraine War continued to abate.

Christopher Glynn: Helping to offset this weakness international net sales in other emerging markets, such as India, The Middle East and East Asia grew at a strong rate during the quarter.

Christopher Glynn: International growth remains an important strategic focus for us moving forward with significant opportunities and continued geographic expansion and further penetration of underserved markets as we implement the generate playbook across a growing global footprint.

Christopher Glynn: As disclosed in our press release. This morning, we expect global C&I product sales to decline by approximately 10% for full year 2024 as weakness in shipments to certain direct telecom rental and beyond standby customers is expected to more than offset growth in other regions and channels.

Aaron Paul Jagdfeld: Internationally, total sales were pressured by lower intersegment sales, primarily related to declines in intercompany shipments from our Mexican operations to the domestic telecom market, as well as lower shipments of portable generators in Europe as energy security concerns resulting from the Russia-Ukraine war continued to abate. Helping to offset this weakness, international net sales in other emerging markets, such as India, the Middle East, and East Asia, grew at a strong rate during the quarter.

Christopher Glynn: In closing this morning, we believe our fourth quarter results reflect a return to positive momentum in our overall business as our residential product sales began to grow again, which should help to offset cyclical softness in certain C&I customers and end markets.

Christopher Glynn: We believe we are nearing the end of the excess field inventory overhang for home standby generators and expect to realize strong year over year growth in shipments of these products in 2024.

Aaron Paul Jagdfeld: International growth remains an important strategic focus for us moving forward, with significant opportunities for continued geographic expansion and further penetration of underserved markets as we implement the Generac playbook across a growing global footprint. As disclosed in our press release this morning, we expect global C&I product sales to decline by approximately 10% for full year 2024 as weakness in shipments to certain direct telecom, rental, and beyond standby customers is expected to more than offset growth in other regions and channels. In closing, this morning, we believe our fourth-quarter results reflect a return to positive momentum in our overall business as our residential product sales began to grow again, which should help to offset cyclical softness in certain C&I customers and end markets.

Christopher Glynn: This momentum gives us confidence in continuing to focus on building out our longer term vision for both residential and C&I energy technology ecosystems.

Christopher Glynn: Our record cash flow performance in the fourth quarter is continued evidence of the earnings power of our business and gives us flexibility to prioritize further organic investments execute on strategic acquisitions, and Opportunistically return capital to shareholders.

Christopher Glynn: Most importantly of all the megatrends that support our longer term opportunities remain firmly intact and our conviction in our powering smarter World Enterprise strategy is as strong as ever.

Christopher Glynn: I'll now turn the call over to York to provide further details on our fourth quarter and full year 2023 results and our outlook for 2020 for Europe. Thanks, Eric.

York Anthony Ragen: Looking at fourth quarter 2023 results in more detail.

Aaron Paul Jagdfeld: We believe we are nearing the end of the excess field inventory overhang for home standby generators and expect to realize strong year-over-year growth in shipments of these products in 2024. This momentum gives us confidence in continuing to focus on building out our longer-term vision for both residential and C&I energy technology ecosystems. Our record cash flow performance in the fourth quarter is continued evidence of the earnings power of our business and gives us flexibility to prioritize further organic investments, execute on strategic acquisitions, and opportunistically return capital to shareholders. Most importantly, the megatrends that support our longer-term opportunities remain firmly intact, and our conviction in our Powering a Smarter World enterprise strategy is as strong as ever. I'll now turn the call over to York to provide further details on our fourth quarter and full year 2023 results and our outlook for 2024.

York Anthony Ragen: Net sales increased 1% to $1.06 billion during the fourth quarter of 2023 as compared to 1.05 billion in the prior year fourth quarter.

York Anthony Ragen: Combination of favorable contributions from acquisitions and foreign currency had an approximate 1% impact on revenue growth during the quarter.

York Anthony Ragen: Net sales for the full year 2023 decreased 12% to approximately $4.02 billion.

York Anthony Ragen: The combination of favorable contributions from acquisitions and foreign currency had an approximate 2% impact on revenue during the full year.

York Anthony Ragen: Briefly looking at consolidated net sales for the fourth quarter by product class.

York Anthony Ragen: Residential product sales increased 1% to $580 million as compared to $575 million in the prior year.

Christopher Glynn: Growth in residential product sales was driven by a strong 10% increase in shipments of home standby generators.

Christopher Glynn: In a more modest increase in energy technology products led by <unk>.

Christopher Glynn: This was partially offset by lower portable generator shipments in the U S and Europe, given a tough prior year comparison.

York Anthony Ragen: Thanks, Aaron. The Bulletproof Executive 2013, Looking at fourth quarter 2023 results in more detail. Net sales increased 1% to $1.06 billion during the fourth quarter of 2023 as compared to $1.05 billion in the prior year fourth quarter. The combination of favorable contributions from acquisitions and foreign currency had an approximate 1% impact on revenue growth during the quarter. Net sales for the full year 2023 decreased 12% to approximately $4.02 billion.

Christopher Glynn: Commercial and industrial product sales for the fourth quarter of 2023 increased slightly to $363 million as compared to $361 million in the prior year quarter.

Christopher Glynn: Contributions from foreign currency and the rescue storage acquisition contributed approximately 3% growth during the quarter.

Christopher Glynn: This core sales decline is due to weakness in sales to our domestic telecom and national equipment rental customers, partially offset by an increase in C&I products shipments to industrial distributors and direct customers for beyond standby applications. In addition to strength in international sales into emerging markets.

York Anthony Ragen: The combination of favorable contributions from acquisitions and foreign currency had an approximate 2% impact on revenue during the full year. However, briefly looking at consolidated net sales for the fourth quarter by product class, residential products failed to increase 1% to $580 million as compared to $575 million in the prior year.

Christopher Glynn: Net sales for the other products and services increased approximately 6% to $120 million as compared to $113 million in the fourth quarter of 2022.

Christopher Glynn: Core sales growth of 5% was primarily due to growth in our domestic C&I service offerings from our owned industrial distributors.

York Anthony Ragen: Growth in residential product sales was driven by a strong 10% increase in shipments of home standby generators and a more modest increase in energy technology products led by Ecobee. However, this was partially offset by lower portable generator shipments in the U.S. and Europe, given a tough prior year comparison. Commercial and industrial product sales for the fourth quarter of 2023 increased slightly to $363 million as compared to $361 million in the prior year quarter. Contributions from foreign currency and the refuse storage acquisition contributed approximately three percent growth during the quarter.

Christopher Glynn: Aftermarket service parts connectivity subscription revenue and <unk> services.

Christopher Glynn: Gross profit margin was 36, 5% compared to 32, 7% in the prior year fourth quarter as a result of favorable sales mix production efficiencies and lower raw material and logistics costs as supply chain challenges abated relative to the prior year.

Christopher Glynn: Operating expenses increased $2 million or 1% as compared to the fourth quarter of 2022.

Christopher Glynn: This increase was primarily driven by higher employee and marketing costs.

Christopher Glynn: The current year and prior year quarters also include approximately $11 million and $10 million, respectively of one time items that we believe are not indicative of our ongoing operations.

York Anthony Ragen: This core sales decline is due to weakness in sales to our domestic telecom and national equipment rental customers, partially offset by an increase in C&I product shipments to industrial distributors and direct customers for beyond standby applications, in addition to strengthening international sales and emerging markets. Net sales for other products and services increased approximately 6% to $120 million as compared to $113 million in the fourth quarter of 2022. Core sales growth of 5% was primarily due to growth in our domestic C&I service offerings from our owned industrial distributors.

Christopher Glynn: The reconciliation schedules in our earnings release for more information on these items.

Christopher Glynn: Adjusted EBITDA before deducting for Noncontrolling interests as defined in our earnings release was $213 million or 20% of net sales in the fourth quarter as compared to $174 million or 16, 6% of net sales in the prior year.

Christopher Glynn: For the full year 2023, adjusted EBITDA before deducting for Noncontrolling interests was 638 million or 15, 9% of net sales as.

York Anthony Ragen: Aftermarket Service Parts, Connectivity Subscription Revenue, and Ecobee Services. Gross profit margin was 36.5% compared to 32.7% in the prior year fourth quarter as a result of favorable sales mix, production efficiencies, and lower raw material and logistics costs as supply chain challenges abated relative to the prior year. Operating expenses increased $2 million, or 1%, as compared to the fourth quarter of 2022.

Christopher Glynn: As compared to $825 million or 18, 1% in the prior year.

Christopher Glynn: I will now briefly discuss financial results for our two reporting segments domestic segment total sales, including intersegment sales increased 1% to 891 million in the quarter as compared to 881 million in the prior year.

Christopher Glynn: Adjusted EBITDA for the segment was $192 million, representing 21, 6% of total sales.

Christopher Glynn: As compared to 144 million in the prior year or 16, 4%.

York Anthony Ragen: This increase was primarily driven by higher employee and marketing costs. The current year and prior year quarters also include approximately 11 million and 10 million, respectively, of one-time items that we believe are not indicative of our ongoing operation. See the reconciliation schedules in our earnings release for more information on these items. Adjusted EBITDA before deducting for non-controlling interests, as defined in our earnings release, $213 million or 20% of net sales in the fourth quarter, compared to $174 million or 16.6% of net sales in the prior year. For the full year 2023, adjust the EBITDA before deducting for non-controlling interest to $638 million or 15.9% of net sales, as compared to $825 million or 18.1% in the prior year. I will now briefly discuss financial results for our two reporting segments. Domestic segment total sales, including intersegment sales, increased 1% to $891 million in the quarter as compared to $881 million in the prior year.

Christopher Glynn: For the full year 2023 domestic segment total sales decreased 15% over the prior year to $332 billion.

Christopher Glynn: Adjusted EBITDA margins for the segment were 15, 8% compared to 18, 2% in the prior year full year.

Christopher Glynn: International segment total sales, including inter segment sales decreased 13% to $190 million in the quarter as compared to 219 million in the prior year quarter, including an approximate 7% sales growth contribution from foreign currency and acquisitions.

Christopher Glynn: Resulting in approximately 20% core total sales decline.

Christopher Glynn: Adjusted EBITDA for the segment before deducting for Noncontrolling interests was $20 4 million or 10, 7% of total sales.

Christopher Glynn: As compared to $29 5 million or 13, 5% in the prior year quarter.

Christopher Glynn: For the full year 2023 International segment total sales increased 6% over the prior year to $838 million.

Christopher Glynn: Adjusted EBITDA margins for the segment before deducting for Noncontrolling interests were 13, 7% of total sales during 2023 as.

Christopher Glynn: As compared to 13, 8% in the prior year full year.

York Anthony Ragen: Adjusted EBITDA for this segment was $192 million, representing 21.6% of total sales, as compared to $144 million in the prior year, or 16.4%. For the full year 2023, domestic segment total sales decreased 15% over the prior year to $3.32 billion. Adjusted without margins for the segment were 15.8% compared to 18.2% in the prior year full year. International segment total sales, including inter-segment sales, decreased 13 percent to $190 million in the quarter, as compared to $219 million in the prior quarter, including an approximate 7 percent sales growth contribution from foreign currency and acquisitions, resulting in approximately a 20% core total sales decline.

Christopher Glynn: Now switching back to our financial performance for the fourth quarter of 2003 on a consolidated basis.

Christopher Glynn: As disclosed in our earnings release GAAP net income for the company in the quarter was $97 million as compared to $71 million for the fourth quarter of 2022.

Christopher Glynn: Current year net income includes approximately $5 million of additional interest expense compared to the prior year due to higher borrowings and interest rates.

Christopher Glynn: GAAP income taxes for the current year fourth quarter were $30 million or an effective tax rate of 23, 7%.

Christopher Glynn: As compared to $13 $6 million or an effective tax rate of 15, 5% for the prior year.

Christopher Glynn: The increase in effective tax rate was primarily driven by discrete tax benefits in the prior year quarter that did not repeat in the current year.

Christopher Glynn: Diluted net income per share for the company on a GAAP basis was $1 57 in the fourth quarter of 2023 compared to 83 in the prior year.

York Anthony Ragen: Adjusted EBITDA for the segment, before deducting for non-controlling interest, was $20.4 million, or 10.7% of total sales, as compared to $29.5 million, or 13.5%, in the prior year quarter. For the full year 2023, international segment total sales increased 6% over the prior year to $838 million. Adjusted EBITDA margins for the segment before deducting for non-controlling interest were 13.7% of total sales during 2023, as compared to 13.8% in the prior year full year. Now switching back to our financial performance for the fourth quarter of twenty-three on a consolidated basis. As disclosed in our earnings release, the gap net income for the company in the quarter was $97 million as compared to $71 million for the fourth quarter of 2022. The current year net income includes approximately $5 million of additional interest expense compared to the prior year due to higher borrowings and interest rates. Gap income taxes for the current year's fourth quarter were $30 million, or an effective tax rate of 23.7%, as compared to $13.6 million, or an effective tax rate of 15.5%, for the prior year.

Christopher Glynn: The strong year over year increase in net earnings per share relative to growth in net income was primarily primarily driven by an unfavorable $18 4 million redeemable noncontrolling interest redemption value adjustment that was recorded in the prior year period as well as a lower share count in the current year period.

Christopher Glynn: Adjusted net income for the company as defined in our earnings release was 126 million in the current year quarter are $2 seven per share. This compares to adjusted net income of 113 million in the prior year were $1 78 per share.

Christopher Glynn: Cash flow from operations was $317 million as compared to 101 million in the prior year fourth quarter.

Christopher Glynn: And free cash flow as defined in our earnings release was an all time quarterly record of $266 million as compared to $80 million in the same quarter last year.

Christopher Glynn: The significant improvement in free cash flow was primarily due to a $144 million reduction in inventory during the quarter and higher and higher operating earnings.

Christopher Glynn: This was partially offset by higher capital expenditures during the current year quarter.

Christopher Glynn: Total debt outstanding at the end of the quarter was $1 five 8 billion.

Christopher Glynn: <unk> on a gross debt leverage ratio at the end of the fourth quarter of two five times on an as reported basis.

Christopher Glynn: Additionally, during the fourth quarter, we repurchased approximately one 3 million shares of our common stock for approximately $151 million.

York Anthony Ragen: The increase in the effective tax rate was primarily driven by discrete tax benefits in the prior quarter that did not repeat in the current year. Diluted net income per share for the company on a gap basis was $1.57 in the fourth quarter of 2023, compared to 83 cents in the prior year. A strong year-over-year increase in net earnings per share relative to growth in net income was primarily driven by an unfavorable $18.4 million redeemable non-controlling interest redemption value adjustment that was recorded in the prior year period, as well as a lower share count in the current year period. Adjusted net income for the company, as defined in our arranged release, was $126 million in the current year quarter, or $2.07 per This compares to adjusted net income of $113 million in the prior year, or $1.78 per share. Cash flow from operations was $317 million as compared to $101 million in the prior year fourth quarter.

Christopher Glynn: As disclosed in our press release. This morning, the company's board of Directors has approved a new stock repurchase program that allows for the repurchase of up to $500 million of our common stock over a 24 month period.

Christopher Glynn: Placing the remaining balance on the previous program.

Christopher Glynn: For the full year cash flow from operations was an all time record of $522 million as compared to 59 million in the prior year and free cash flow as defined in our earnings release was $396 million as compared to minus $24 million in 2022.

Christopher Glynn: We strategically deploy deployed approximately 153 million of capital in 2023 with the acquisition of refuse storage systems. The purchase of the remaining 20% minority ownership interest in <unk> and a minority investment in <unk>.

Christopher Glynn: In addition capital expenditures capital expenditures totaled $129 million to support additional capacity for future organic growth.

York Anthony Ragen: The free cash flow, as defined in our earnings release, was an all-time quarterly record of $266 million, as compared to $80 million in the same quarter last year. The significant improvement in free cash flow was primarily due to a $144 million reduction in inventory during the quarter and higher operating earnings. This was partially offset by higher capital expenditures during the current year quarter. Total debt outstanding at the end of the quarter was $1.58 billion, resulting in a gross debt leverage ratio at the end of the fourth quarter of 2.5 times on an as-reported basis.

Christopher Glynn: We also opportunistically repurchased approximately two 2 million shares of our common stock for $252 million during the second half of the year.

Christopher Glynn: Moving forward, we will continue to operate within our disciplined and balanced capital allocation framework as we accelerate our powering a smarter world enterprise strategy and execute other shareholder value enhancing opportunities.

Christopher Glynn: With that I will now provide further comments on our new outlook for 2024.

Christopher Glynn: As disclosed in our press release. This morning, we are initiating 2024 net sales guidance that anticipates a return to growth for the full year period.

York Anthony Ragen: Additionally, during the fourth quarter, we repurchased approximately 1.3 million shares of our common stock for approximately $151 million. As disclosed in our press release this morning, the company's board of directors has approved a new stock repurchase program that allows for the repurchase of up to $500 million of our common stock over a 24-month period, replacing the remaining balance on the previous program. For the full year, cash flow from operations was an all-time record of $522 million, as compared to $59 million in the prior year.

Christopher Glynn: This increase is expected to be led by higher home standby generator sales and shipments are projected to be more closely aligned with activations during 2024.

Christopher Glynn: We also expect our residential energy technology sales to grow as we expand distribution and launch our next generation energy storage system later in 2024.

Christopher Glynn: And we continue to drive strong growth with our <unk> products and solutions.

Christopher Glynn: Overall, we expect residential product sales to grow in the mid teens range for 2024.

Christopher Glynn: However, in our C&I product category.

Christopher Glynn: Cyclical pressures for certain telecom rental and beyond standby customers are expected to be more than offset.

York Anthony Ragen: And free cash flow, as defined in our earnings release, was $396 million, as compared to minus $24 million in 2022. We strategically deployed approximately $153 million in capital in 2023 with the acquisition of Refuse Storage Systems, the purchase of the remaining 20% minority ownership interest in Pramac, and the minority investment in Walbox. In addition, capital expenditures totaled $129 million to support additional capacity for future organic growth. We also opportunistically repurchased approximately 2.2 million shares of our common stock for $252 million during the second half of the year.

Christopher Glynn: I expect to more than offset continued growth in broader C&I end markets around the world.

Christopher Glynn: As a result, we are projecting global C&I sales to decline by approximately 10% in 2024 compared to the prior year.

Christopher Glynn: As a result of these factors, we expect consolidated net sales for the full year to increase between 3% to 7% as compared to the prior year, which includes a slight payroll benefit from foreign currency.

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

Christopher Glynn: Consistent with our historical approach this outlook does not assume the benefit of a major power outage event during the year such as a category.

York Anthony Ragen: Moving forward, we'll continue to operate within our disciplined and balanced capital allocation framework as we accelerate our Powering a Smarter World enterprise strategy and execute other shareholder value-enhancing opportunities. With that, I will now provide further comments on our new outlook for 2024. As disclosed in our press release this morning, we're initiating 2024 NET-FAIL guidance that anticipates a return to growth for the full year period. This increase is expected to be led by higher home standby generator sales as shipments are projected to be more closely aligned with activations during 2024. We also expect our residential energy technology sales to grow as we expand distribution and launch our next-generation energy storage system later in 2024, and we continue to drive strong growth with our Ecobee products and solutions.

Christopher Glynn: <unk>, three or higher landed hurricane or major winter storm, which we believe could add $50 million to $100 million of sales.

Christopher Glynn: As a result of this top line outlook, we expect sales to be in line with normal historical seasonality, resulting in overall net sales in the first half being approximately 45% weighted in sales in the second half being approximately 55% weighted.

Christopher Glynn: Specifically for the first quarter, we expect overall net sales to be nearly flat from the prior year first quarter.

Christopher Glynn: With solid growth in residential product sales offset by a decline in C&I product shipments.

Christopher Glynn: With Q1 2024 being the seasonal low point of the year, we expect sales for each product class to increase sequentially throughout the year.

Christopher Glynn: Looking at our gross margin expectations for the full year 2024.

Christopher Glynn: We expect the realization of lower input costs and favorable mix impact from higher home standby sales volumes to drive continued year over year improvement throughout the year.

York Anthony Ragen: Overall, we expect residential product sales to grow in the mid-teens range for 2024. However, in our C&I product category, cyclical pressures for certain telecom, rental, and beyond standby customers are expected to be more than offset by continued growth in broader C&I end markets around the world. As a result, we are projecting global C&I sales to decline by approximately 10% in 2024 compared to the prior year.

Christopher Glynn: As a result, we expect gross margins to increase by approximately 300 basis points for the full year as compared to 2023.

Christopher Glynn: From a seasonality perspective, we expect gross margins to increase by approximately 350 basis points on a year over year basis in the first quarter to approximately 34% to 34, 5% due to favorable sales mix impact from higher home standby shipments and realization of lower input costs.

York Anthony Ragen: As a result of these factors, we expect consolidated net sales for the full year to increase between 3% to 7% as compared to the prior year, which includes a slight unforeseen benefit from foreign currency. Importantly, this guidance assumes a level of power outage activity during the year in line with the longer-term baseline average. Consistent with our historical approach, this outlook does not assume the benefit of a major power outage event during the year, such as a Category 3 or higher landed hurricane or major winter storm, which we believe could add $50 to $100 million of sales. As a result of this top line outlook, we expect sales to be in line with normal historical seasonality, resulting in overall net sales in the first half being approximately 45% weighted, and sales in the Specifically, for the first quarter, we expect overall net sales to be nearly flat from the prior year's first quarter, with solid growth in residential product sales offset by a decline in C&I product shipment.

Christopher Glynn: These factors are also expected to result in sequential gross margin improvement into the second half of the year with second half gross margins projected in the 38% range.

Christopher Glynn: With respect to operating expenses, we continue to invest heavily in the resources needed to position our business for longer term growth in new and existing markets.

Christopher Glynn: Maintaining a healthy heavy focus on supporting innovation and executing our strategic initiatives across the enterprise.

Christopher Glynn: As a result of these investments we expect operating expenses as a percentage of sales to be approximately 23% for the full year 2024.

Christopher Glynn: We expect to leverage these costs as we sequentially grow from first half to second half helping to improve our EBITDA margins throughout the year.

Christopher Glynn: As a result of our gross margin and operating expense expectations adjusted EBITDA margins before deducting for Noncontrolling interests are expected to be approximately 16, five to 17, 5% for the full year compared to 15, 9% in 2023.

Christopher Glynn: From a seasonality perspective, we expect adjusted EBITDA margins to improve significantly as we move throughout the year.

Christopher Glynn: Specifically regarding the first quarter adjusted EBITDA margins are expected to be the lowest for the year in the mid 12% range.

York Anthony Ragen: With Q1 2024 being the seasonal low point of the year, we expect sales for each product class to increase sequentially throughout the year. Looking at our gross margin expectations for the full year 2024. We expect the realization of lower input costs and the farewell mixed impact from higher home standby sales volumes to drive continued year-over-year improvement throughout the year. As a result, we expect gross margins to increase by approximately 300 basis points for the full year as compared to 2023. From a seasonality perspective, we expect gross margins to increase by approximately 350 basis points on a year-over-year basis in the first quarter to approximately 34 to 34.5 percent due to favorable sales mix impact from higher home standby shipments and realization of lower input costs.

Christopher Glynn: And then improve sequentially throughout the year returning to approximately 20% in the fourth quarter.

Christopher Glynn: As a result second half adjusted EBITDA margins are expected to be nearly 600 basis points higher than the first half margins.

Christopher Glynn: Additionally, as Aaron discussed we continue to make significant investments in our residential energy technology products and solutions to capitalize on the opportunities presented by these robust long term growth markets.

Christopher Glynn: As a result, we currently expect residential energy technology to deduct to dilute our EBITDA margins by approximately 350 to 400 basis points for the full year 2024, similar to the level of dilution experienced in 2023.

Christopher Glynn: As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2024.

York Anthony Ragen: These factors are also expected to result in sequential gross margin improvement into the second half of the year, with second half gross margins projected in the 38% range. With respect to operating expenses, we continue to invest heavily in the resources needed to position our business for longer-term growth in new and existing markets, maintaining a heavy focus on supporting innovation and executing our strategic initiatives across the enterprise. As a result of these investments, we expect operating expenses as a percentage of sales to be approximately 23% for the full year 2024.

Christopher Glynn: Importantly, we arrive at appropriate.

Christopher Glynn: Estimates for adjusted net income and adjusted earnings per share.

Christopher Glynn: Add back items should be reflected net of tax using our expected effective tax rate.

Christopher Glynn: For 2024, our GAAP effective tax rate is expected to be between 25% to 26% as compared to 25, 2%.

Christopher Glynn: Full year GAAP tax rate for 2023.

Christopher Glynn: We expect interest expense to be approximately $85 million to $90 million, assuming no additional term loan or revolver principal prepayments during the year and assuming sulfur rates decline throughout 2024 in line with market expectations.

York Anthony Ragen: We expect to leverage these costs as we sequentially grow from first half to second half, helping to improve our EBITDA margins throughout the year. As a result of our gross margin and operating expense expectations, adjusted for our margins before deducting for non-controlling interests are expected to be approximately 16.5 to 17.5 percent for the full year, compared to 15.9 percent in 2023. From a seasonality perspective, we expect adjusted even time margins to improve significantly as we move throughout the year. Specifically, regarding the first quarter, adjusted without margins are expected to be the lowest for the year in the mid-12% range, and then they will improve sequentially throughout the year, returning to approximately 20% in the fourth quarter. As a result, the second half adjusted EBIT without margins is expected to be nearly 600 basis points higher than the first half margin.

Christopher Glynn: Our capital expenditures are projected to be approximately 3% of our forecasted net sales for the year at the high end of our historical range as we add incremental C&I manufacturing capacity and execute other project projects to support future growth expectations.

Christopher Glynn: Depreciation expense is forecast to be approximately $70 million to $73 million in 2024, given our assumed capex guidance.

Christopher Glynn: GAAP intangible amortization expenses in 2024 is expect to be approximately $95 million to $100 million during the year.

Christopher Glynn: Stock compensation expense is expected to be between $55 million to $60 million for the year.

Christopher Glynn: Operating and free cash flow generation is expected to be disproportionately weighted toward the second half of the year in 2024 similar to 2023.

Christopher Glynn: For the full year, we expect free cash flow conversion from adjusted net income to be strong at approximately 100% as we continue to monetize working capital builds of prior years.

York Anthony Ragen: Additionally, as Aaron discussed, we continue to make significant investments in our residential energy technology products and solutions to capitalize on the opportunities presented by these robust, long-term growth markets. As a result, we currently expect residential energy technology to dilute our EPA-DEL margins by approximately 350 to 400 basis points for the full year 2024, similar to the level of dilution experienced in 2023. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2024. Importantly, we arrive at appropriate... Estimates for Adjusted Demand Income and Adjusted Earnings per Share. Add back items should be reflected net of tax using our expected effective tax rate. For 2024, our GAAP effective tax rate is expected to be between 25-26% as compared to 25.2%, a full year gap tax rate for 2023. We expect interest expense to be approximately $85 to $90 million, assuming no additional term loan or revolver principal prepayments during the year and assuming SOFR rates decline throughout 2024 in line with market expectations.

Christopher Glynn: Our full year weighted average diluted share count is expected to decrease to approximately 61 million shares as compared to $62 1 million shares in 2023, which reflects the share repurchases that were completed in the latter half of 2023.

Christopher Glynn: Finally, the 2024 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value.

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

Speaker Change: We will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star. One again, we ask that you limit yourself to one question and return to the queue for any follow up questions.

Speaker Change: That will be compile the Q&A roster.

Speaker Change: Our first question comes from George <unk> with Canaccord Genuity. Your line is open.

George: Hi, good morning, and thanks for taking my question.

George: Hey, Jordan.

George: Could you just maybe focus on the agency residential growth assumed for 2020, Florida mid teens can you just help us understand what the underlying activation growth is.

York Anthony Ragen: Our capital expenditures are projected to be approximately 3% of our forecasted net sales for the year, at the high end of our historical range as we add incremental C&I manufacturing capacity and execute other projects to support future growth expectations. Appreciation expenses are forecast to be approximately $70 to $73 million in 2024, given our assumed CapEx guidance. The gap in tangible amortization expenses in 2024 is expected to be approximately $95-100 million during the year. Stock compensation expense is expected to be between $55 to $60 million for the year. Operating and free cash flow generation is expected to be disproportionately weighted toward the second half of the year in 2024, similar to 2023.

Speaker Change: But is that guidance for the year. Thank you.

Jordan: Yes, George I mean, we're not expecting a decline I mean, obviously in the current environment with the softer consumer tied to big ticket ticket discretionary we we didn't want to take an aggressive assumption on the activation rate assumptions, obviously, what we said in the prepared remarks home standby, we expect to grow somewhere in that mid teens.

Jordan: Range year over year similar to the overall residential category that we guided that way.

Jordan: Again, a lot of that is the fact that.

Jordan: The destock of field inventory in 2023.

Jordan: While some of that is going to continue here in Q1 that will abate here in Q2 and for the rest of the year. So a good chunk of that year over year growth is that is the fact that we don't have that.

York Anthony Ragen: For the full year, we expect free cash flow conversion from adjusted net income to be strong at approximately 100 percent as we continue to monetize working capital builds of prior years. Our full year weighted average diluted share count is expected to decrease to approximately 61 million shares as compared to 62.1 million shares in 2023, which reflects the share repurchases that were completed in the latter half of 2023. Finally, this 2024 Outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value. This concludes our prepared remarks. At this time, we'd like to open up the call for questions. Then, we'll conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced.

Jordan: That overhang on the field inventory and but but we arent assuming that the home standby market is declining.

Jordan: Modest growth now, it's kind of it's kind of holding that new and higher baseline assumption that we talked about in the absence of kind of power outage activity being above the baseline we guide with it in line. So I think in the prepared remarks, we even said we don't include any assumptions for major outages and that could include that that could drive additional.

Jordan: Opportunities, both with home standby and portable generators actually.

Jordan: But but the assumption I think you are right in kind of big ticket discretionary items.

Jordan: In our environment.

Jordan: <unk> where rates remain somewhat elevated here.

Operator: To withdraw your question, please press star 1-1 again. We ask that you limit yourself to one question and return to the queue for any follow-up questions. One moment while we compile the Q&A roster. Our first question comes from George Gianaricas with Canaccord Genuity. Your line is open. Hi, good morning, and thanks for taking my question. Hey, Jordan.

Jordan: We think that consumer demand.

Jordan: Could could remain kind of flattish and kind of at that baseline level.

Speaker Change: One moment.

Jordan: Question.

Jordan: Okay.

Jordan: Our next question comes from Michael Halloran with Baird. Your line is open.

Michael Patrick Halloran: Hey, good morning, everyone.

Michael Patrick Halloran: Hey, Brian.

Michael Patrick Halloran: Could you talk about the energy tech side of things, obviously, the 25% growth.

Aaron Paul Jagdfeld: It would be maybe focus on the HSB or the residential growth assumed for 2024 and the mid teens. Can you just help us understand what the underlying activation growth is that buttresses that guidance for the year? Thank you.

Michael Patrick Halloran: Maybe a little bit of understanding what it would be versus the.

Michael Patrick Halloran: Other products, but more importantly, maybe talk about the.

Brian: The expectations for how you're expecting new product launches.

Aaron Paul Jagdfeld: Yeah, George, I mean, we're not expecting a decline. Obviously, in the current environment, with a softer consumer tied to big-ticket discretionary spending, we didn't want to take an aggressive assumption on the activation rate assumption. Obviously, what we said in the prepared remarks, home standby, we expect to grow somewhere in that mid-teens range year-over-year, similar to the overall residential category that we guided that way. Again, a lot of that is the fact that, you know, the destock of field inventory in 2023, while some of that is going to continue here in Q1, that will abate here in Q2 and for the rest of the year. So a good chunk of that year-over-year growth is the fact that we don't have that overhang on the field inventory, but we aren't assuming that the home standby market is declining or showing modest growth.

Michael Patrick Halloran: I don't know if rebranding is the right word but certainly the.

Michael Patrick Halloran: The newer pieces that youre going to be bringing to market. How you expect that to start impacting the revenue line. Obviously you heard the orcs Yorks comment.

Michael Patrick Halloran: Margin impact year over year, the dilution there, but more just kind of a revenue thought process and how you are thinking about the cadence of that being launched to the market.

Speaker Change: Yes, Thanks, Mike you made a lot of the new products that we talked about.

Michael Patrick Halloran: We're in development right now and have been for for the better part of 2023 actually.

Michael Patrick Halloran: We are going to make sure we get it right and these are the products that.

Michael Patrick Halloran: Are going to be.

Michael Patrick Halloran: At the top of the market if not market, leading both for the energy storage products, which are next generation energy storage devices should hit the market. Here later this year kind of as we exit Q3 and get into Q4. So we really only have a very modest amount of topline.

Aaron Paul Jagdfeld: It's kind of holding that new and higher baseline assumption that we talked about, you know, in the absence of any kind of, you know, power outage activity being above the baseline, we guide with it in line. So I think, you know, in the prepared remarks, we even said we don't include, you know, any assumptions for major outages, and that could include, that could drive additional opportunities both with home standby and portable generators. But, but the assumption I think York's right with, you know, in kind of big ticket discretionary items, you know, in an environment where rates remain somewhat elevated here, we think that consumer demand, you know, could, could remain kind of flattish and kind of at that baseline level. One moment, next question. Our next question comes from Michael Halloran with Baird. Your line is open. Hey, good morning, everyone.

Michael Patrick Halloran: Allocated to that launch we think it will get more traction we have a lot of work to do obviously.

Michael Patrick Halloran: You call it rebranding building out the distribution regaining the confidence of the market with with those those installers in particular.

Michael Patrick Halloran: We've been doing a lot of work there and I think we're making headway, but we need to get the new products in the market and so there's not a ton of growth on that side <unk>. We do we do see continued growth there.

Michael Patrick Halloran: They continue to take share that has been.

Michael Patrick Halloran: Just a fantastic asset for us not only in just its growth curve, but also just the technology and the.

Aaron Paul Jagdfeld: Hi Mike. Could you talk about the energy tech side of things, obviously, the 25% growth, and maybe a little better understanding of what it could be versus other products? But more importantly, maybe talk about the expectations for how you're expecting the new product launches. And I don't know if rebranding is the right word, but certainly the newer pieces that you're going to be bringing to market, how you expect that to start impacting the revenue line. Obviously, I heard York's comment on the margin impacting every year, the dilution there, but more just kind of a revenue thought process and how you're thinking about the cadencing of that being launched into the market. Yeah, thanks, Mike.

Michael Patrick Halloran: The.

Michael Patrick Halloran: The competencies that they bring to us relative to what we're trying to achieve with the user experience right. So we want everything we're calling it kind of single pane of glass is kind of a reference to it but but putting everything on the same platform. We've got we've acquired <unk> have a lot of technologies organically that we've got products and solutions.

Michael Patrick Halloran: Round, but bringing it altogether to work seamlessly in synchronously that is a lot of work and so behind the scenes as we introduce each new products. So this next generation storage device when we get to the micro inverter products, which will we will hit the market early next year in 'twenty five.

Aaron Paul Jagdfeld: I mean, a lot of the new products that we talked about, we're in development right now and have been for, you know, the better part of 2023, actually, because we're going to make sure we get it right. And these are the products that, you know, are going to be at the top of the market, if not market leading, both for the energy storage products, which are next generation energy storage devices, which should hit the market here, later this year, kind of, you know, as we exit Q3 and get into Q4. So we really only have a very modest amount of top line allocated to that launch. You know, we think it'll get more traction; we have a lot of work to do, obviously.

Michael Patrick Halloran: Those products will all be they will operate within a single pane of glass platform you have seen some evidence how we've started to weep pieces together already this year, we've got home standby generators now visible.

Michael Patrick Halloran: Homeowner has an equal be thermostat you can see the status of your home standby generator, if that generator happens to be running on propane you can see the status of your propane fuel level. If you have a tank utility monitoring device. So all of these pieces are starting to get woven together and integrated we're going to do the same with the wall box.

Michael Patrick Halloran: <unk> as those roll into the market.

Michael Patrick Halloran: So again building all that out I think <unk> has been just a tremendous.

Aaron Paul Jagdfeld: We call it rebranding, you know, building out the distribution, regaining the confidence of the market with, you know, those installers in particular. You know, we've been doing a lot of work there, and I think we're making headway, but we need to get the new products in the market. And so there's not a ton of growth on that side.

Michael Patrick Halloran: Have a great team and very adept at what they do.

Michael Patrick Halloran: On top of the top notch products that they are in market with with the smart thermostats and Theyre and Theyre doorbell camera.

Michael Patrick Halloran: They are able to help kind of integrate this ecosystem and really bring it to life.

Speaker Change: One moment for our next question.

Aaron Paul Jagdfeld: Ecobee, we do, you know, we do see continued growth there. You know, they continue to take share. That has been, you know, just a fantastic asset for us. Not only in just its growth curve, but also just the technology and, you know, the competencies that they bring to us relative to what we're trying to achieve with the user experience, right? So we want everything, and we're calling it kind of a single pane of glass, which is kind of our reference to it, but putting everything on the same platform.

Michael Patrick Halloran: Our next question comes from Jeff Hammond with Keybanc capital markets. Your line is open.

Michael Patrick Halloran: Hey, Good morning, everyone. This is David Tarantino on for Jeff Hey, Dave.

David Tarantino: Could you maybe give us a little bit more color on where you see the home standby channel inventories versus the normal level it sounds like.

David Tarantino: There is some lingering destocking into the first quarter. So maybe how much do we have left and maybe on that could you give us an update on the $300 billion tailwind from the absence of Destocking do we get all of that this upcoming year.

Aaron Paul Jagdfeld: We've got, we've acquired, and or have a lot of technologies organically that we have products and solutions around, but bringing them all together to work seamlessly and synchronously, that is a lot of work. And so behind the scenes, as we introduce each new product, such as this next-generation storage device, when we get to the microinverter products, which will hit the market early next year in 25, those products will all be, they will all operate within the single pane of glass platform. You've seen some evidence of how we've started to weave pieces together already this year. We've got home standby generators now visible. If a homeowner has an Ecobee thermostat, they can see the status of their home standby generator. If that generator happens to be running on propane, you can see the status of your propane fuel level if you have a tank utility monitoring device.

Speaker Change: Yeah. Thanks, Dave So as we said kind of in line with our expectations, we were getting very close to kind of wiping out that that field inventory.

Speaker Change: What we'll call we'll call it abnormal excess field inventory that look this has been a painful process over the last six quarters.

Speaker Change: We overproduced ahead of the market demand got ahead of ourselves and we've just we've been working that down.

Speaker Change: Very close that we saw it kind of normal order patterns starting to return in Q3, even and into Q4 for sure and then we believe we believe that most of that is going to be gone as we exit Q1, youre always going to have pockets markets channels customers. There have field inventory levels that are probably higher than normal.

Aaron Paul Jagdfeld: So all of these pieces are starting to get woven together and integrated. We're going to do the same with the wall box products as those roll into the market. So again, building all that out, I think Ecobee has been tremendous. They have a great team and are very adept at what they do.

Speaker Change: That has always existed.

Aaron Paul Jagdfeld: And on top of the top-notch products that they're in the market with, with the smart thermostats and their doorbell camera, they're able to help kind of integrate this ecosystem and really bring it to life. One moment for our next question. Our next question comes from Jeff Hammond with KeyBank Capital Markets. Your line is open. Hey, good morning, everyone. This is David Tarantino on for Jeff.

Speaker Change: If you don't get an event in a market or you've got maybe a channel that's.

Speaker Change: Underperforming to other channels I mean, you can have that happen and thats just normal cadence. So I would say that the big excess field inventory level that that thing we've been talking about here for six quarters nonstop. We believe is going to be largely gone by the end of Q1, we definitely saw it come down in Q4 and it came down.

Aaron Paul Jagdfeld: Hey Dave, hi. Could you maybe give us a little bit more color on where you see the home standby channel inventories versus the normal levels? Sounds like there's some lingering destocking into the first quarter, so maybe how much do we have left? And maybe on that, could you give us an update on the $300 million tailwind from the absence of destocking? Do we get all of that this upcoming year? Yeah, thanks, Dave.

Speaker Change: Watching it come down here to date in Q1, and we're seeing it.

Speaker Change: B in a good spot by the end of the quarter and then I think your second part was about the $300 million.

Speaker Change: <unk> under shipping the market in 2023 that was the estimate we gave at our Investor day that actually that number is actually holding as we finished the year. So.

Speaker Change: That's what we under shipped the market in 2003 for home standby now obviously, we won't get all that back in 2024 of the tailwind given that Q1, we're still working things down here, but.

Aaron Paul Jagdfeld: So, you know, as we said, kind of in line with our expectations, we were getting very close to kind of wiping out that field inventory at what we'll call, we'll call it an abnormal excess field inventory. Look, this has been a painful process over the last six quarters where we overproduced ahead of market demand, got ahead of ourselves, and we've just we've been working that down. We were, you know, very close to seeing a kind of normal order pattern starting to return in Q3 even and into Q4 for sure. And then, you know, we believe we believe that most of that is going to be gone as we exit Q1. You know, you're always going to have pockets, markets, channels, customers that have field inventory levels that are probably higher than normal. I think that that has always existed. You know, if you don't get an event in a market, or you've got, you know, maybe a channel that's, you know, underperforming against other channels, I mean, you can have that happen. And that's just normal.

Speaker Change: You'll get you'll get a good chunk of that is a tailwind to growth and again, we talked about that I think on the first question.

Speaker Change: Our next question.

Speaker Change: Our next question comes from Brian Drab with William Blair. Your line is open.

Brian Drab: Hey, good morning, Thanks for taking my questions.

Brian Drab: I was wondering if you could good morning can you give any more color or quantification around what's happening with the IH sees.

Brian Drab: Year over year sequentially.

Brian Drab: Yeah sure, Brian So a couple of things.

Brian Drab: We saw IHG has actually softened in Q4 and that really largely aligns with the power outage environment was well below the kind of baseline average. So in fact it was the lowest Q4 I think in our prepared remarks, we said since 2015, so pretty pretty low environment for outages and that.

Aaron Paul Jagdfeld: So I would say that the big excess field inventory level that we've been talking about here for six quarters nonstop, we believe is going to be largely gone by the end of Q1. We definitely saw it come down in Q4. And yeah, it came down, we're watching it come down here today in Q1. And then I think your second part was about $300 million effectively underwriting the market in 2023. That was the estimate we gave at our investor day. That number is actually holding as we finish the year.

Brian Drab: It kind of fit with a good chunk of the second half right. We didn't see a lot of activity certainly no major activity in throughout the year last year, but.

Speaker Change: But in spite of that <unk> were up on the year.

Speaker Change: Total count so in spite of the softness in the fourth quarter and probably more importantly January we got off to a pretty hot start.

Speaker Change: There was quite a bit of weather localized quite a bit of outage activity and then more importantly, I think one thing that we are starting to see.

Aaron Paul Jagdfeld: So that's why we undershipped the market in 2023 for home standby. Now, obviously, we won't get all that back in 2024 as a tailwind, given that Q1 we're still working things down here. But you'll get a good chunk of that as a tailwind for growth. And again, we talked about that, I think, on the first question. Thank you for your time. Our next question comes from Brian Drab, with William Blair. Your line is open. Hey, good morning.

Speaker Change: Which is really interesting in the category.

Speaker Change: Normally the category has traded on an outage activity, but what we're also seeing is evidence now in markets, where outages haven't taken place, but where media reports and other information.

Speaker Change: Is.

Speaker Change: Is flowing into the market around potential outages right. So these.

Speaker Change: These notifications of power shortfalls that some utilities had to send out in January.

Speaker Change: Because of the extreme cold weather that actually drove IAC activity without actually having it didn't really result in a tremendous amount of outage activity, but it drove outage drove IHT activity. So it's kind of I don't want to say theres a disconnect now like but looking purely at outage activity is probably not the only way to look at.

Aaron Paul Jagdfeld: Thanks for taking my questions. I was wondering if you could this morning, can you give any more color quantification around what's happening with the IHCs year-over-year, sequentially? Yeah, sure, Brian.

Aaron Paul Jagdfeld: So a couple things. You know, we saw IHCs actually soften in Q4. And that really largely aligns with the power outage environment being well below the kind of baseline average. So in fact, it was the lowest Q4, I think, in our prepared remarks, we said, since 2015. So pretty low environment for outages. And that kind of fit with a good chunk of the second half.

Speaker Change: <unk>, which are that as a proxy for sales leads I would just one other kernel to this we also continue to see a modest improvement in close rates in the fourth quarter for IAC. So kind of we've talked about this recovery story on close rates, we kind of had assumed that close rates were going to flatten out after Q2 last year.

Speaker Change: Sure.

Aaron Paul Jagdfeld: We didn't see a lot of activity, certainly no major activity throughout the year last year. But in spite of that, IHCs were up on the year, total count. So in spite of the softness in the fourth quarter, probably more importantly, January, we got off to a pretty hot start. There was quite a bit of weather, localized, quite a bit of outage activity.

Speaker Change: And we saw that initially, but then we are actually starting to see some of those close rates improve and that's encouraging because I think it speaks to.

Speaker Change: The continued not only interest in the product, but obviously the conversion of prospects into buyers. So I think thats. Those are encouraging signs there are green shoots if you will.

Aaron Paul Jagdfeld: And then more importantly, I think one thing that we are starting to see, which is really interesting in the category, is evidence now in markets where outages haven't taken place, but where media reports and other information is flowing into the market around potential outages. So these notifications of power shortfalls that some utilities had to send out in January because of the extreme cold weather actually drove IHC activity. Without actually having it, it didn't really result in a tremendous amount of outage activity, but it drove IHC activity.

Speaker Change: And lead us to have I think.

Speaker Change: Gives us anyway confidence in certainly gives us confidence in the guide that we gave this morning around consumer the consumer power products.

Speaker Change: One moment our next question.

Speaker Change: Okay.

Speaker Change: Our next question comes from Christopher Glynn with Oppenheimer <unk> co. Your line is open.

Christopher Glynn: Thanks, guys.

Christopher Glynn: A clarification before my question did you say 45 55 first half second half split for sales, yes, that's correct.

Christopher Glynn: Okay great.

Christopher Glynn: Four.

Aaron Paul Jagdfeld: So it's kind of, I don't want to say there's a disconnect now, but looking purely at outage activity is probably not the only way to look at IHCs, which are, that's our proxy for sales leads. I would just add one other kernel to this: we also continue to see a modest improvement in close rates in the fourth quarter for IHCs. So we've talked about this recovery story for close rates. We kind of assumed that close rates were going to flatten out after Q2 last year, and we saw that initially, but then we've actually started to see some of those close rates improve. And that's encouraging because I think it speaks to the continued interest in the product and, obviously, the conversion of prospects into buyers. So I think those are encouraging signs.

Christopher Glynn: Curious what you have baked in for close rates following up on that topic and last quarter. You mentioned October saw a nice bump did October account for all of the <unk> improvement or was each month in October better than the core.

Christopher Glynn: Orders that preceded it.

Speaker Change: Yeah. Thanks, Chris I don't have the pacing each month for the quarter to be honest I, just all I had youre correct. We did say on the Q3 call that October we saw some some improvement it was it was pretty it was modest but we like that it was improving not.

Speaker Change: Not going the other way for the quarter was up again modestly. So I think you can assume that it was it didn't drop off because that would have set us negative for the quarter. So.

Aaron Paul Jagdfeld: They're green shoots, if you will, and lead us to have, I think, gives us anyway, confidence in, certainly gives us confidence in the guide that we gave this morning around the consumer power product. One moment for our next question. Our next question comes from Christopher Glynn with Oppenheimer & Co. Your line is open.

Speaker Change: Again, I don't have the pacing apologize for each month of the quarter, but the assumption to your question. The assumption for 2024, we are assuming close rates kind of continue on that modest improvement pace.

Aaron Paul Jagdfeld: Thanks, guys. Clarify something before my question. Did you say 45-55, first half-second, half-split for sales? Yeah, that's correct. Okay. Okay, great.

Speaker Change: We've got a long way to go to get back to the kind of pre pandemic.

Christopher Glynn: Kind of pandemic induced high if you will we kind of hit that I think the peak Chris was do we say.

Aaron Paul Jagdfeld: For, You know, curious what you have baked in for close rates following up on that topic. And, you know, last quarter, you mentioned October saw a nice bump. Did October account for all of the 4Q improvement, or was, you know, each month in October better than the quarters that preceded it? I mean, each month in the fourth quarter. Yeah, thanks, Chris. I don't have the pacing for each month for the quarter, to be honest.

Christopher Glynn: Q3 of 2020 is where we kind of peaked out when we saw things really fall off as our lead times extended.

Christopher Glynn: And now we've been in that recovery mode. The good news is we're seeing that recovery I do think kind.

Christopher Glynn: Pursuant to my answer to the previous question.

Christopher Glynn: The additional color from the previous question about we've got more people coming into the sales funnel that maybe arent experiencing outages, but they are concerned about outages and theyre hearing more about it either because of media reports or other things or maybe notifications from their local utility that they could be at risk of an outage with cold temperatures if there if they don't.

Aaron Paul Jagdfeld: I just, all I had, you're correct, we did say on the Q3 call that October, we saw some, you know, some improvement. It was pretty, it was modest, but we liked that it was improving, not, you know, not going the other way. For the quarter, it was up, again, modestly. So, you know, I think you can assume that it wasn't, it didn't drop off because, you know, that would have set us negative for the quarter. So, again, I don't have the pacing. I apologize for each month of the quarter.

Christopher Glynn: Immediately turn off.

Christopher Glynn: There are reduced their power consumption those are scary things. When you are a homeowner and you get that text message.

Christopher Glynn: It's zero degrees outside and you need to reduce your energy consumption immediately or you could be facing blackouts.

Christopher Glynn: Those things send people on a hunt for solutions and that's one that's when we see and we are seeing evidence that people are coming into the sales funnel I will say that it is going to be a longer conversion cycle for those homeowners. If they haven't experienced an outage. So we're aware of that and we think that that could lead to some could take a little longer than for close rates to really truly recover to that law.

Aaron Paul Jagdfeld: But the assumption, to your question, the assumption for 2024, we are assuming that close rates kind of continue at that modest improvement pace. You know, we've got a long way to go to get back to the kind of pre-pandemic, or the kind of pandemic-induced high, if you will. We kind of hit that. I think the peak, Chris, was, did we say?

Christopher Glynn: <unk> as a result of just more people coming into the sales funnel and investigating the category. We don't necessarily think Thats a bad thing. We just think that it means that it's even more important that are nurturing efforts and our efforts to continue to continue to engage homeowners who have interest in the product category.

Aaron Paul Jagdfeld: Q3 of 2020 is where we kind of peaked out. And then we saw things really fall off as our lead times extended. And now, you know, we've been in that recovery mode. The good news is, you know, we're seeing some recovery. I do think, kind of pursuant to my answer to the previous question about, or the additional color from the previous question about, we've got more people coming into the sales funnel that maybe aren't experiencing outages, but they're concerned about outages and they're hearing more about them, either because of media reports or other things, or maybe notifications from their local utility that, you know, they could be at risk of an outage with cold temperatures if You know, those are scary things.

Christopher Glynn: But we remain very diligent in our efforts there so again.

Christopher Glynn: Close rates, the assumption kind of a modest improvement over the course of 2024.

Christopher Glynn: Yes.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.

Jerry Revich: Yes, hi, good morning, everyone, Hey, Gerry.

Christopher Glynn: Okay.

Jerry Revich: Can you just talk about the margin outlook. So you had 20% margins in the fourth quarter and seasonally that's a 19% annual equivalent rate.

Aaron Paul Jagdfeld: When you're a homeowner and you get that text message, you know, and it's zero degrees outside, and you need to reduce your energy consumption immediately, or you could be facing blackouts. I mean, those things send people on a hunt for solutions. And that's when we see, and we are seeing evidence that people are coming into the sales funnel. But I will say that, you know, it's gonna be a longer conversion cycle for those homeowners if they haven't experienced an outage. So we're aware of that, and we think that that could lead to some, you know, could take a little bit longer for close rates to really truly recover to that level as a result of just more people coming into the sales funnel and investigating the category. But we don't necessarily think that's a bad thing.

Jerry Revich: We're looking at guidance of 17%, so what's the 200 basis points of margin degradation beyond normal seasonality.

Gerry: But you folks are guiding twos R&D or other areas can you just expand on that.

Chris: Hi, This is Chris.

Chris: In the prepared I did talk about our operating expense investments, we are expecting those as a percentage of sales to go up as we.

Chris: As we add the resources necessary to continue to drive our growth.

Chris: At our Investor Day last September we talked about a lot of significant long term growth opportunities.

Aaron Paul Jagdfeld: We just think that it means that it's even more important for our nurturing efforts and our efforts to continue to engage homeowners who have an interest in the product category, that we remain very diligent in our efforts there. So again, close rates, the assumption, you know, kind of a modest improvement over the course of 2024. One moment for our next question. The Bulletproof Executive 2013, Our next question comes from Jerry Revich with Goldman Sachs. Your line is open. Yes, hi. Good morning, everyone.

Jerry Revich: We want to add those resources here in 2024 to go after those opportunities. So that you had that before the revenue is incurred and thats really across all of our business not just <unk>.

Jerry Revich: It's our consumer power business, our industrial business, our energy technologies.

Jerry Revich: Products and you need to add those costs before the revenue and that will increase our opex as a percentage of sales. We believe in 2024 relative to 'twenty, three and maybe that that's probably the to square that up with maybe the math that you're looking at yes, I think Jerry just ask just one last comment on that.

Jerry Revich: We have been investing heavily.

Aaron Paul Jagdfeld: Hey, Jerry. Aaron, can you just talk about the margin outlook, so you had 20% margins in the fourth quarter and, you know, seasonally that's a 19% annual equivalent rate and we're looking at guidance of 17%, so what's the 200 base point margin degradation beyond normal seasonality that you folks are guiding to as an R&D or other areas, can you just expand on the drivers compared to the... Yeah, I did talk about our operating expense investments, we are expecting those as a percentage of sales to go up as we... As we add the resources necessary to continue to drive our growth, you know, at our Investor Day last September, we talked about a lot of significant long-term growth opportunities. We want to add those resources here in 2024 to go after those opportunities so that you add that before the revenue is incurred.

Jerry Revich: For the future here, we think those investments are.

Jerry Revich: Both necessary and I think improve our odds of.

Jerry Revich: Of being successful as the market continues to change.

Speaker Change: There is just.

Jerry Revich: Ream of evidence around the fact that the greatest changing.

Jerry Revich: Talking about in my prepared remarks, we talked to a lot of utility and grid operators.

Jerry Revich: Are there is a significant challenge ahead as we continue to retire traditional thermal assets on the supply side in favor of renewables, which which is I think we all agree we want to decarbonize the grid as much as we can the challenge of course is those renewables.

Jerry Revich: In nature and storage costs are still high and large format utility storage.

Jerry Revich: It's difficult to balance out with the cost of building those renewable plants.

Aaron Paul Jagdfeld: And that's really across all of our business, not just, you know, it's... It's our consumer power business, our industrial business, our energy technologies products. And you need to add those costs before revenue, and that will increase our OPEX as a percentage of sales, we believe, in 2024 relative to 23. And maybe that's probably to square that up with the math that you're looking at. Yeah, I think, Jerry, just one last comment on that.

Jerry Revich: Couple that with this one.

Jerry Revich: Were now seeing which is an increase on the demand side, which we haven't seen in decades. The demand side has been relatively muted retail electric sales have been relatively muted over the last couple of decades as maybe some of the growth has been offset to some of the either population growth or just growth in.

Aaron Paul Jagdfeld: You know, we have been investing heavily for the future here. We think those investments are both necessary and, you know, I think improve our odds of being successful as the market continues to change. There is just, you know, a ream of evidence around the fact that the grid is changing. I talked about it in my prepared remarks.

Jerry Revich: Some of the power usage devices has been offset by efficiency gains, but that's changing and we're seeing the electrification trends again around cooking around.

Jerry Revich: Cleaning around.

Jerry Revich: Heating and cooling certainly around transportation Super early innings, there, but it is creating these incredible opportunities for mismatch of supply and demand and in particular as more severe weather and volatile weather patterns pick up that is putting traumatic dramatic stress on on the grid.

Aaron Paul Jagdfeld: We talked to a lot of utility and grid operators. They are in. There is a significant challenge ahead as we continue to retire traditional thermal assets on the supply side in favor of renewables, which is, I think we all agree, we want to decarbonize the grid as much as we can. The challenge, of course, is that renewables are intermittent in nature, and storage costs are still high.

Jerry Revich: And so I.

Jerry Revich: Again, we couldnt be in a better place at a better time with the products and solutions that we've assembled here we have a lot of work to do obviously to deploy those to great effect to build out these ecosystems for homeowners and business owners, we're working very hard on that and the work is the investment level. We're talking about here and that is what <unk> was referring to.

Aaron Paul Jagdfeld: And large format utility storage is difficult to balance out with the cost of building those renewable plants. You couple that with what we're now seeing, which is an increase on the demand side, which we haven't seen in decades. You know, the demand side has been relatively muted. Retail electric sales have been relatively muted over the last couple of decades, as maybe some of the growth has been offset by some of the either population growth or just growth in some of the power usage devices has been offset by efficiency gains. But that's changing.

Jerry Revich: Certainly in throughout the year of 350 to 400 basis point dilution to EBITDA margin for energy technologies for energy technology or is that really having said all of that we start expecting to increase our EBITDA margins from 'twenty three to 'twenty four.

Jerry Revich: <unk>.

Speaker Change: One moment our next question.

Jerry Revich: Okay.

Aaron Paul Jagdfeld: And we're seeing the electrification trends, you know, again, around cooking, around cleaning, around heating and cooling, certainly around transportation, very early innings there. But it's creating these incredible opportunities for mismatch of supply and demand. And in particular, as more severe weather and volatile weather patterns pick up, that is putting dramatic stress on the grid.

Jerry Revich: Our next question comes from Stephen <unk> with Stifel. Your line is open.

Stephen: Thanks, Good morning, gentlemen, good morning, good morning.

Stephen: So two things from me.

Stephen: And I'm not sure if you're able to comment but when you. When you talk about that that margin drag from from when you entered your technology side.

Aaron Paul Jagdfeld: And so I don't, you know, again, we couldn't be in a better place at a better time with the products and solutions that we've assembled here. We have a lot of work to do, obviously, to deploy those to great effect, to build out these ecosystems for homeowners and business owners. We're working very hard on that, and the work is the investment level we're talking about here. And that is what York was referring to, certainly in the, you know, throughout the year, 350 to 400 basis points of dilution to EBITDA margins for energy technology. For energy technology

Stephen: You sort of paint this picture in your at your Analyst day, but should we expect that start.

Stephen: Dissipate in 'twenty five.

Speaker Change: Yes, absolutely and then the idea is we laid out and we're still on our path here, but the idea is we laid out in September at the Investor Day is that that we would be at breakeven we would start to achieve breakeven levels in that business. In 2006. So you will start to see an abatement of that dilution impact.

Stephen: It's just not going to happen. This year. So it really starts in 'twenty five and accelerate those we get cut in half by 'twenty six is what we've cut in half by 26 right exactly.

Speaker Change: One moment for our next question.

Aaron Paul Jagdfeld: Having said all that, we are starting to expect to increase our EBITDA margins from 23 to 24. Yeah. One moment for our next question. Our next question comes from Steven Gingaro with CEPL. Your line is open. Thanks. Good morning, gentlemen. Good morning.

Speaker Change: Our next question comes from Mark <unk> with Jpmorgan. Your line is open.

Mark: Yes. Good morning, Thanks, very much for taking my questions.

Mark: I wanted to start with the gross margin guide for 2024% to 37% that would be the highest since 2020.

Aaron Paul Jagdfeld: So two things for me. The first, and I'm not sure if you're able to comment, but when you talk about that margin drag from the new energy technology side, and you sort of painted this picture in your analyst's report there, but should we expect that to start to dissipate in 2025? Yes, absolutely. And then the idea as we laid out, and we're still on our path here, but the idea as we laid out in September at Investor Day is that we would be at break even, we would start to achieve break even levels in that business in 26. So you will start to see an abatement of that dilution impact. But it's just not going to happen this year.

Mark: I assume a good part of that is driven by mix can you talk about.

Mark: Your expectations for pricing that are embedded in that and then just a quick clarification question if I could.

Mark: Residential revenue in <unk> grew 1% I think you said that home standby grew.

Mark: Maybe upwards of 10%.

Mark: The energy Tech business grew as well.

Speaker Change: If that's true what was the offset to get to 1% growth. Yes. So let me unpack that so it was mostly portable gens in Q4 again without a really soft power outage environment and no major events.

Aaron Paul Jagdfeld: So it really starts at 25 and it accelerates as we get back to 26. Cut in half by 26. Right, exactly. One moment for our next question. Our next question comes from Mark Struth with J.P. Morgan. Your line is open. Yes, good morning.

Speaker Change: <unk> com and a tough comp last year here and in Europe, correct, yes, the European side of that as well to your point there.

Speaker Change: Russia, Ukraine War.

York Anthony Ragen: Thanks very much for taking our questions. I wanted to start with the gross margin guide for 2024, 37%. That would be the highest since 2020. I assume a good part of that is driven by MIPS. Can you talk about your expectations for pricing, though, that are embedded in that? And then just a quick clarification question: Residential revenue in 4Q grew 1%.

Speaker Change: They haven't really some of the energy concerns security concerns haven't come to pass there and as a result, we saw we've seen portable gens really really come off.

Speaker Change: And also a chore products were soft we said we called this out throughout the year last year, we had a tough year with our chore products business. So that was that was also soft but that was offset by 10% growth in hsp.

Speaker Change: And some growth also in the clean energy business on the margin question.

York Anthony Ragen: I think you said that home standby grew maybe upwards of 10%. And then the energy tech business grew as well. If that's true, what was the offset to get to 1% growth? Yeah, so let me unpack that. So it was mostly portable gens in Q4, again, with a really soft power outage environment and no major events. And a tough comp last year.

Speaker Change: I'll just I'll touch on the price piece of that real quick and then you can kind of round out the discussion, but it's small I mean, we've got we've got a little bit of price in there this year just to cover.

Speaker Change: Some of the additional costs that we've seen around the investments that we've had to make.

Speaker Change: As we scale the business.

Speaker Change: But they are quite modest I would say in terms of price there is no big price so the rest of it.

York Anthony Ragen: Here and in Europe. Correct, yeah. And the European side of that as well, to York's point. The Russia-Ukraine war, you know, they just haven't really – some of the energy concerns and security concerns haven't come to pass there.

Speaker Change: I'd say half of that gross margin increase that you referred to is in fact mix obviously as resi.

Speaker Change: In home standby grow faster than our our C&I business that will that will be a tailwind for gross margin growth.

York Anthony Ragen: And as a result, we saw – we've seen portable gens really, really come off. And also, chore products were soft. We called this out. Throughout the year, last year, we had a tough year with our chore products business. So that was also soft.

Speaker Change: The other half is really cost.

Speaker Change: Costs, continuing to abate the realization of the cost that we're experiencing.

York Anthony Ragen: But that was offset by 10% growth in HSB and some growth in the clean energy business. On the margin question, you know, I'll just – I'll touch on the price piece of that real quick, and then York can kind of round out the discussion. But it's small.

Speaker Change: I'd say in the beginning of 2023, we were still feeling the supply chain pressures that spilled over from 'twenty two into 'twenty three those are largely.

Speaker Change: We won't we won't see that in 2024 here logistics costs.

York Anthony Ragen: I mean, we've got a little bit of a price in there this year, just to cover, you know, some of the additional costs that we've seen around the investments that we've had to make, you know, as we've scaled the business. But they're quite modest, I would say, in terms of price. There's no big price.

Speaker Change: I think we were.

Speaker Change: Those costs spilled over from 'twenty, two into our inventory and as we sell through that inventory.

Speaker Change: <unk>.

Speaker Change: That headwind will.

Speaker Change: That won't be a headwind.

York Anthony Ragen: So the rest of it – I'd say half of that gross margin increase that you referred to is in fact mixed, obviously, as Res-E. Home Standby grows faster than our C&I business, that will be a tailwind to gross margin growth. The other half is really cost continuing to abate the realization of the cost that we're experiencing. I'd say at the beginning of 2023, we were still feeling the supply chain pressures that spilled over from 22 into 23. Those are largely – we won't see that in 2024 here.

Speaker Change: As we ramp up our production.

Speaker Change: Our plants, we'll have obviously favorable overhead absorption lower warehousing and storage costs as we bring our inventory levels down thats sort of behind the scenes Theres a lot of we don't need as much warehousing space to store the inventory anymore. So that those are costs that will come down just general plant efficiencies and then we always have our profitability enhancement program that it's it's.

Speaker Change: It's sort of part of our DNA now that we.

Speaker Change: We cascade cost reduction initiatives across the company throughout the company and we have goals for those for those initiatives and projects that we believe will we will realize in the second half of the year. So the cost side of it as an important side of it as well in terms of the gross margin improvement.

York Anthony Ragen: Logistics costs – I think we were – as those costs spilled over from 22 into our inventory, and as we sell through that inventory, that headwind won't – that won't be a headwind. As we ramp up our production in our plants, we'll have, obviously, favorable overhead absorption, lower warehousing and storage costs as we bring our inventory levels down. That's sort of behind the scenes.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Donovan Schafer with Northland Capital markets. Your line is open.

York Anthony Ragen: There's a lot of – we don't need as much warehousing space to store the inventory anymore, so those are costs that will come down, just general plant deficiencies. Then we always have our profitability enhancement program that – it's sort of part of our DNA now that we – We cascade cost reduction initiatives across the company, throughout the company, and we have goals for those initiatives and projects that we believe we'll achieve in the second half of the year. So the cost side of it is an important side of it as well, in terms of gross margin improvement. One moment for our next question. Our next question comes from Donovan Schaefer with Northland Capital Markets. Your line is open.

Donovan Schafer: Hey, guys. Thanks for taking my questions. So I wanted to ask for some of the softness on the C&I side of the business.

Donovan Schafer: In the release you mentioned.

Donovan Schafer: It also applies of course this telecom in the rental accounts is kind of what comes first in the order of significance it seems like but.

Donovan Schafer: The beyond.

Donovan Schafer: <unk> has become increasingly interesting and I believe in chances rock has been an important part of that I believe it goes into that bucket.

Speaker Change: Correct me, if I'm wrong on that.

Speaker Change: And so I'm curious.

Speaker Change: If you can comment on what youre seeing in the beyond standby and kind of the weakness there if it is tied to and Janet rock.

Aaron Paul Jagdfeld: Hey guys, thanks for taking the questions. So I want to ask you about some of the softness on the C&I side of the business. In the release, you mentioned it also applies, you know, of course, there's telecom, and the rental accounts are kind of what comes first in the order of significance, it seems like, but, you know, the beyond has become increasingly interesting, and I believe Enchanted Rock has been an important part of that. I believe it goes into that bucket. Correct me if I'm wrong about that.

Speaker Change: Kind of when that agreement and I believe it was either expiring.

Speaker Change: 'twenty through 'twenty four.

Speaker Change: Yes, if you expect that to be renewed and if you can comment at all on potential for data center demand being helpful. I know you have I believe you have the largest natural gas.

Speaker Change: Generator.

Speaker Change: For data center backup so any color on those would be appreciated. Thank you. Yeah. Thanks adamant. So yes, I think it'd be good to maybe spend a few minutes on the C&I side.

Aaron Paul Jagdfeld: And so I'm curious, you know, if you can comment on what you're seeing in the beyond standby and kind of the weakness there, if it is tied to Enchanted Rock, kind of when that agreement ends, I believe it was either expiring in 23 or 24, if you expect that to be renewed, and if you can comment at all on the potential for data center demand being helpful. I know you have, and I believe you have the largest natural gas generator for data center backup, so any color on those would be appreciated. Thank you. Yeah, thanks Adam, and so yeah, I think it'd be good to maybe spend a few minutes on the CNI side. You know, that business has been on an absolute tear over the last three years. Kager, you know, close to 30 percent.

Speaker Change: That business has been on an absolute tear over the last three years.

Speaker Change: CAGR.

Speaker Change: It's a 30%, it's a $1 $5 billion asset for us today globally.

Speaker Change: As a truly global business.

Speaker Change: And in fact, we have a lot of long term conviction there as evidenced by we broke ground on a new plant here in Wisconsin.

Speaker Change: Just here in the fourth quarter, because we see the long term need for additional capacity.

Speaker Change: As the market grows spin.

Speaker Change: Specifically.

Speaker Change: We have always had seen certain cycles in the C&I markets. We've been serving the I'll start with telecom kind of work my way through the the walk here on kind of the three different areas, we called out specifically in the prepared remarks, but I'll start with telecom that is it's been an important vertical for us historically around 10% of C&I, we had a really strong year.

Aaron Paul Jagdfeld: It's a 1.5 billion dollar asset for us today globally. It is a truly global business, and, in fact, we have a lot of long-term conviction there, as evidenced by, you know, we broke ground on a new plant here in Wisconsin just in the fourth quarter because we see the long-term need for additional capacity as the market grows. You know, specifically, we have always seen certain cycles in the CNI markets. We've been serving the top. I'll start with telecom and kind of work my way through the walk here on the three different areas we called out specifically in the prepared remarks, but I'll start with telecom.

Speaker Change: Really strong year in 2022 with telecom, we started to see that soften up in the back half of this year, we called that earlier this year. So it kind of fell in line with what we saw but I think we were more hopeful than it would rebound more quickly here in 'twenty four and right now all evidenced based on kind of.

Aaron Paul Jagdfeld: That's, you know, it's been an important vertical for us historically around 10 percent of CNI. We had a really strong year last, you know, a really strong year in 2022 with telecom. We started to see that soften in the back half of this year.

Speaker Change: You can you can.

Speaker Change: Look at any of the transcripts for me and a major wireless carriers.

Speaker Change: We are a tier one supplier to all of them.

Speaker Change: They are all kind of cut their capex guide year over year by roughly 10% call. It.

Aaron Paul Jagdfeld: We called that earlier this year, so it kind of fell in line with what we saw, but I think we were more hopeful that it would rebound more quickly here in 24. And right now, all evidence based on kind of, you know, you can, you can, you know, look at any of the transcripts from any of the major wireless carriers. We're the, we're a tier one supplier to all of them. You know, they've all kind of cut their CapEx guide year over year by roughly 10 percent. Call it that.

Speaker Change: I think that's kind of a proxy for.

Speaker Change: What we're seeing to some degree in telecom.

Speaker Change: We've seen this moving before we've been serving that market for 40 years and they tend to cycle on and off of Capex. Some of it is the pacing of the build out of the network. Some of it is they're balancing other capital priorities, sometimes M&A, sometimes other things. So we've seen that before that will come back absolutely.

Speaker Change: And we feel like that's just a cycle, we're going to get through here in 'twenty for the other one is the rental accounts the national rental accounts in particular again, we're a major supplier to all of them.

Aaron Paul Jagdfeld: So, you know, I think that's kind of a proxy for what we're seeing to some degree in telecom, but we've seen this move before. We've been serving that market for 40 years, and they tend to cycle on and off with CapEx. Some of it is the pacing of the build out of the network. Some of it is that they're balancing other capital priorities, sometimes M&A, sometimes other things. So, you know, we've seen that before. That will come back, absolutely, and we feel like that's just a, you know, a cycle we're going to get through here in 24. The other one is the rental accounts, the national rental accounts, in particular.

Speaker Change: And you've seen a couple of other rental customers come out rental accounts come out and say that their capex is going to be lower year over year. So.

Speaker Change: We're kind of we're kind of working off of that those types of guidance is and in particular, you know theres been a pretty heavy re fleeting cycle over the last few years and the categories that we supply in particular in power and life.

Speaker Change: So <unk> got temporary power or temporary lighting those are the products, we manufacture and put into those channels.

Speaker Change: They've gone through a heavy re fleeting cycle and now they've got to wait for the utilization rates.

Aaron Paul Jagdfeld: Again, we're a major supplier to all of them, and, you know, you've seen a couple of the rental customers come out, rental accounts come out, and say that their CapEx is going to be lower year over year. So, you know, we're kind of working off of that, those types of guidance, and in particular, there's been a pretty heavy refleeting cycle over the last few years in the categories that we supply, in particular, in power and light. So, you know, where you've got temporary power or temporary lighting, those are the products we manufacture and put into those channels.

Speaker Change: To kind of get to where they need them to be.

Speaker Change: Before they start kind of.

Speaker Change: Purchasing new equipment, so that again, we've seen that cycle about three times in our ownership.

Speaker Change: And our participation in that market over the last decade plus years. So thats just cycle and then the last one would be on standby that is an area. That's been very interesting. It's grown very quickly we have customers like in Shannon rock in there they're not the only ones. We've got others that we sell a lot of these generators.

Speaker Change: And in particular on the gas side, where we would sell a typical gas generator for emergency backup customers are finding that theres additional utility and value that they can deploy that generator and perhaps a grid support type program right. So time of use program or some other kind of demand response type program and they can help monetize.

Aaron Paul Jagdfeld: You know, they've gone through a heavy refleeting cycle, and now they've got to wait for the utilization rates to kind of get to where they need them to be before they start, you know, purchasing new equipment. So, again, we've seen that cycle about three times in our ownership and in our participation in that market over the last decade plus years. So that's just the cycle. And then the last one is beyond standby.

Speaker Change: The asset in a way that they couldn't before they had to think of it purely as a kind of a.

Speaker Change: Disaster response type purchase before kind of an insurance policy and so not something that would necessarily create a return year after year right. I mean, obviously it would give you a return if you experienced an outage.

Aaron Paul Jagdfeld: That is an area that's been very interesting. It's grown very quickly. We have customers like Enchanted Rock in there, but they're not the only ones.

Aaron Paul Jagdfeld: We've got others that we sell. You know, a lot of these generators, and in particular on the gas side, where we would sell a typical gas generator for emergency backup, customers are finding that there's additional utility and value in that generator in perhaps a grid support-type program, right? So a time-of-use program or some other kind of demand-response-type program, and they can help monetize the asset in a way that they couldn't before. They had to think of it purely as a, you know, kind of a, you know, it was really a disaster-response-type purchase before, kind of an insurance policy. And so, you know, not something that would necessarily create a return year after year, right? I mean, obviously, it would give you a return if you experienced an outage, but that's infrequent use.

Speaker Change: That is an infrequent news this is a way now to as natural gas prices stay low electricity prices continue to rise.

Speaker Change: That has been a very interesting growth opportunity is still relatively small in the context of everything we do but it's been growing very quickly and we called it out on the over the last couple of years.

Speaker Change: <unk> channel rock is.

Speaker Change: As an important customer there, but also data centers. These are smaller gas gen. So they are used more in edge data centers not necessarily hyperscale hyperscale data centers are still going to be using very large diesel gens that are manufactured by our competitors, we're not in that business today.

Speaker Change: So we're really serving more of the edge data center markets or.

Aaron Paul Jagdfeld: This is a way now to, you know, as natural gas prices have stayed low, electricity prices continue to rise, you know, that has been a very interesting growth opportunity. Still relatively small in the context of everything we do, but it's been growing very quickly, and we've called it out on, you know, over the last couple of years, underpinned by Enchanted Rock as an important customer there. But also, you know, data centers; these are smaller gas generators, so they're used more in edge data centers, not necessarily hyperscale.

Speaker Change: <unk> data center operators that want to use those assets in a monetize fashion you wouldn't be able to do that economically with diesel you can do it economically with gas, but it takes a lot more jens to get to the same level of protection because the density the power density of each generator for gas.

Speaker Change: Is lower than it is for diesel that's just.

Speaker Change: That's a physics thing kick it around that but it's still a great market opportunity. We just what we called out this morning on the call on the prepared remarks, there is with a higher interest rate environment. We're just seeing those projects get pushed out the timelines right. So we think it's temporary we think it will return when interest rates kind of returned to a more normal level do we.

Aaron Paul Jagdfeld: Hyperscale data centers are still going to be using very large diesel generators that are manufactured by our competitors. We're not in that business today, so we're really serving more of the edge data center markets or those data center operators that want to use those assets in a monetized fashion. You wouldn't be able to do that economically with diesel. You can do it economically with gas, but, you know, it takes a lot more generators to get to the same level of protection because the density of the power density of each generator for gas is lower than it is for diesel. That's just a, you know, that's a physics thing. You can't get around that.

Speaker Change: No and that is no.

Speaker Change: I think you can listen to economists and we see a lot of them in here a lot of them. It's anywhere between zero rate cuts and 12. This year I don't know take your pick your number but.

Speaker Change: <unk> that we're seeing kind of what goes on in that environment, but we do think that as rates come down.

Speaker Change: That obviously changes I think that the.

Aaron Paul Jagdfeld: But that's, you know, it's still a great market opportunity. We just, what we called out this morning in the prepared remarks there is that in a higher interest rate environment, we're just seeing those projects get pushed out, the timelines, right? So we think it's temporary. We think it'll return when interest rates, you know, kind of return to a more normal level. Do we know when that is? No.

Speaker Change: Not only the economics around those projects, but.

Speaker Change: To bring some of those projects that have been delayed back into the mix.

Speaker Change: One moment for our next question.

Speaker Change: Yeah.

Speaker Change: Our next question comes from Kashi Harrison with Piper Sandler Your line is open.

Kashi Harrison: Good morning, all and thanks for taking the question.

Kashi Harrison: So maybe just sticking with C&I since we're talking about it.

Aaron Paul Jagdfeld: You know, I think you listen to economists, and we see a lot of them and hear a lot of them. It's anywhere between zero rate cuts and 12 this year. I don't know. Pick your number, but we're watching that.

Kashi Harrison: Aaron as you pointed out.

Kashi Harrison: You guys had been serving telecom for I think you said 40 years and rental companies for a really long time, So you know.

Kashi Harrison: How long does it typically takes or the spending to recover on average is this something where.

Aaron Paul Jagdfeld: We're seeing kind of what goes on in that environment, but we do think that as rates come down, you know, that obviously changes, I think the, not only the economics around those projects, but, you know, shouldn't bring some of those projects that have been delayed back into the mix. One moment for our next question. Our next question comes from Cashie Harrison with Piper Sandler. Your line is open.

Kashi Harrison: It drops and stays down for a year two years three years, just maybe help us think about that and then similarly following up on this topic of interest rates.

Kashi Harrison: Can you walk us through the level of rates that drove weakness in that segment was it when we got to 5% on the benchmark was at another level just trying to think and just trying to think through.

Aaron Paul Jagdfeld: The Bulletproof Executive 2013, Good morning, all, and thanks for taking the question. So, you know, maybe just sticking with CNI since we're talking about it. You know, Aaron, as you pointed out, you guys have been serving telecom for, I think, you said, 40 years and rental companies for a really long time. So, you know, how long does it typically take for the spending to recover on average? Is this something where it drops and stays down for a year, two years, three years?

Speaker Change: If we get the 3% is not win this segment is back is at 4% is a 2% just some thought around the level of rates and how it impacts at the beyond standby business. Thank you, yes. Thanks, Kashi, so with respect to the telecom and rentals cycles, just kind of how we've seen that historically they play out in like four to six quarters generally.

Aaron Paul Jagdfeld: Just maybe help us think about that. And then, you know, similarly, following up on this topic of interest rates. Can you walk us through the level of rates that drove weakness in that segment? Was it when, you know, we got to 5% on the benchmark? Or was it another level?

Speaker Change: Kind of how it plays out there can be unique situations.

Speaker Change: We had as an example, when consolidation has happened historically in the telecom industry.

Aaron Paul Jagdfeld: Just trying to think, and just trying to think through, you know, if we get to 3%, is that when the segment is back? Is it 4%? Is it 2%?

Speaker Change: And acquisition.

Speaker Change: Sprint by T mobile that kind of thing or merger those types of situations those can be more unique.

Aaron Paul Jagdfeld: Just some thought around the level of rates and how it impacts the beyond standby business. Thank you. Yeah, thanks, Kashi. So with respect to the telecom and rental cycles, just kind of, you know, how we've seen that historically, they play out in like four to six quarters, generally, is kind of how it plays out. There can be unique situations, you know, if we had as an example, when consolidation has happened historically in the telecom industry, you know, you know, an acquisition of, you know, Sprint by T-Mobile, that kind of thing, or merger, those types of situations, those can be more unique, you know, those, you know, whenever there's major acquisitions, that usually creates a pause in CapEx as, you know, the carriers do their integration activities, and they try and rationalize what they've acquired in terms of the assets and the networks, and how they want to deploy that going forward from a strategy standpoint.

Speaker Change: Those whenever theres major acquisitions that usually creates a pause in capex as you know.

Speaker Change: The carriers do their integration activities and they try and rationalize what they've acquired in terms of the assets and the networks and how they want to deploy that going forward from a strategy standpoint, but typically four to six quarters and similarly on the rental side those re fleeting cycles can be a year or two depending on the category depending on the customer.

Speaker Change: <unk>.

Speaker Change: Depending on the market, sometimes they are influenced in oil and gas and oil as oil and gas prices.

Kashi Harrison: Go up that can mean better utilization of the equipment in certain regions, where they are used in those applications and so.

Kashi Harrison: The timing can vary, but I would say pretty reliably historically, we've seen four to six quarters, then beyond standby I'm, sorry, I was going to say because we sell direct you tend to see it quickly to like do they turn it they can turn it off faster that they can turn it on for a really good point, yes, we do.

Aaron Paul Jagdfeld: But typically, four to six quarters, and similarly, on the rental side, those refleeting cycles, you know, can be a year or two, depending on the category, depending on the customer, depending on the market. Sometimes they're influenced by oil and gas. As oil and gas prices go up, that can mean, you know, better utilization of the equipment in certain regions, where they're used in those applications. And so, you know, the timing can vary, but I would say, pretty reliably, historically, we've seen four to six quarters. The beyond standby, oh, sorry.

Kashi Harrison: Tend to see them.

Kashi Harrison: <unk>.

Kashi Harrison: There.

Kashi Harrison: Capital spending their purchase orders can be as York said, it can be pretty abrupt.

Kashi Harrison: Both on and off so we watch that very closely one of the reasons, we're expanding capacity in C&I. The range of product were aimed at actually is what we would refer to as our mid range product, which really goes after that telecom market and some of that some of that temporary.

Aaron Paul Jagdfeld: I was going to say, because we sell direct, you tend to see it quickly, too, like they turn it on, they can turn it off fast, but they can turn it on fast. A really good point. Yeah, we tend to see them wield power, you know, their capital spending, their purchase orders can be, as Jörg said, they can be pretty abrupt, both on and off. So, you know, we watch that very closely. One of the reasons we're expanding capacity in CNI, the range of product we're aimed at, actually, is what we would refer to as our mid-range product, which really goes after that telecom market and some of that, some of that temporary power market for the rental markets, as well.

Kashi Harrison: <unk> market for the rental markets as well as kind of the mid range products and that's where we see we are absolutely the strongest manufacturer there in North America in terms of.

Kashi Harrison: In terms of our share and our aggressive stance with these customers. We have an outsized share with these segments, which is maybe why we're getting hurt a little bit more than perhaps some of our competitors and some of it in C&I in 2020 for some of our competitors are little more focused on the Hyperscale data centers as I said before we don't have products. There. So I think some of that.

Kashi Harrison: Some of the way we're looking at the markets in 24, maybe differ from some of our competitors as a result to answer your question on kind of what interest rate level kind of impacts.

Kashi Harrison: The beyond standby market, we kind of saw projects starting to.

Aaron Paul Jagdfeld: It's kind of the mid-range products, and that's where we see we are absolutely the strongest manufacturer there in North America, in terms of, you know, our share and our aggressive stance with these customers. We have an outsized share with these segments, which is maybe why we're getting heard a little bit more than perhaps some of our competitors in some of the, you know, CNI in 2024. Some of our competitors are a little more focused on hyperscale data centers, but as I said before, we don't have products there.

Kashi Harrison: Kind of elongate in the cycle, it's new to us So we haven't been through a rate.

Kashi Harrison: A higher rate environment, there with that with that product category. So it's new so we've got a lot of learning cycles. There were trying to get under our belt. So I can't I can't give you an exact rate because one thing. We do know is that every project pencils out differently in every market.

Kashi Harrison: It really depends on the local utility cost in a market. It depends on the use case of the products in a particular market the end customer the project size there or just.

Aaron Paul Jagdfeld: So, I think some of the, you know, some of the way we're looking at the markets in 2024 may be different from some of our competitors as a result. To answer your question on kind of what interest rate level kind of impacts the beyond standby market, we kind of saw projects starting to, you know, kind of elongate in the cycle. It's new to us.

Kashi Harrison: A ton of factors. So I would tell you that I don't know that there's like a specific interest rate level, where we can say, we called it being cooling off and vice versa. A specific interest rate level, where we would say if we get to three 5% that it will turn back on I think a lot of that is just going to depend on economics, improving in particular mark.

Kashi Harrison: And there's just a ton of factors that go into each one.

Aaron Paul Jagdfeld: So, we haven't been through a rate, you know, a higher rate environment there with that product category, so it's new. So, we've got a lot of learning cycles there we're trying to get under our belts. So, I can't give you an exact rate because one thing we do know is that every project pencils out differently in every market. You know, it really depends on the local utility cost in a market. It depends on the use case of the products in a particular market, the end customer, the project size, there are just a ton of factors.

Speaker Change: One moment our next question.

Speaker Change: Our next question comes from Josh Joseph Osha with Guggenheim. Your line is open.

Speaker Change: Thanks for taking my question I've two product questions for you. The first one relates to some of the DC generators that you were talking about.

Speaker Change: Products to be coupled with storage I'm curious if we can get an update there and second in terms of the storage strategy.

Speaker Change: Given the timeline you were talking about in the Micros I know you still have the micro architecture out there.

Aaron Paul Jagdfeld: So, I would tell you that I don't know that there's like a specific interest rate level where we could say we call it being, you know, cooling off, and vice versa, a specific interest rate level where we would say if we get to 3.5%, that it will turn back on. I think a lot of that's just going to depend on economics improving in particular markets, and there's just a ton of factors that go into each one. One moment for our next question. Our next question comes from Joseph Asha on behalf of Guggenheim. Your line is open.

Speaker Change: What can you tell us in particular about how you how you what your outlook is through 80 couple of storage and whether we might see you selling storage alongside other peoples and burgers at some point during 2024 as we wait for the updated fuel Chem product become thank you yes.

Speaker Change: Yes, Thanks, Joe.

Aaron Paul Jagdfeld: Thanks for taking my question. I have two product questions for you. The first one relates to some of the DC generators that you were talking about, you know, as products to be coupled with storage.

Speaker Change: Good questions all of those yes.

Speaker Change: Yes, I think so on the DC generator question. There was a very small product that we launched a couple of years ago, we didn't see a ton of receptivity to it. It really was aimed at people who truly want it to be unplugged from the grid be isolated independent from the grid and it's a small.

Aaron Paul Jagdfeld: I'm curious if we can get an update on that. And second, in terms of the storage strategy, given the timeline you're talking about in the micros, I know you still have the, you know, PICA architecture out there. What can you tell us in particular about, you know, how you, what your outlook is for AT couple storage and whether we might see you selling storage alongside other people's inverters at some point during 2024 as we wait for the updated silicon product to come? Thank you. Yeah, thanks, Joel. You know, good questions, all of those.

Speaker Change: Small host of Av.

Speaker Change: Customers, what we actually think it's probably a better opportunity going forward is to take our our existing AC product AC generator products in an AC coupled environment and allow that generator to act as a.

Speaker Change: As a battery charger through an AC coupling as opposed to a DC. So it's just it's a little bit it's not quite as efficient.

Speaker Change: But and but it allows us to leverage the AC generator platform, which in terms of our cost structure is frankly, just its just better because we just we have scale. There we can offer better value to customers, even though we might we might be taking away a little bit of value in terms of the AC generators are a little bit louder.

Aaron Paul Jagdfeld: Yeah, I think so on the DC generator question. That was a very small product that we launched a couple years ago. We didn't see a ton of receptivity to it. It really was aimed at people who truly wanted to be unplugged from the grid, be isolated, and independent from the grid. And yeah, it's a small, small, you know, host of customers. But what we actually think is probably a better opportunity going forward is to take our existing AC products, AC generator products, in an AC coupled environment and allow the generator to act as a battery charger through an AC coupling as opposed to DC. So it just, it's a little bit, it's not quite as efficient.

Speaker Change: And then maybe as a little consume a little more fuel, but not materially. So so that that kind of direction. We're headed strategically there is kind of moving away from the DC generator product to the AC generators, but it's a really small part of our product line the.

Speaker Change: The broader question, you're asking a kind of an AC coupling, we have AC coupling capabilities today with the pica system.

Aaron Paul Jagdfeld: And but and but it allows us to leverage the AC generator platform, which in terms of our cost structure is frankly, just, it's just better, because we just have scale there, we can offer better value to customers, even though we might, you know, we might be taking away a little bit of value in terms of, you know, the AC generators are a little bit louder, they maybe use a little more fuel, but not materially. So, that's the kind of direction we're headed strategically; there is a kind of moving away from the DC generator product to AC generators, but it's a really small part of our product line. The broader question, and you're asking it kind of about AC coupling, you know, we have AC coupling capabilities today with the PICA system. We can take the battery as a standalone with the PICA inverter, we can AC couple it to a competitor's inverters, but that's not the most efficient architecture.

Speaker Change: We can take the battery as a stand alone with the pica inverter and we can we can AC couple it too.

Speaker Change: Our competitors.

Speaker Change: <unk>, that's not the most efficient architecture. So as we introduce new products. Later this year. The next generation storage products were going to improve the capability for AC coupling and make that a more I'll call. It a better experience a more sophisticated and experienced a lower cost experience going forward and then.

Speaker Change: Of course that sets us up nicely as we go forward with the micro inverter products into 2025.

Speaker Change: We're going to continue to offer the pica products I mean, there are if youre doing a clean sheet implementation, we still believe that DC coupling is the most efficient round trip efficient way to do that and so we think there's a place in the architecture for that system at least for now.

Aaron Paul Jagdfeld: So as we introduce new products later this year, the next generation storage products, we're going to improve the capability for AC coupling and make that a more, I'll call it, a better experience, a more sophisticated experience, a lower cost experience going forward. And then, of course, that sets us up nicely as we go forward with the micro inverter products into 2025. You know, we're going to continue to offer the PICA products. I mean, there are, if you're doing a clean sheet in implementation, we still believe that, you know, DC coupling is the most efficient roundtrip efficient way to do that.

Speaker Change: But as we roll microbe burgers out and as we continue to build out our strategy and have success I think the market will tell us directionally, where we need to go.

Speaker Change: I. Thank you in particular pointed out trying to support both architectures going forward.

Speaker Change: As a heavy load to do and we would probably tend to agree with you on that but again, we've got a long way to go before were.

Speaker Change: Proficient in the AC coupled solutions with the micro <unk> solutions. There is some very capable products in market today, and it's taken us a long time to get to market. Because we are going to have a product that.

Aaron Paul Jagdfeld: And so we think there's a place in the architecture for that system, at least for now. But as we roll out micro inverters, and as we continue to build out our strategy and have success, I think the market will tell us directionally where we need to go. You know, I think you in particular have pointed out trying to support both architectures going forward is a heavy load to do. And we would probably tend to agree with you on that.

Speaker Change: We're proud to put our name on and that will.

Speaker Change: Stand the test of time from a reliability standpoint.

Speaker Change: For our customers.

Speaker Change: We're working through that it's part of the big investment that we've been talking about this 350 to 400 basis point drag it's a piece of that on EBITDA margins, but.

Speaker Change: We're committed to it we think that there is there is there is a huge opportunity for us to be successful in that going forward.

Aaron Paul Jagdfeld: But again, we've got a long way to go before we're, you know, kind of proficient in the AC coupled solutions with the micro inverter solutions. There are some very capable products in the market today. And it's taken us a long time to get to market because we are going to have a product that we're, you know, proud to put our name on and that will stand the test of time from a reliability standpoint for our customers. And we, you know, we're working through that.

Speaker Change: One moment our next question.

Speaker Change: Our next question comes from Jordan Levy with <unk> Securities. Your line is open.

Speaker Change: Hey.

Jordan Levy: Jordan. Thanks for taking my question as it relates to the dealer Count I think you closed the year with 8700, and we have talked about the desire to bring that number closer to 10000 over the coming years. So can you maybe talk to the work you're doing there.

Aaron Paul Jagdfeld: It's part of the big investment that we've been talking about, this 350 to 400 basis point drag on EBITDA margins, but, but we're committed to it. We think that there's, there's a huge opportunity for us to be successful in that going forward. One moment for our next question. Our next question comes from Jordan Levy with Truist Securities. Your line is open. Hey, it's Mo from Jordan.

Jordan: And some of their you know they can point that makes it more challenging to bring that number up. Thank you, yes, absolutely great question.

Jordan: And we've had some eye popping increases over the last couple of years and dealer counts.

Speaker Change: He was a more muted year right, we kind of Flatlined in 'twenty three.

Speaker Change: Yes part of that is I think the the large increase that we saw over 2000 dealers being added in the years, leading up to 23, you've got I think as you would imagine you've got a.

Aaron Paul Jagdfeld: Thanks for taking my question. As it relates to the dealer count, I think you closed the year with 8,700. And you have talked about the desire to bring that number closer to 10,000 over the coming years. So can you maybe talk about the work you're doing there and some of the sticking points that make it more challenging to bring that number up? Thank you.

Speaker Change: Our process there that.

Speaker Change: Our dealer count by the way is on a net basis right. So and we basically we don't count a dealer for the purposes of that count if they haven't bought anything from us in a 12 month period. So we're maybe a little bit hard on ourselves in the way, we think about dealer counts and the way we talk about it. We are if you were to actually look at the total number of dealers in our network, it's more than 8700.

Aaron Paul Jagdfeld: Yeah, absolutely. A great question. And we've had some eye-popping increases over the last couple of years in dealer counts, although 2023 was a more muted year.

Aaron Paul Jagdfeld: We kind of flatlined in 23. Part of that is, I think, the large increase that we saw of over 2,000 dealers being added in the years leading up to 23. I think, as you would imagine, you've got a process there that our dealer count, by the way, is on a net basis. And we basically don't count a dealer for the purposes of that count if they haven't bought anything from us in a 12-month period.

Speaker Change: But the 10000 is a target on a net basis and we are still targeting that the headwinds to that this year in particular.

Speaker Change: Just kind.

Speaker Change: Kind of rollover of some of the adds that we had we still had a lot of really nice gross adds to the dealer count. So we're bringing a new dealers in but we as we call them, we call them dark doors, when a dealer hasnt bought from US in 12 months, we've put them in that quote unquote dark door category and that is an offset to any gross adds that we have so it's kind of churn if you will theres.

Aaron Paul Jagdfeld: So we're maybe a little bit hard on ourselves in the way we think about dealer counts and the way we talk about them. If you were to actually look at the total number of dealers in our network, it's more than 8,700. But the 10,000 is a target on a net basis.

Speaker Change: Churn that happens here, we had more churn in 2023 churn a lot of those dealers that were added over the last couple of years that also happens when you have kind of softer power outage environment, which certainly as we talked about Q4 being a softer environment, that's a headwind to adding dealers, it's tough to get people interested in the category.

Aaron Paul Jagdfeld: And we are still targeting that. The headwinds to that this year, in particular, where I think just the kind of rollover of some of the ads that we had, we still had a lot of really nice gross ads for the dealer count. So we were bringing new dealers in. But as we call them, we call them dark doors.

Aaron Paul Jagdfeld: When a dealer hasn't bought from us in 12 months, we put them in that, quote unquote, dark door category. And that is an offset to any gross ads that we have. So it's kind of churn, if you will. There's a lot of churn that happens there. We had more churn in 2023, churn of a lot of those dealers that were added over the last couple of years. That also happens when you have kind of softer power outage environments, which certainly, as we talked about Q4 being a softer environment, that's a headwind to adding dealers. It's tough to get people interested in the category if the demand isn't necessarily there, right? So we saw in-home consultations drop off in Q4. So those things present headwinds.

Speaker Change: If the.

Speaker Change: If the demand isn't there necessarily right. So we saw.

Speaker Change: In home consultations drop off in Q4, so those things present headwinds I think longer term.

Speaker Change: As we've looked at this we built this from basically zero 20 years ago to 8700 today to get to that 10000.

Speaker Change: We're deploying an army of people that are going out there and engaging with primarily electrical contractors, but we've started to open the aperture on that to also include HVAC contractors. One interesting trend that I think many people would probably noted is youre seeing kind of a consolidation.

Speaker Change: Kind of home services businesses, so electrical contractors getting in the HVAC business or vice versa or into plumbing or into home automation.

Aaron Paul Jagdfeld: I think longer term, as we've looked at this, we built this from basically zero 20 years ago to 8,700 today. To get to that 10,000, we're deploying an army of people that are going out there and engaging with primarily electrical contractors, but we've started to open the aperture on that to also include HVAC contractors. One interesting trend that I think many people have probably noted is you're seeing kind of a consolidation of home services businesses. So electrical contractors getting into the HVAC business or vice versa, or into plumbing or into home automation, kind of this broadening of the suite of services that a contracting business will offer. It's giving us a nice opportunity to get introduced to new kinds of cohorts in the contracting business. And then, on top of that, I would tell you that by bringing Ecobee into the fold, they have upwards of 14,000 HVAC contracting relationships just with the three and a half million homes that they put devices into.

Speaker Change: Candidates broadening of the suite of services that.

Speaker Change: Our contracting business will offer its giving us a nice opportunity to get introduced to new kind of cohorts in the contracting business and then on top of that I would tell you that bringing <unk> into the fold they have upwards of 14000 HVAC contracting relationships.

Speaker Change: With the $3 5 million homes that they've put devices into.

Speaker Change: And that is a kind of a really important.

Speaker Change: [laughter] kind of feeding ground for us in terms of a bench. If you want to think of it that way, where we can add and bring new dealers and to sell to so working all of those paths I'm very confident we're going to get to 10000 as the category continues to expand.

Speaker Change: In the years ahead, so we havent kind of put a pin on the date, that's going to happen, but it's definitely going to happen as the category continues to grow.

Aaron Paul Jagdfeld: And that is a kind of a really important feeding ground for us in terms of a bench, if you wanna think of it that way, where we can add and bring new dealers in to sell to. So working all those paths, I'm very confident we're gonna get to 10,000 as the category continues to expand, you know, in the years ahead. So we haven't kind of put a pin on the date that it's gonna happen, but it's definitely gonna happen as the category continues to grow.

Speaker Change: One moment for our next question.

Speaker Change: Yeah.

Our next question comes from Chip Moore with Roth and can your line is open.

Chip Moore: Hi, Thanks for taking the question.

Chip Moore: Wanted to go back effective visibility for C&I with some of that cyclical deteriorate deterioration you've seen since the investor day.

Chip Moore: And is there may be potential for infrastructure investments to kick in here at some point and start to help drive growth there and then any implications for those three year growth targets you've laid out.

Aaron Paul Jagdfeld: One moment for our next question. Our next question comes from Chip Moore with Roth MKM. Your line is open.

Aaron Paul Jagdfeld: Hi, thanks for taking the question. Wanted to go back to visibility for CNI with some of that cyclical deterioration you've seen since the investor day. Aaron, is there maybe potential for infrastructure investments to kick in here at some point and start to help drive growth there? And then any implications for those three-year growth targets you've laid out? Thanks.

Speaker Change: Yes, great question.

In terms of infrastructure obviously.

Speaker Change: Anything that moves the needle there will certainly help shorten.

The cycle.

The kind of off cycle for the rental equipment for sure.

Speaker Change: Telecom cycle, I think it's going to play out.

Speaker Change: Some of that is.

Speaker Change: The installation bandwidth that those.

Aaron Paul Jagdfeld: Yeah, it's a great question. You know, I think in terms of infrastructure, obviously, anything that moves the needle there will certainly help shorten the, you know, the cycle, the kind of off cycle for the rental equipment, for sure. You know, the telecom cycle is going to play out. Some of that is the kind of installation bandwidth that those network, you know, kind of operators have to build out, right, the speed at which they can build out their networks. There is some, we ran into some headwinds there with some specific customers, just being able to kind of keep pace with, you know, keep pace with installations according to their schedules that they had originally set for themselves. We were giving As a result, we were not really calling it that way because it's not really a business where we talk about inventory being carried forward.

Speaker Change: Network.

Speaker Change: Operators have to build out the speed at which they can build out their networks there.

Speaker Change: There is some.

Speaker Change: We ran into some some headwinds there with some specific customers just being able to kind of keep pace with that.

Speaker Change: Keep pace with installations occur.

According to their schedules that they had originally set for themselves we were giving them products. According to the schedules you could probably say, okay. Maybe there's some field inventory there as a result, we're not really calling it that way because it's not really a business. We we talk about inventory being carried for but.

Speaker Change: That's somewhat the issue there with maybe one or two of those customers, but I think that cycle I don't know theres much. We can do this or that we would see two point to kind of that cycle.

Speaker Change: Accelerating I think it is just going to have to play out the way that it plays out but.

Speaker Change: But I think again the C&I cycles, we've seen this movie before.

Speaker Change: So it doesn't it doesn't really worry us the visibility question's a good one.

Speaker Change: Unfortunately, because these are big customers that kind of is in our world. We say they will big pencils right, they've got and Thats, probably a data terminal anti dating myself, but they can write the.

Aaron Paul Jagdfeld: But, you know, that's somewhat the issue there with maybe one or two of those customers. But I think that cycle, I don't I don't know, there's much we can do about that, or that we would see to point to kind of that cycle. Accelerating, I think it's just going to have to play out the way that it plays out.

Speaker Change: Big Big keep we're thinking right now.

Speaker Change: They can stop writing <unk>.

Speaker Change: And when we get forecast from them and we listen to the same things that others listened to with in terms of their capex guidance because that obviously is the best proxy that we can use and we have as much dialogue with them as we can about what are their build out plans for networks and what are their build out plans for fleet. When it comes to the rental customers and we know we have some visibility into the pipe.

Aaron Paul Jagdfeld: But, but I think, you know, I, again, the CNI cycles, we've seen this movie before. So it doesn't, it doesn't really worry us. The visibility questions, a good one, you know, I, unfortunately, because these are big customers that, in our world, we say, you know, they wield big pencils, right, they've got, and that's probably a dated term. Now, I'm dating myself, but they can write big, big keyboards; they can write big POs, or they can stop writing big POs.

Speaker Change: Line for beyond standby projects as we're quoting them, but but unfortunately, the visibility it's probably the weakest area of visibility for us in terms of our C&I business. When you look at the the strength, we called out in C&I, which is offsetting some of this weakness it won't offset all of it obviously, because we're saying C&I is going be down for the year, 10%, but but offsetting that.

Speaker Change: Our IDC, we call it our IDC, our independent distribution network as we continue to see growth. There in fact in some of the distribution partners. We actually have acquired a number of them over the last several years and.

Aaron Paul Jagdfeld: And you will get forecasts from them. And we listen to the same things that others listen to in terms of their CAPEX guidance, because that obviously is the best proxy that we can use. And we have as much dialogue with them as we can about what are their build-out plans for networks. And what are their build-out plans for fleet when it comes to rental customers.

Speaker Change: Given us really clearer insight and really good visibility actually into some local markets.

Speaker Change: And that is much more of a quotation business.

Aaron Paul Jagdfeld: And we know, you know, we have some visibility in the pipeline for beyond standby projects as we're quoting them, but, unfortunately, visibility is probably the weakest area of visibility for us in terms of our CNI business. When you look at the strength we called out in CNI, which is offsetting some of this weakness, it won't offset all of it, obviously, because we're saying CNI is gonna be down for the year by 10%. But, but offsetting that our IDC, we call it our IDC, our independent distribution network, we continue to see growth there. In fact, some of the distribution partners, we have acquired a number of them over the last several years. And that's given us really clear insight and really good visibility into some local markets.

Speaker Change: And so we have I think much better visibility in that part of the business on C&I, but not as much. Unfortunately some of these national account customers that can be I think a lot more volatile and their order patterns and there are some pockets around the globe that we're seeing growth as well.

Speaker Change: Good point offset some of that softness, but I think I think the last part of your question was how.

Speaker Change: How do we feel about C&I in the SRP that we the long range plan that we rolled out during Investor day, and I think you are.

Speaker Change: Talking to the team that runs that business, it's I think because they they.

Speaker Change: Select certain customers that were referring to in telecom rent that will be on standby.

Speaker Change: Maybe they turn things off a little bit harder than we were expecting when we were walking through the investor day materials, but we think they think we think that they can turn them back on just as fast. So they can put a cycle in the LR exactly but maybe it just was a little bit harder down in 'twenty four than maybe they were maybe thought but what they think they're going to be turning things back on in line with the MRP.

Aaron Paul Jagdfeld: And that is much more of a quotation business. And so we have, I think, much better visibility in that part of the business on CNI, but not as much, unfortunately, in some of these national account customers that can be, I think, a lot more volatile in their order patterns. And there are some pockets around the globe that we're seeing growth as well to offset some of that softness.

Aaron Paul Jagdfeld: But I think, I think the last part of your question was, And how do we feel about C&I, you know, in the LRP that we, the long range plan that we rolled out during investor day. And I think we in talking to the team that runs that business, it's, I think, because they, these, these select certain customers that we're referring to in telecom, rental, be on standby, they, Maybe they turned things off a little bit harder than we were expecting when we were walking through the Investor Day materials, but we think, they think, we think that they can turn them back on just as fast, so. They had put a cycle in the LRP, but maybe it just was a little bit harder down in 24 than maybe they originally thought, but they think they're going to be turning things back on in line with the LRP. 2526 College.

Speaker Change: In 'twenty five 'twenty six call it.

Speaker Change: One moment our next question.

Key Tucson: Our next question comes from key Tucson with Northcoast Research Your line is open.

Good morning, guys. Thanks for getting me in here just one question on in terms of the interest rates. This time focus more on the HSBC can you just remind me in terms of how critical is the interest rate environment too I guess.

Tucson: Growth or decline of <unk> in any given quarter.

Speaker Change: Yes, Thanks Keith.

Speaker Change: Sorry to get you in here at the end [laughter] major wait an hour and a half but.

Keith: Yes, the interest rate actually we've said this a couple of times I think as we talked through this I don't know if we've talked about publicly as much but.

Keith: It's not the home standby category in particular is not a highly interest rate.

Keith: Sensitive category, specifically now obviously the impacts that higher rates have on the macroeconomic environment.

Aaron Paul Jagdfeld: One moment for our next question. Our next question comes from Keith Housum with North Coast Research. Your line is open. Good morning, guys.

Keith: Bofa job security issues for people or kind.

Keith: Other challenges with maybe around.

Aaron Paul Jagdfeld: Thanks for getting me in here. Just one question in terms of the interest rates. This time, focus more on the HSBs. Can you guys remind me in terms of how critical the interest rate environment is to, I guess, the growth or decline of HSBs in any given quarter? Yeah, thanks, Keith. And sorry to get you in here at the end. I made you wait an hour and a half.

Keith: No.

Keith: The way they feel about the way people feel about spending money on large ticket purchases that does have an impact kind of on the margins, but it's not a highly finance its not a highly finance purchase oddly enough now that said, we do have a third party financing program through synchrony, which has been a great program. It grew like almost 50% last year.

Aaron Paul Jagdfeld: But yeah, the interest rate, actually, we've said this a couple of times as we talked through this, I think, as we talked through this, I don't know if we've talked about it publicly as much, but it's not so high that the home standby category in particular is not a highly interest rate sensitive category specifically. Now, obviously, the impacts that higher rates have on the macro economic environment, you know, be they job security issues for people or, you know, kind of, you know, other challenges with, you know, maybe around, you know, the way they feel about the way people feel about spending money and on large ticket purchases, that does have an impact, you know, kind of on the margins, but it's not a highly financed purchase, oddly enough. Now, that said, you know, we do have a third-party financing program through Synchrony, which has been a great program. It grew by, like, almost 50% last year.

Keith: So we are seeing more evidence that people are using finance, but then when you Peel the onion back the number one thing that we see people using is the 18 month same as cash so we.

We don't think that we think that that's not necessarily evidence just theyre just deferring their payments cost of their payment and it doesn't cost them anything they're going to use somebody else's money for that year and a half.

Speaker Change: Yes, I don't think that all indications are that when you look at the the kind of demographic that we sell into primarily there and these are people that.

Are there are older Americans, who.

Speaker Change: <unk> got their homepage for a lot of cases, they are probably retired and cases so for them it's more about.

Speaker Change: Protecting their home protecting their safety protecting their families and I think that it's frankly, it's more about that than it is maybe about where interest rates are at any point in time.

Aaron Paul Jagdfeld: So we are seeing more evidence of people using finance. But then, when you peel the onion back, the number one thing that we see people using is the 18-month same as cash. So they're, you know, we don't think that that's necessarily evidence, just they're just delaying their payment, their payment, it doesn't cost anything, they're going to use somebody else's money for that year and a half. So I, you know, I don't think that all indications are that, and you look at the kind of demographic that we sell into primarily there. And these are people, you know, that are, they're older Americans who, you know, they've got their home paid for in a lot of cases, they're probably retired in some cases.

Speaker Change: Yeah.

Speaker Change: That concludes the question and answer session. At this time I would like to turn the call back to Chris Rosman for closing remarks.

We want to thank everyone for joining us. This morning, we look forward to discussing our first quarter 2024 earnings results with you in early May Thank you again and goodbye.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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Aaron Paul Jagdfeld: So for them, it's more about, you know, protecting their home, protecting their safety, protecting their families. And, you know, I think that it's, frankly, it's more about that than it is maybe about where interest rates are at any point. That concludes the question and answer session. At this time, I would like to turn the call back to Chris Rosemann for closing remarks. We want to thank everyone for joining us this morning. We look forward to discussing our first quarter 2024 earnings results with you in early May. Thank you again and goodbye. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. www.globalonenessproject.org www.globalonenessproject.org

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