Q1 2024 Generac Holdings Inc Earnings Call

Operator: Thank you for standing by, and welcome to the Generac Holdings first quarter 2024 earnings call. At this time, all participants are in listen only mode.

Yeah.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered, and you'd like to remove yourself from the queue, simply press star 11 again.

Speaker Change: Thank you for standing by and welcome to the General Holdings' first quarter 2024 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone if your question has been answered.

Operator: As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Kris Rosemann, Senior Manager, Corporate Development and Investor Relations. Please go ahead.

Speaker Change: Like to remove yourself from the queue simply press Star one again as a reminder, today's program is being recorded and now I'd like to introduce your host for today's program, Chris Roseman seating, you're manager corporate development and Investor Relations. Please go ahead.

Kris Rosemann: Good morning, and welcome to our first quarter 2024 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.

Kris Rosemann: Good morning, and welcome to our first quarter 2024 earnings call I'd like to thank everyone for joining US. This morning with me today is <unk>, President and Chief Executive Officer, and York Ragen, Chief Financial Officer, We will begin our call today by commenting on forward looking statements certain statements made during this presentation as well as other information provided from time to time by <unk>.

Kris Rosemann: <unk> 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.

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

Kris Rosemann: 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'll now turn the call over to Eric.

Kris Rosemann: 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'll now turn the call over to Aaron. Thanks, Kris. Good morning, everyone.

Aaron P. Jagdfeld: And thank you for joining us today. Our first quarter results were ahead of our prior expectations due to higher than expected CNI shipments, favorable input costs, and strong operational execution. We are reiterating our overall 2024 outlook this morning for net sales, adjusted EBITDA margin, and free cash flow conversion, which York will discuss more in detail later in the call. Year-over-year, overall net sales increased slightly to $889 million. Residential product sales increased 2% as compared to the prior year quarter, as strong growth in home standby generator shipments was partially offset by a decline in certain other residential product sales. Global CNI product sales decreased 2% from a strong prior year period as a robust increase in shipments to our industrial distributor customers mostly offset weakness in the domestic rental and telecom market.

Eric: Thanks, Chris Good morning, everyone and thank you for joining US today, our first quarter results were ahead of our prior expectations due to higher than expected C&I shipments favorable input costs and strong operational execution.

Eric: We are reiterating our overall 2024 outlook. This morning for net sales adjusted EBITDA margin and free cash flow conversion, which Eric will discuss more in detail later in the call.

Eric: Year over year overall, net sales increased slightly to $889 million residential product sales increased 2% as compared to the prior year quarter as strong growth in home standby generator shipments was partially offset by a decline in certain other residential product sales.

Eric: C&I product sales decreased 2% from a strong prior year period as a robust increase in shipments to our industrial distributor customers, mostly offset weakness in the domestic rental and telecom markets.

Aaron P. Jagdfeld: Significant year-over-year margin expansion and disciplined work in capital management helped drive a substantial improvement in free cash flow generation from the prior year while we continue to invest in our strategic initiatives. Home standby shipments were in line with our prior expectations during the quarter, increasing at a mid-teens rate from the softer prior year period that included a meaningful headwind from excess fuel inventory levels. As expected, shipments and activations were aligned exiting the first quarter, signaling that field inventory levels are reaching more normalized levels.

Significant year over year margin expansion and disciplined working capital management helped drive a substantial improvement in free cash flow generation from the prior year, while we continue to invest in our strategic initiatives.

Eric: Home standby shipments were in line with our prior expectations during the quarter, increasing at a mid teens rate from the softer prior year period that included a meaningful headwind from excess field inventory levels.

Eric: As expected shipments and Activations were aligned exiting the first quarter signaling that field inventory levels are reaching more normalized levels.

Aaron P. Jagdfeld: The removal of the excess field inventory headwind is expected to support strong year-over-year growth in home standby generator sales in the coming quarters. Power outage activity in the U.S. during the first quarter was approximately in line with the longer-term baseline average, as higher outages in January were offset by lower outage activity in the months of February and March.

Eric: The removal of the excess field inventory headwind is expected to support strong year over year growth in home standby generator sales in the coming quarters.

Eric: Power outage activity in the U S. During the first quarter was approximately in line with the longer term baseline average as higher outages in January were offset by lower outage activity in the months of February and March.

Aaron P. Jagdfeld: Activations, which are a proxy for installs, declined modestly from the prior year period, reflecting the softer outage environment over the last several quarters and the resulting weaker home consultation performance, specifically in the fourth quarter of 2023. However, home consultations did increase sequentially during the first quarter, but declined on a year-over-year basis from a very strong prior year period. For historical perspective, home consultations in the first quarter were modestly higher than the first quarter of 2022 but were more than three and a half times higher than the first quarter of 2019.

Eric: Activations, which are a proxy for installs declined modestly from the prior year period, reflecting the softer outage environment over the last several quarters and resulting weaker home consultation performance specifically in the fourth quarter of 2023.

Kris Rosemann: Insultation did increase sequentially during the first quarter, but declined on a year over year basis from a very strong prior year period.

Kris Rosemann: For historical perspective home consultations in the first quarter were modestly higher than the first quarter of 2022, but we're more than three five times higher than the first quarter of 2019.

Aaron P. Jagdfeld: Additionally, we experienced moderate sequential improvement in close rates during the first quarter as we continue to execute initiatives that we believe will drive further increases beyond this year, including data-driven lead optimization practices, sales tool enhancements, and improved lead nurturing practices. We are also making ongoing investments in engaging with our end customers and bringing awareness to the category to new and broader demographic categories to expand the overall sales funnel for home standby generators. We ended the first quarter with our residential dealer count at approximately 8,800, a net increase of 100 dealers during the period.

Kris Rosemann: Additionally, we experienced moderate sequential improvement in close rates during the first quarter as we continued to execute initiatives that we believe will drive further increases beyond this year, including data driven lead optimization practices sales tool enhancements and improved lead nurturing practices.

Kris Rosemann: We are also making ongoing investments in engaging with our end customers and bringing awareness of the category to new and broader demographic categories to expand the overall sales funnel for home standby generators.

We ended the first quarter with our residential dealer count at approximately 8800, a net increase of 100 dealers during the period.

Aaron P. Jagdfeld: We have also been experiencing good traction with non-dealer contractors as we have seen steady increases in the number of installers in our Aligned Contractor Program, an effort that helps us better strengthen these relationships and improve our installation bandwidth while allowing contractors to purchase products through their preferred channel. We will continue to invest in growing our network of installers, including both dealers and non-dealer installers, as well as in the tools and teams to support and optimize these distribution partners, which we view as a key competitive advantage for our business.

Kris Rosemann: We have also been experiencing good traction with non dealer contractors as we have seen steady increases in the number of installers in our aligned contractor program an effort that helps us better strengthen these relationships and improve our installation bandwidth, while allowing contractors to purchase products or their preferred channel.

Speaker Change: We will continue to invest in growing our network of installers, including both dealers and non dealer installers as well as in the tools and teams as well as the tools and teams to support and optimize these distribution partners, which we view as a key competitive advantage for our business.

Aaron P. Jagdfeld: Our teams have also continued to make incremental operational improvements within our home standby production facilities. These improvements contributed to the margin expansion that we experienced in recent quarters, and this momentum bodes well for future growth and profitability. We believe we are emerging from the recent field inventory challenges with a continued focus on quality and execution, as well as an improved competitive position. We will continue to leverage our unparalleled scale and strength in manufacturing, sourcing, marketing, distribution, and our strong financial profile to drive growth in the home standby market in the years ahead as we grow the number of consumers engaging in the category, expand our industry-leading omni-channel distribution network, invest in customized sales processes and tools to drive close rates higher, and expand the broadest product portfolio in the market.

Speaker Change: Our teams are also continuing to make incremental operational improvements within our home standby production facilities.

Speaker Change: These improvements contributed to the margin expansion that we experienced in recent quarters and this momentum bodes well for future growth and profitability.

Speaker Change: We believe we are emerging from the recent field inventory challenges with a continued focus on quality and execution as well as an improved competitive position.

Speaker Change: We will continue to leverage our unparalleled scale and strength in manufacturing sourcing and marketing distribution and our strong financial profile to drive growth in the home standby market in the years ahead as we grow the number of consumers engaging in the category expand our industry, leading omnichannel distribution network invest in customized sales processes and tools to drive closer.

Speaker Change: It's higher and expand the broadest product portfolio in the market.

Aaron P. Jagdfeld: While home standby shipments were in line with our prior expectations during the first quarter, however, our overall residential product sales were lower than expected due to continued softness in global portable generator shipments, as well as weaker domestic energy storage and EB markets, and continued post-pandemic challenges with the market for chore products. We expect these specific software end-market conditions to impact our overall residential product category sales growth for the full year 2024. But our expectations for home standby generator shipments are unchanged relative to our prior guidance.

Speaker Change: While home standby shipments were in line with our prior expectations. During the first quarter. However, our overall residential product sales were lower than expected due to continued softness in global portable generator shipments as well as weaker domestic energy storage and EV markets and continued post pandemic related challenges with the market for chore products.

Speaker Change: We expect these specific softer end market conditions to impact our overall residential product category sales growth for the full year 2024, but our expectations for home standby generator shipments are unchanged relative to our prior guidance.

Aaron P. Jagdfeld: Now moving to our residential energy technology products and solutions, our Ecobee team continued to drive year-over-year sales growth in the first quarter despite a challenging retail environment as performance with professional contractors remained strong. Ecobee's number of connected homes and services attached rate also experienced positive momentum during the quarter. Importantly, Ecobee's gross margin improved meaningfully on a year over year basis, primarily due to cost reduction initiatives and improvement in electronic component supply chains relative to the first quarter of 2023.

Speaker Change: Now moving to our residential energy technology products and solutions, our <unk> team continued to drive year over year sales growth in the first quarter. Despite a challenging retail environment as performance with professional contractors remains strong <unk>.

Speaker Change: <unk> number of connected homes and services attached rate also experienced positive momentum during the quarter importantly, <unk> gross margin improved meaningfully on a year over year basis, primarily due to cost reduction initiatives and improvement in electronic component supply chain relative to the first quarter of 2023.

Aaron P. Jagdfeld: Within our residential clean energy product suite, we continue to make progress on key product development objectives, and additionally, fleet health of our installed base has materially improved after substantially completing our warranty upgrade program in 2023 and with a continued laser focus on improving the quality of these products and solutions. We are also moving forward in our partnerships with the Department of Energy, as we work to bring clean power generation and resiliency to Puerto Rico via our residential energy storage systems and through our participation in the Grid Resilience and Innovation Partnership Program in Massachusetts, which demonstrates our ability to integrate multiple technologies to support a home's energy needs, while also providing additional value for grid operators. Finally, we remain excited about our collaboration with Wallbox, as we will begin shipments of the company's best-in-class EV charging solutions during the second quarter.

Speaker Change: Within our residential clean energy product suite, we continue to make progress on key product development objectives, and Additionally fleet health of our installed base has materially improved after substantially completing our warranty upgrade program in 2023 and with a continued laser focus on improving the quality of these products and solutions.

Speaker Change: We are also moving forward and our partnerships with the department of energy as we work to bring clean power generation and resiliency to Puerto Rico via our residential energy storage systems and through our participation in the grid resilience and innovation partnership program in Massachusetts, which demonstrates our ability to integrate multiple technologies to support our homes energy needs.

Speaker Change: While also providing additional value for good operators.

Speaker Change: Finally, we remain excited about our collaboration with wall box as we will begin shipments of the company's best in class EV charging solutions during the second quarter.

Aaron P. Jagdfeld: We continue to expect that the investments we're making to develop residential energy technology solutions will generate attractive returns in the years to come. Our teams are focused on deep integration of the products and platforms we have acquired while tightening our focus on building high-quality solutions where we believe we can create the most value for the consumer. With improved focus and execution, and by leveraging our core competencies around sales and marketing, lead generation, distribution, customer support, and global sourcing, we believe we can create competitive advantages that will become evident over time as we continue to develop the smart energy home of the future.

Speaker Change: We continue to expect that the investments, we're making to develop residential energy technology solutions will generate attractive returns in the years to come.

Speaker Change: Our teams are focused on deeper integration of the products and platforms. We have acquired while tightening our focus on building high quality solutions, where we believe we can create the most value for the consumer.

Speaker Change: With improved focus on execution and by leveraging our core competencies around sales and marketing lead generation distribution and customer support and global sourcing. We believe we can create competitive advantages that will become evident over time as we continue to develop the smart energy home of the future.

Aaron P. Jagdfeld: Switching gears, I now want to provide some commentary on our C&I products. Global C&I product sales declined 2% from the prior year, which was ahead of our prior expectations, driven by a decrease in sales to domestic telecom and rental customers, partially offset by continued growth in our North American industrial distributor channel and certain international markets. As a result of the strong first quarter outperformance, our expectations for full year 2024 C&I product sales are now higher.

Speaker Change: Switching gears I don't want to provide some commentary on our C&I products.

Speaker Change: Global CNI product sales declined 2% from the prior year, which was ahead of our prior expectations driven by a decrease in sales to domestic telecom and rental customers, partially offset by continued growth in our north American industrial distributor channel and certain industrial our international markets.

Speaker Change: As a result of the strong first quarter outperformance our expectations for full year 2020 for C&I product sales are now higher.

Aaron P. Jagdfeld: Shipments of C&I generators through our North American Distributor Channel again grew significantly in the first quarter. Quoting activity remained resilient in the quarter, and we continue to drive market share gains within our core product lineup. In addition, our operational execution helped to reduce lead times during the quarter. As expected, shipments to national telecom and rental customers declined in the quarter from the strong prior year period.

Speaker Change: Shipments of C&I generators through our North American distributor channel again grew significantly in the first quarter.

Speaker Change: Quoting activity remained resilient in the quarter and we continue to drive market share gains within our core product lineup.

Speaker Change: In addition, our operational execution helped to reduce lead times during the quarter.

Speaker Change: As expected shipments to national Telecom and rental customers declined in the quarter from a strong prior year period.

Aaron P. Jagdfeld: Consistent with our prior expectations, we believe these end markets will remain soft in the coming quarters. However, despite the cyclical weakness in the rental channel, we continue to believe this end market has substantial runway for future growth given the critical need for future infrastructure projects that leverage our products. Additionally, leveraging our 40 years of experience serving the telecom market, we are confident in our ability to capture the future growth potential around the secular trend of increasing global tower and network hub counts and the increasingly critical nature of wireless communications and services that require significantly greater power reliability. Shipments of natural gas generators used in applications beyond traditional standby projects declined moderately during the quarter as the higher interest rate environment impacted project ROIs and timelines.

Speaker Change: Consistent with our prior expectations. We believe these end markets will remain soft in the coming quarters.

Speaker Change: However, despite the cyclical weakness in the rental channel. We continue to believe this end market has substantial runway for future growth given the critical need for future infrastructure projects that leverage our products.

Speaker Change: Additionally, leveraging our 40 years of experience serving the telecom market. We are confident in our ability to capture the future growth potential around the secular trend of increasing global tower and network hub counts and the increasingly critical nature of wireless communications and services that require significantly greater power reliability.

Speaker Change: Shipments of natural gas generators used in applications beyond traditional standby projects declined moderately during the quarter as the higher interest rate environment impacted project Rois and timelines.

Aaron P. Jagdfeld: Longer term, we view these applications as an important opportunity for Generac, our end customers, and grid operators as reliability concerns, energy prices, and market volatility all trend higher. Additionally, we will continue to build a pipeline of multi-asset projects that utilize both our natural gas generators and our recently introduced CNI energy storage system. While we are in the early innings of the growth opportunity, we intend to leverage our leading position in natural gas generators to drive market share gains in behind-the-meter energy storage in the coming years, as our CNI customers seek to utilize energy storage for short-duration outages, variable-rate arbitrage, and grid service opportunities, while also leveraging our traditional generator offerings for a complete resiliency solution.

Speaker Change: Longer term, we view these applications as an important opportunity for <unk>, our end customers and grid operators as reliability concerns energy prices and market volatility all trend higher.

Speaker Change: Additionally, we will continue to build our pipeline of multi asset projects that continue that utilize both our natural gas generators and our recently introduced C&I energy storage systems.

Speaker Change: While we are in the early innings of the growth opportunity, we intend to leverage our leading position in natural gas generators to drive market share gains and behind the meter energy storage in the coming years as our C&I customers seek to utilize energy storage for short duration outages variable rate arbitrage and grid service opportunities, while also leveraging our traditional generator offerings for our <unk>.

Speaker Change: <unk> resiliency solution.

Aaron P. Jagdfeld: We believe we are uniquely positioned to bring these solutions to market and continue to invest in the teams, technology, and processes necessary to deliver comprehensive solutions for the C&I market focused on energy resilience and efficiency. Internationally, total sales were lower year over year, primarily related to declines in intercompany shipments from our Mexican operations to the telecom market in the US, as well as lower shipments in certain European markets, most notably for portable generators, as energy security concerns eased relative to the first quarter of 2023.

Speaker Change: We believe we are uniquely positioned to bring these solutions to market and continue to invest in the teams technology and processes necessary to deliver comprehensive solutions for the C&I market focused on energy resilience and efficiency.

Speaker Change: Internationally total sales were lower year over year, primarily related to declines in intercompany shipments from our Mexican operations to the telecom market in the U S as well as lower shipments in certain European markets, most notably for portable generators as energy security concerns eased relative to the first quarter of 2023.

Aaron P. Jagdfeld: Strong growth in shipments to Latin American end markets partially offset this softness. Internationally, international adjusted EBITDA margins held at 15%, consistent with the prior year period, as disciplined price-cost actions were offset by lower operating leverage on decreased shipment volumes.

Speaker Change: Strong growth in shipments to Latin American end markets, partially offset this softness.

Speaker Change: Internationally International adjusted EBITDA margins held at 15% consistent with the prior year period as disciplined price cost actions were offset by lower operating leverage on decreased shipment volumes.

Aaron P. Jagdfeld: In closing, this morning, we are encouraged by the ongoing improvement in operational execution reflected in our first quarter results, as strong year-over-year performance in home standby generators and increased shipments of C&I products to our industrial distributor customers offset end-market softness in other areas of our business. The return to our historically robust gross margin and cash flow generation profile allows for additional capital allocation optionality and further strengthens our confidence in executing our Powering a Smarter World enterprise strategy.

Speaker Change: In closing this morning, we are encouraged by the ongoing improvement in operational execution reflected in our first quarter results as strong year over year performance in home standby generators and increased shipments of C&I products to our industrial distributor customers offset end market softness in other areas of our business.

Speaker Change: The return to our historically robust gross margin and cash flow generation profile allows for additional capital allocation Optionality and further strengthens our confidence in executing our powering a smarter world enterprise strategy.

Aaron P. Jagdfeld: Additionally, the recent acceleration in data center construction activity, driven in large part by the emergence of artificial intelligence, has further increased the growing pressure on electricity supply-demand imbalances and underscores the relevance of the megatrends that underpin our enterprise strategy. Data centers will not only directly increase industry-wide demand for backup power but have also served to raise public awareness of the looming electrical grid supply constraints. Accelerating demand for artificial intelligence and the deployment of energy-intensive data centers join the growing trends of electrification and the re-industrialization of North America, which is driving power consumption forecasts meaningfully higher than previously forecasted.

Speaker Change: Additionally, the recent acceleration in data center construction activity driven in large part by the emergence of artificial intelligence has further increased the growing pressure on electricity supply demand imbalances and underscores the relevance of the mega trends that underpin our enterprise strategy.

Speaker Change: Data centers will not only directly increase industry wide demand for backup power, but have also served to raise public awareness of the looming electrical grid supply constraints.

Speaker Change: Accelerating demand for artificial intelligence and the deployment of energy intensive data centers joined the growing trends of electrification and the Reindustrialization of North America, which is driving power consumption forecast meaningfully higher than previously forecasted.

Aaron P. Jagdfeld: At the same time, grid operators continue to add intermittent power generation sources and retire baseload thermal generation, while also facing extensive siting and permitting challenges as well as critical equipment shortages. After multiple decades of very little growth in electrical demand, the aging power grid in the U.S. is clearly not prepared for the future trajectory of power consumption needed to satisfy these converging trends.

Speaker Change: At the same time grid operators continue to add intermittent power generation sources and retire baseload thermal generation, while also facing extensive siting and permitting challenges as well as critical equipment shortages.

Speaker Change: After multiple decades of very little electrical growth in electrical demand the aging power grid in the U S is clearly not prepared for the future trajectory of power consumption needed to satisfy these converging trends and this is even before considering the long term trend of increasingly frequent severe weather events that are creating additional stress on the nation's electric.

Aaron P. Jagdfeld: And this is even before considering the long-term trend of increasingly frequent severe weather events that are creating additional stress on the nation's electrical grid. Generac's backup power portfolio, in particular, is well-positioned to provide home and business owners with the continuity and resilience they demand in an increasingly electrified world. In addition, our next-generation energy technology solutions across both residential and CNI product categories will further expand on our resiliency value proposition by helping optimize efficiency, consumption, comfort, and cost.

Speaker Change: Grid.

Speaker Change: <unk> backup power portfolio in particular is well positioned to provide home and business owners with the continuity and resilience they demand and an increasingly electrified world.

Speaker Change: In addition, our next generation energy technology solutions across both residential and C&I product categories will further expand on our resiliency value proposition by helping optimize for efficiency consumption comfort and cost.

Aaron P. Jagdfeld: We believe our broad offering of products and solutions is uniquely capable of helping home and business owners solve the challenges resulting from this accelerating energy transition. I'll now turn the call over to York to provide further details on our first quarter results and our updated outlook for 2024.

Speaker Change: We believe our broad offering of products and solutions are uniquely capable in helping home and business owners solve the challenges, resulting from this accelerating energy transition.

Speaker Change: I'll now turn the call over to York to provide further details on our first quarter results and our updated outlook for 2020 for your thanks Aaron.

York A. Ragen: Thanks, Aaron. Looking at the first quarter 2024 results in more detail. Net sales increased to $889 million during the first quarter of 2024, as compared to $888 million in the prior year first quarter. The combination of contributions from acquisitions and the favorable impact from foreign currency had an approximate 1% positive impact on revenue growth during the quarter. Looking at consolidated net sales for the first quarter by product class, residential product sales increased 2% to $429 million, as compared to $419 million in the prior year.

York A. Ragen: Looking at first quarter 2024 results in more detail.

York A. Ragen: Net sales increased to $889 million during the first quarter of 2024 as compared to $888 million in the prior year first quarter.

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

York A. Ragen: Growth in residential product sales was primarily driven by a mid-teens increase in shipments of home standby generators. However, this was partially offset by a large decrease in portable generator shipments in the U.S. and Europe, given a strong prior year comparison. Ongoing softness in the domestic solar plus storage market and Lord Shore Product Sales. Commercial and industrial product sales for the first quarter of 2024 decreased 2 percent to $354 million as compared to $363 million in the prior year quarter.

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

York A. Ragen: Residential product sales increased 2% to $429 million as compared to $419 million in the prior year.

York A. Ragen: Growth in residential product sales was primarily driven by a mid teens increase in shipments of home standby generators.

York A. Ragen: This was partially offset by a large decrease in portable generator shipments in the U S and Europe, given a strong prior year comparison.

York A. Ragen: Ongoing softness in the domestic solar plus storage market.

York A. Ragen: And large or product sales.

York A. Ragen: Commercial and industrial product sales for the first quarter of 2024 decreased 2% to $354 million as compared to $363 million in the prior year quarter.

York A. Ragen: Foreign currency and acquisitions contributed approximately 2% growth in the quarter. The core sales decline was due to the expected weakness in sales to our domestic telecom and national equipment rental customers. This performance was largely offset by a robust increase in C&I product shipments through our domestic industrial distributor channel and growth in certain international markets, including Latin America. Net sales for other products and services increased slightly to $106 million, including approximately 1% contribution from favorable foreign currency.

York A. Ragen: Foreign currency and acquisitions contributed approximately 2% growth in the quarter.

York A. Ragen: The core sales decline was due to the expected weakness in sales to our domestic telecom and national equipment rental customers.

York A. Ragen: This performance was largely offset by a robust increase in C&I products shipments through our domestic industrial distributor channel and growth in certain international markets, including Latin America.

York A. Ragen: Net sales for other products and services increased slightly to $106 million, including approximately 1% contribution from favorable foreign currency.

York A. Ragen: Gross profit margin was 35.6% compared to 30.7% in the prior year first quarter due to a favorable sales mix given stronger home standby shipment, improved production efficiencies, lower input costs, and higher pricing as compared to the prior year. First quarter gross margins exceeded our prior expectations as a result of better than expected input cost realization and strong operational execution. However, operating expenses increased by 21 million, or 9%, as compared to the first quarter of 2023.

York A. Ragen: Gross profit margin was 35, 6% compared to 37% in the prior year first quarter due to due to a favorable sales mix given stronger home standby shipments improved production efficiencies and lower input costs and higher pricing as compared to the prior year.

York A. Ragen: First quarter gross margins exceeded our prior expectations as a result of better than expected input cost realization and strong operational execution.

York A. Ragen: This increase was primarily due to ongoing investment in our teams to drive future growth and Hire Marketing Spend to create incremental awareness for our products. More specifically, research and development expenses grew at a rate approximately double that of our overall operating expenses, highlighting our ongoing evolution to an energy technology solutions company. Operating expenses for the quarter were in line with our prior expectations as we execute strategic initiatives to drive long-term growth.

York A. Ragen: Operating expenses increased $21 million or 9% as compared to the first quarter of 2023. This increase was primarily due to ongoing investment in our teams to drive future growth.

York A. Ragen: And higher marketing spend to create incremental awareness for our products.

York A. Ragen: More specifically research and development expenses grew at a rate approximately double that of our overall operating expenses highlighting our ongoing evolution to an energy technology solutions company.

York A. Ragen: Operating expenses for the quarter were in line with our prior expectations as we execute strategic initiatives to drive long term growth.

York A. Ragen: As a result of these factors, a just city bid-dob before deducting for non-controlling interests as defined in our earnings release was $127,000,000, or 14.3% of net sales in the first quarter as compared to $100,000,000, or 11.3% of net sales in the prior year. I will now briefly discuss financial results for our two reporting segments. Domestic segment total sales, including inter-segment sales, increased slightly to $720 million in the quarter. Adjusted EBITDA for this segment was $99 million, representing a 13.8% margin, as compared to $68 million in the prior year, or 9.4% of total sales. International segment total sales, including inner segment sales, decreased 14% to $187 million in the quarter, as compared to $216 million in the prior year quarter.

York A. Ragen: As a result of these factors adjusted EBITDA before deducting for Noncontrolling interests as defined in our earnings release.

York A. Ragen: Was $127 million or 14, 3% of net sales in the first quarter as compared to $100 million or 11, 3% of net sales in the prior year.

York A. Ragen: Foreign currency and acquisitions contributed approximately 4% of sales growth in the quarter. The approximately 18% core total sales decline for the segment was primarily driven by declines in intercompany shipments from our Mexican operations to the domestic telecom market, as well as lower shipments in certain European markets, most notably for portable generators. Adjusted EBITDA for the segment before deducting for non-controlling interest was $28,000,000, or 15% of total sales, as compared to $32,000,000, or 15% of total sales, in the prior year.

York A. Ragen: I will now briefly discuss financial results for our two reporting segments.

York A. Ragen: Domestic segment total sales, including inter segment sales decreased slightly to $720 million in the quarter.

York A. Ragen: Adjusted EBITDA for the segment was 99 million, representing a 13, 8% margin as compared to $68 million in the prior year or nine 4% of total sales.

York A. Ragen: International segment total sales, including inter segment sales decreased 14% to $187 million in the quarter as compared to 216 million in the prior year quarter.

York A. Ragen: Foreign currency and acquisitions contributed approximately 4% sales growth in the quarter.

York A. Ragen: The approximate 18% core total sales decline for the segment was primarily driven by declines in intercompany shipments from our Mexican operations to the domestic telecom market.

York A. Ragen: As well as lower shipments in certain European markets, most notably for portable generators.

York A. Ragen: Adjusted EBITDA for the segment before deducting for Noncontrolling interests was $28 million or 15% of total sales as compared to $32 million or 15% of total sales in the prior year.

York A. Ragen: Now switching back to our financial performance for the first quarter of 2024 on a consolidated basis. As disclosed in our earnings release, gap net income for the company in the quarter was $26 million, as compared to $12 million for the first quarter of 2023. The current year period includes a $6 million non-cash expense that reflects the change in the fair value of our warrants and equity securities in Wallbox, a minority investment we made in Q4 of 2023. The income taxes during the current year's first quarter were $12 million, or an effective tax rate of 31.2%, as compared to $8 million, or an effective tax rate of 35.7% for the prior year.

York A. Ragen: Now switching back to our financial performance for the first quarter of 2004 on a consolidated basis.

York A. Ragen: As disclosed in our earnings release GAAP net income for the company in the quarter was $26 million as compared to $12 million for the first quarter of 2023.

York A. Ragen: The current year period includes a $6 million noncash expense that reflects the change in the fair value of our warrants and equity securities in wallboard ex a minority investment we made in Q4 of 2023.

York A. Ragen: GAAP income taxes during the current year first quarter were $12 million or an effective tax rate of 31, 2% as compared to $8 million or an effective tax rate of 35, 7% for the prior year.

York A. Ragen: The decrease in effective tax rate was primarily driven by higher pre tax book income that reduce the impact of certain discrete tax items in the current year.

York A. Ragen: The decrease in the effective tax rate was primarily driven by higher pre-tax book income that reduced the impact of certain discrete tax items in the current year. Diluted net income per share for the company on a gap basis was 39 cents in the first quarter of 2024, compared to $0.05 in the prior year. The current year period included a $2.7 million redemption value adjustment that impacted earnings per share, while the prior year period included a $9 million redemption value adjustment.

York A. Ragen: Diluted net income per share for the company on a GAAP basis was <unk> 39 in the first quarter of 2024 compared to <unk> in the prior year.

York A. Ragen: The current year period included a $2 7 million redemption redemption value adjustment that impacted our earnings per share while the prior year period included a $9 million redemption value adjustment.

York A. Ragen: Adjusted net income for the company, as defined in our earnings release, was $53 million in the current year, first quarter, or $0.88 per share. This compares to adjusted net income of $39 million in the prior year, or $0.63 per share. Cash flow from operations in the current year, first quarter was a positive $112 million as compared to negative $19 million in the prior year, first quarter.

York A. Ragen: Adjusted net income for the company as defined in our earnings release was $53 million in the current year quarter or <unk> 88.

York A. Ragen: <unk> per share.

York A. Ragen: This compares to adjusted net income of $39 million in the prior year or <unk> 63 per share.

York A. Ragen: Cash flow from operations in the quarter and the current year first quarter was a positive $112 million as compared to negative $19 million in the prior year first quarter.

York A. Ragen: And free cash flow, as defined in our earnings release, was positive $85 million as compared to negative $42 million in the same quarter last year. The significant improvement in free cash flow was primarily due to higher operating earnings. A reduction in primary working capital in the current year quarter and a large one-time cash tax payment in the prior year period, which did not repeat. Total debt outstanding at the end of the quarter was $1.56 billion, resulting in a gross debt leverage ratio at the end of the first quarter of 2.35 times on an as-reported basis, a continued reduction from the 2.5 times at the end of 2023.

York A. Ragen: And free cash flow as defined in our earnings release was positive $85 million as compared to negative $42 million in the same quarter last year.

York A. Ragen: The significant improvement in free cash flow was primarily due to higher operating earnings.

York A. Ragen: A reduction in primary working capital in the current year quarter.

York A. Ragen: And a large onetime cash tax payment in the prior year period, which did not repeat.

York A. Ragen: Total debt outstanding at the end of the quarter was $1 $5 6 billion.

York A. Ragen: Resulting in a gross debt leverage ratio at the end of the first quarter of 235 times on an as reported basis.

York A. Ragen: <unk> reduction from the two five times at the end of 2023.

York A. Ragen: With that, I will now provide further comments on our updated outlook for 2024. As disclosed in our press release this morning, we are maintaining our overall outlook for net sales and adjusted even without margin for the full year 2024. For our top-line sales outlook, we still expect overall year-over-year growth to be approximately 3 to 7 percent, which includes a slight favorable impact from acquisitions in foreign currencies. However, we now expect a slightly lower mix of residential products and a slightly higher mix of C&I products compared to our previous expectations.

Speaker Change: With that I will now provide further comments on our updated outlook for 2024.

York A. Ragen: As disclosed in our press release. This morning, we are maintaining our overall outlook for net sales and adjusted EBITDA margin for the full year 2024.

York A. Ragen: For our topline sales outlook, we still expect overall year over year growth to be approximately 3% to 7%, which includes a slight favorable impact from acquisitions and foreign currency.

York A. Ragen: However, we now expect a slightly lower mix of residential products and a slightly higher mix of C&I products compared to our previous expectations.

York A. Ragen: As Aaron previously mentioned, we are not changing our outlook for home standby generator shipments for the full year. As field inventory for home standby generators normalizes, and we start shipping in line with the end market, we continue to expect a significant year-over-year increase in home standby generator shipments. However, other residential products are facing softer end market conditions than previously anticipated.

York A. Ragen: As Aaron previously mentioned, we are not changing our outlook for home standby generator shipments for the full year.

York A. Ragen: As field inventory for home standby generators normalizes and we start shipping in line with the end market. We continue to expect a significant year over year increase in home standby generator shipments.

York A. Ragen: However, other residential products are facing softer end market conditions than previously anticipated.

York A. Ragen: As a result of lower expectations for global portable generator shipment, continued softness in domestic energy storage and EV markets, and weakness in shore product sales, we now expect the full-year growth rate for residential product sales to be in the low double-digit range as compared to the mid-teens growth rate previously projected. Offsetting this incremental softness in residential end markets, we now anticipate C&I product sales to be higher than previously expected, resulting in a mid to high single-digit rate decrease versus prior year, as compared to our prior guidance for an approximate 10% decline.

York A. Ragen: As a result of lower expectations for global portable generator shipments continued softness in domestic energy storage and EV markets and weakness in short product sales. We now expect our full year growth rate for residential product sales to be in the low double digit range as compared to the mid teens growth rate previously projected.

York A. Ragen: Offsetting this incremental softness in residential end markets. We now anticipate C&I product sales to be higher than previously expected, resulting in a mid to high single digit rate decrease versus prior year as compared to our prior guidance for an approximate 10% decline.

York A. Ragen: This improved outlook is primarily driven by higher-than-expected shipments to our domestic industrial distributor customers in the first quarter. Specifically, for the second quarter, we expect overall net sales to be nearly flat as compared to the prior year period, with growth rates anticipated to accelerate in the second half of the year. Importantly, this guidance assumes a level of power outage activity during the remainder of the year that is in line with the longer-term baseline average.

York A. Ragen: This improved outlook is primarily driven by the higher than expected shipments to our domestic industrial distributor customers in the first quarter.

York A. Ragen: Specifically for the second quarter, we expect overall net sales to be nearly flat as compared to the prior year period with growth with growth rates anticipated to accelerate in the second half of the year.

York A. Ragen: Importantly, this guidance assumes a level of power outage activity during the remainder of the year that is in line with the longer term baseline average.

York A. Ragen: Consistent with our historical approach, this outlook does not assume the benefit of a major power outage event, which could add $50 to $100 million in additional shipments during the year. However, our gross margin expectations for the full year 2024 are now modestly higher than previous guidance given the Q1 outperformance. We now expect gross margins to improve by approximately 300 to 350 basis points over the full year 2023, an increase from the 300 basis point improvement previously expected.

York A. Ragen: Consistent with our historical approach this outlook does not assume the benefit of a major power outage event, which could add $50 million to $100 million in additional shipments during the year.

York A. Ragen: Our gross margin expectations for the full year 2024 are now modestly higher than previous guidance given the Q1 outperformance.

York A. Ragen: We now expect gross margins to improve by approximately 300 to 350 basis points over the full year of 2023 and.

York A. Ragen: An increase from the 300 basis point improvement previously expected.

York A. Ragen: Gross margins are projected to increase sequentially throughout the year with second half 2024 gross margins now growing by approximately 200 basis points over the first half of 2020 for gross margins given favorable mix price and cost impacts.

York A. Ragen: Gross margins are projected to increase sequentially throughout the year. With second half 2024 gross margins now growing by approximately 200 basis points over the first half 2024 gross margins, given favorable mix, price, and cost impact. Adjusted EBITDA margins before deducting for non-controlling interests are still expected to be approximately 16.5% to 17.5% for the full year.

York A. Ragen: Adjusted EBITDA margins before deducting for Noncontrolling interest are still expected to be approximately 16, five to 17, 5% for the full year.

York A. Ragen: This guidance assumes that the better-than-expected gross margins previously discussed will be mostly offset by modestly higher-than-expected operating expenses to help support enterprise-wide strategic initiatives. As a result, we now expect second half adjusted EBITDA margins to be approximately 450 basis points higher than first half EBITDA margins driven by the combination of gross margin expansion and operating leverage on higher sales volumes in the second half of the year. This compares to the previous expectation of nearly 600 basis points of EBITDA margin improvement from the first half to the second half of the year.

York A. Ragen: This guidance assumes that the better than expected gross margins previously discussed will be mostly offset by modestly higher than expected operating expenses to help support enterprise wide strategic initiatives.

York A. Ragen: As a result, we now expect second half adjusted EBITDA margins to be approximately 450 basis points higher than first half EBITDA margins driven by the combination of gross margin expansion and operating leverage on higher sales volumes in the second half of the year.

York A. Ragen: This compares to the previous expectation of nearly 600 basis points.

York A. Ragen: <unk> EBITDA margin improvement from the first half to the second half of the year.

York A. Ragen: As is our normal practice, we are also providing updated guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2024. For the full year, our gap effective tax rate is still expected to be approximately 25 to 26% as compared to the 25.2% full year gap tax rate for 2023. This is expected to result in a gap effective tax rate of approximately 25% in each of the remaining three quarters of the year.

York A. Ragen: As is our normal practice, we will also.

York A. Ragen: We're also providing updated guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2024.

York A. Ragen: For the full year, our GAAP effective tax rate is still expected to be approximately 25% to 26% as compared to the 25, 2% full year GAAP tax rate for 2023.

York A. Ragen: This is expected to result in a GAAP effective tax rate of approximately 25% in each of the remaining three quarters of the year.

York A. Ragen: And most importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add-back items should be reflected net of tax using our expected effective tax rate. Interest expense is now expected to be approximately $90 to $93 million as compared to prior guidance of approximately $85 to $90 million due to an increase in interest rate expectations for the remainder of the year. This guidance assumes no additional term loan or revolver principal prepayments during the year.

York A. Ragen: Importantly to arrive at appropriate estimates for adjusted net income and adjusted earnings per share.

York A. Ragen: Add back items should be reflected net of tax using our expected effective tax rate.

York A. Ragen: Interest expense is now expected to be approximately 90% to $93 million as compared to prior guidance of approximately $85 million to $90 million due to an increase in interest rate expectations for the remainder of the year.

York A. Ragen: This guidance assumes no additional term loan a revolver principal prepayments during the year.

York A. Ragen: Our capital expenditures are still projected to be approximately 3% of our forecasted net sales for the year. Our overall cash flow generation guidance remains unchanged. Operating and free cash flow generation is still expected to follow historical seasonality of being disproportionately weighted toward the second half of the year in 2024. For the full year, we continue to expect adjusted net income to free cash flow conversion to be strong at approximately 100 percent as we continue to monetize working capital bills of prior years.

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

York A. Ragen: Our overall cash flow generation guidance remains unchanged operating and free cash flow generation is still expected to follow historical seasonality of being disproportionately weighted towards the second half of the year in 2024.

York A. Ragen: For the full year, we continue to expect adjusted net income to free cash flow conversion to be strong at approximately 100% as we continue to monetize working capital build of prior years.

York A. Ragen: Appreciation Expense, Gap and Tangible Amortization Expense, Stock Compensation Expense, and Diluted Share Count Expectations also remain consistent with last quarter's guidance. Additionally, this 2024 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value.

York A. Ragen: Depreciation expense GAAP intangible amortization expense stock compensation expense and diluted share count expectations also remain consistent with last quarter's guidance.

York A. Ragen: Finally, this 2024 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder shareholder value.

Operator: This concludes our prepared remarks. At this time, we'd like to open up the call for questions. Certainly, and ladies and gentlemen, we ask that you please limit yourselves to one question each. You may get back in the queue as time allows.

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

Speaker Change: Certainly and ladies and gentlemen, we ask that you. Please limit yourselves to one question. Each you may get back into queue. As time allows one moment for our first question.

Operator: One moment for our first question, and the first question comes from the line of Tommy Moll from Stevens, Inc. Your question, please. Good morning, and thank you for taking my questions, Tommy. Aaron, starting off on home standby, wanted to see if you could reconcile for us. I think I heard you say shipments are up mid teens, but year over year, activations are down year over year. Can you just help us understand the two of those in context?

Speaker Change: And our first question comes from the line of Tommy Moll from Stephens. Your question. Please.

Aaron P. Jagdfeld: Yeah, so it's a great question, Tommy. I mean, activations have been a little slower this year, relative to, if you look at the outage environment, most recently, the last couple of quarters, that outage environment has been weaker than, You know, kind of the trend over the last, I would say, couple of years. So Q1 was actually in line with the long-term average since we've been tracking outages. But again, you look kind of trend-wise, you know, it's just, it was a quiet, you know, relatively quiet quarter.

Thomas Allen Moll: Good morning, and thank you for taking my questions.

Speaker Change: Tommy.

Thomas Allen Moll: Erin starting off on home standby.

Thomas Allen Moll:

Thomas Allen Moll: Wanted to see if you could reconcile for US I think I heard you say shipments are up mid teens year over year Activations are down year over year.

Thomas Allen Moll: Can you just help us understand the two of those in context.

Erin: Yeah, So great question Tommy.

Erin: Activations have been a little slower this year relative to if you look at the outage environment. Most recently the last couple of quarters.

Erin: That outage environment has been has been weaker than.

Speaker Change: Kind of a trend over the last I would say a couple of years. So.

Speaker Change: Q1 was actually in line with our long term average since we've been tracking outages.

Speaker Change: But again, you look kind of trend wise.

Speaker Change: It was a quiet.

Aaron P. Jagdfeld: You know, once you get past January, things really slowed down in February and March. And then Q4, as we discussed previously, was a really light quarter relative to, you know, kind of historical trends. Q1 last year was, you know, 23 was really strong for a Q1, so, you know, kind of a tougher comp that way.

Speaker Change: Relatively quiet quarters past January things really slowed down in February and March and then Q4 as we discussed previously was up was it really light quarter relative to <unk>.

Speaker Change: Kind of historical trends so in Q1 over the last year in Q1 last year was 23 was for US was really strong.

Speaker Change: For our Q1, so kind of a tougher comp that way, so activations were a little bit down.

Aaron P. Jagdfeld: So, activations were a little bit down, but, you know, but shipments are up because, again, the field inventory headwind is largely gone now, right? So, we exited the quarter, and really, kind of February, March run rates, you know, activations and shipments were in line with each other. So, we think that's a really good sign that we're kind of at a point of stasis with field inventories in terms of them returning to normal, which has been the primary headwind here.

Speaker Change: But but yet shipments are up because again the field inventory headwind.

Speaker Change: Is largely gone now right. So we exited the quarter.

Speaker Change: And really kind of February March run rates Activations and shipments were in line with each other so we think that's a.

Speaker Change: That's a really good sign that we're kind of at a point of stasis with.

Speaker Change: Field inventories in terms of them returning to normal which has been the primary headwind here. So as that abates that helps us in terms of Comping.

Aaron P. Jagdfeld: So, as that abates, that helps us in terms of, you know, comping more strongly on shipments, but yet, you know, the activation's been a little bit softer as a result of the most recent outage periods. The field inventory drag was a bigger drag last year than it was this year.

Speaker Change: Strongly on shipments, but yet the activations being a little bit softer as a result, I think of the most recent outage periods. The field inventory drag was a bigger bigger drag last year than it was this year is actually order and that allowed for the year over year increase in shipments exactly.

Aaron P. Jagdfeld: Exactly. And that allowed for the year-over-year increase in shipments. Exactly. Thank you both.

Operator: That's helpful. I'm not sure if we're limited to one, but I'll turn it back. Thank you. One moment for our next question. And our next question comes from the line to George Gianarikas from Kenicord Genuity. Your question, please? Hi, good morning, and thank you for taking my question. Hey, good morning, George.

Speaker Change: Thank you both that's helpful. It Im not sure if were limited to one but I'll turn it back.

Speaker Change: Hey, Kelly.

Kelly: Thank you one moment for our next question.

Speaker Change: And our next question comes from the line of George George <unk> from Canaccord Genuity. Your question. Please.

George Gianarikas: Hi, Good morning, and thank you for taking my question Hey, Good morning, guys.

Operator: I was wondering, you talked about the tangential impacts of the surge in data center power demand. I was wondering if you could discuss maybe a little bit more in detail your strategy there and any incrementally you've seen demand directly from the needs of AI data centers. Thank you.

George Gianarikas: I was wondering you talked about the tangential impacts of the surge.

George Gianarikas: In data center power demand I was wondering if you could discuss maybe a little bit more in detail your strategy, there and any incremental you've seen direct demand directly.

Speaker Change: From the needs of AI data centers. Thank you, yes, thanks, George so.

Aaron P. Jagdfeld: Yeah, thanks, George. So, you know, our product range is typically underneath the range of products that are being used purely for backup in the data center market. And that's a market where, you know, they use very large blocks of power. And that's dominated on a direct basis by the large diesel engine manufacturers that are out there. There are a handful of them in the world, and they sell all the major data centers on a direct basis.

Speaker Change: Our product range.

Speaker Change: Is typically underneath the range of products that are being used for purely for backup for the data center market in that sub market that.

Speaker Change: Use very large blocks of power.

Speaker Change: Thats dominated on a direct basis by the large diesel engine manufacturers that are out there. There is a handful of them in the world and they sell all of the major data centers on a direct basis.

Aaron P. Jagdfeld: So, you know, we don't have a product like that, and we don't have any plans to develop an engine range. Those are engines that get used in, you know, tugboats and mine haul trucks and trains and things like that.

Speaker Change: So we don't have a product like that in which we don't have any plans to develop an engine range. Those are engines that get used in.

Speaker Change: Tug boats and mine haul.

Aaron P. Jagdfeld: So, very different applications than what you'd see just outside of power generation. That said, you know, we do serve some of the edge data centers where the power needs for backup are not as great. And we also have seen some opportunities come across relative to natural gas backup. So today, the backup generator market for data centers is almost entirely diesel, again, driven by these large diesel engine players. But we are seeing issues around siting and permitting for certain large concentrations of diesel engines.

Speaker Change: Trucks, and trains and things like that so much different applications than what you'd see just outside of power generation that said, we do serve some of the edge data centers, where the power needs for backup are not as great.

Speaker Change: And we also have seen some opportunities come across relative to natural gas backup. So today the backup generator market for data centers is almost entirely diesel again driven by these large diesel engine players, but we are seeing issues around siting and permitting with certain large cons.

Aaron P. Jagdfeld: So in Virginia, as an example, there are some high-profile areas where permitting has been challenging to obtain for, you know, the kinds of the raw numbers of diesel engines that have to be sited and permitted to operate for backup. So some of these data center EPCs and owners have turned to, you know, natural gas as a potential option. Now, the blocks of power are smaller because natural gas doesn't have the density in terms of energy as you see in diesel fuel.

Speaker Change: <unk> a diesel engine so in Virginia as an example, there is some high profile.

Speaker Change: Areas, where permitting has been challenging to obtain.

Speaker Change: For the kinds of the raw numbers of diesel engines that have to be sited.

Speaker Change: And permitted to operate for backup so some of these data center.

Speaker Change: <unk> and owners have turned to.

Speaker Change: Natural gas is a potential.

Speaker Change: As a potential option now the blocks of power are smaller because natural gas doesn't have the density in.

Aaron P. Jagdfeld: But nonetheless, the emissions are quite a bit cleaner, the emissions profile of those products, so that could be a potential opportunity. We continue to grow our natural gas generator line in terms of total output for those products. So there could be opportunities, but we think they're primarily going to be smaller edge data centers. Probably the bigger opportunity, George, is indirectly, right?

Speaker Change: In terms of energy as you see in diesel fuel, but nonetheless, the emissions are quite a bit cleaner emissions profile of those products. So that could be a potential opportunity. We continue to grow our natural gas generator line in terms of total output for those products. So we think there could be opportunities, but we think theyre primarily.

Speaker Change: Going to be smaller edge data centers, probably the bigger opportunity George is indirectly right. The the amount of data centers that are going to be coming online here between now and 2030, so call. It five six years.

Aaron P. Jagdfeld: The amount of data centers that are going to be coming online here between now and 2030, so call it five, six years. It's estimated that the amount of power that will be drawn from those data centers will triple from the current levels that we're at today. It's almost the equivalent, like if you step back, if we get to 2030, and if that happens, it's the equivalent of adding 40 million households to the grid. So just process that for a second.

Speaker Change: Estimated that the amount of power.

Speaker Change: That will be drawn from those data centers will triple from the current levels that we're at today.

Speaker Change: It's almost the equivalent like if you step back if we get to 2030 and if that happens it's the equivalent of adding 40 million households to the grid. So just process that for a second I mean in terms of just the raw number of.

Aaron P. Jagdfeld: I mean, in terms of just the raw number of, you know, the raw increase in demand that's going to come from these data centers in a very short period of time. And, you know, for those of you who have been around the utility industry or even the energy industry for any length of time, you know that it's really challenging for grid operators and utilities to react quickly because there's a process involved, right? For, again, citing and permitting of new plants, the approval process through different regulatory bodies. And then, of course, what is the generating capacity you're going to add? Most likely today, it's going to be intermittent, right?

Speaker Change: The raw increase in demand that's going to come from these data centers in a very short period of time and for those of you who have been around the utility industry or even the energy industry for any length of time you know.

Speaker Change: No that it's really challenging for grid operators and utilities to react quickly because there is but there is a process involved right for again siting and permitting of new plants, the approval process through different regulatory bodies and.

Aaron P. Jagdfeld: It's going to be solar or wind at the utility scale. You can do that cost effectively to get to the nameplate rating of a thermal plant, but unfortunately, those are intermittent sources. So you need to have a different strategy with how you're going to operate on a 24-hour basis. So you either need to add storage of some sort, which is quite a bit more expensive, obviously, and that would obviously have to be passed along to rate payers.

Speaker Change: And then of course, what are you what are you going to what is the generating capacity youre going to add most likely today, it's going to be intermittent rights can be solar or wind at a utility scale you can do that cost effectively to get to the nameplate rating the thermal plant, but unfortunately those are intermittent sources. So you need to have a different strategy.

Speaker Change: <unk> with how youre going to operate on a $24 seven basis, so either need to add storage of some sort, which is quite a bit more expensive, obviously and that would obviously have to be passed along to ratepayers.

Aaron P. Jagdfeld: Or you've got to come up with, you know, a different approach, virtual power plants, other grid services programs to help offload demand during peak times or to augment supply during those peak times with distributed assets that might be out there and available on the grid. We're definitely seeing much greater interest from grid operators and utilities in these types of conversations and programs. But again, many times they're bespoke, they're highly customized, and there are complicated processes to get these programs up and running.

Speaker Change: Or you have got to come up with.

Speaker Change: A different approach virtual power plants other grid services types of programs to help offload demand during peak times are to augment supply during those peak times with with distributed assets that might be out there and available on the grid, we're definitely seeing much greater interest with grid operators and utilities and these types of conversations.

Speaker Change: And programs, but again many times there'll be spoke there theyre highly customized and theres a complicated processes to get the.

Aaron P. Jagdfeld: And so it's just going to take time, and data centers and the data center operators are not going to wait. The opportunity with AI is just, you know, it's far too great. And it's coming at us very, very quickly. So we think that structurally, what that's going to result in on a net basis is a reduced quality of power. And I just don't think that we even have a remote inkling of what's going to happen over the next five to 10 years in terms of power quality.

Speaker Change: To get these programs up and running and so it's just going to take time and data centers and the data center operators are not going to wait and see the opportunity with AI is just it's far too great.

Speaker Change: And it is coming at us very very quickly. So we think that structurally what thats going to result in just on a net basis is reduced quality of power.

Speaker Change: And I, just don't think that we even have a remote inkling of what's going to happen over the next five to 10 years in terms of power quality.

Aaron P. Jagdfeld: It's clear to me that what we're going to see here in the future is a critical degradation of power and shortages. You know, these are not weather-driven outages, although those will happen because the grid is, you know, will continue to be susceptible to weather.

Speaker Change: It's clear to me that.

Speaker Change: What we're going to see here in the future is a critical.

Speaker Change: Gradation of power and shortages you know these are not weather driven outages, although those will happen because the greatest.

Aaron P. Jagdfeld: But it's really this supply-demand imbalance that's going to continue to grow. On the supply side, we're dealing with replacing traditional 24 seven thermal assets like coal and gas with intermittent assets like wind and solar. And then on the demand side, we're racing to electrify everything, and we're adding all of this additional load profile from data centers. So it's just not a great setup for power quality in the years ahead.

Speaker Change: <unk> to be susceptible to weather, but it's really the supply demand imbalance that is going to continue to grow as on the supply side, we are dealing with replacing traditional $24 seven thermal assets like coal and coal and gas with intermittent assets like wind and solar and the demand side, we're racing to electrify every.

Speaker Change: Thing and we're adding all of this additional load profile from from data centers. So it's just not a great setup for a power quality in the years ahead.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Mike Holloran from Baird. Your question, please? Hey morning, guys. Hey, Mike. Hey, Mike.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And our next question comes from the line of Mike Halloran from Baird. Your question. Please.

Michael Patrick Halloran: Hey, Good morning, guys, Hey, Mike Mike.

Operator: Hey, so just digging a little deeper in the C&I side of things, seems like a pretty similar outlook for the rental and telecom channels. Maybe we can talk about two things here. One, how you're thinking about the seasonality for the businesses in the areas where the outlook is improved, and then also the confidence in the sustainability of the run rate, and so more the distribution side from the other areas, and any kind of evidence you would point to for the sustainability piece and why you think that might have some nice legs here relative to what you were thinking a couple months back.

Michael Patrick Halloran: So just digging a little deeper in the C&I side of things it sounds like pretty similar outlook for rental and telecom channels.

Michael Patrick Halloran: Maybe talk to two things here, one how youre thinking about the seasonality for the businesses.

Michael Patrick Halloran: In the areas, where the outlook is improved and then also the confidence in the sustainability of the run rate and so more of the distribution side some of the other areas.

Michael Patrick Halloran: And any kind of evidence you would point to for the sustainability piece and why do you think that might have some nice legs here relative to what you were thinking a couple of months back.

Operator: Yeah, thanks, Mike. So our CNI business has continued to perform quite well in the face of, you know, as you noted, and as we've been noting for quite some time now in the slowdown, the cyclical slowdown that we're experiencing in the rental markets, as well as the telecom markets, which again, guidance for rental and telecom is largely unchanged for the year. Really, the change has come from, you know, our industrial distribution channel, which is, You know, again, they're serving businesses; they're serving, you know, the infrastructure, like wastewater treatment plants and school districts.

Speaker Change: Yes, Thanks, Mike our C&I business has continued to perform quite well in the face of.

Speaker Change: As you noted and as we've been noting for quite some time now in the slowdown the cyclical slowdown that we're experiencing in the rental markets as well as the telecom markets.

Speaker Change: Which again guy.

Speaker Change: Guidance for rental and telecom are largely unchanged for the year.

Speaker Change: The change has come from.

Michael Patrick Halloran: Our industrial distribution channel, which is.

Michael Patrick Halloran: They are serving businesses they are serving.

Michael Patrick Halloran: Infrastructure like wastewater treatment plants and school districts and.

Operator: You know, other types of applications, a very wide range of applications, healthcare, you know, manufacturing plants, even data centers, as I mentioned before, data and telecom, outside of the strict telecom market that we talk about oftentimes on a direct basis.

Michael Patrick Halloran: Other types of applications, a very wide range of applications.

Speaker Change: <unk> care Manny.

Speaker Change: Manufacturing plants, even data centers as I mentioned before data and telecom.

Michael Patrick Halloran: Outside of the strict telecom market that we talk about oftentimes on a direct basis, but.

Aaron P. Jagdfeld: But that industrial distributor channel, for us, has been a growing channel for really the greater part of the last decade. We've invested heavily in it. We've done some acquisitions along the way, where we've been able to attack some of the markets where we felt we were underrepresented from a market share standpoint around the US. We've filled that with owned distribution, if you will. And that has, that playbook has worked out quite well for us.

Michael Patrick Halloran: That industrial distributor channel for US has been a growing channel for the greater part of the last decade.

Michael Patrick Halloran: We've invested heavily in it we've done some acquisitions, along the way, where we've been able to attack some of the markets, where we felt we were underrepresented from a market share standpoint around the U S with infill that with owned distribution if you will.

Michael Patrick Halloran: That has that playbook has worked out quite well for us.

Aaron P. Jagdfeld: And we, you know, we've been able to pick up a share is really kind of flat out the answer. You know, so it's coming in stronger. I think that's representative of the broader power quality discussions that we've been having here and have had for some time, right? Whether you're talking about the supply-demand imbalance that I just, you know, prattled on about, or, you know, just the continued challenges with, you know, reliable supply. And also just the deeper electrification within businesses, right? I mean, businesses today, without power, you just can't operate.

Michael Patrick Halloran: And we we've been able to pick up share as really kind of flat out the answer.

Michael Patrick Halloran: Yes, so it's coming in stronger.

Michael Patrick Halloran: It's been very resilient right, we haven't necessarily seen the break down there and I think thats.

Michael Patrick Halloran: I think thats representative of the broader power quality discussions that we've been having here and have had for some time right whether youre talking about the supply demand imbalance that I just.

Michael Patrick Halloran: <unk> about or just the.

Michael Patrick Halloran: <unk> challenges.

Michael Patrick Halloran: <unk> with.

Michael Patrick Halloran: Reliable supply.

Michael Patrick Halloran: And also just the deeper electrification within businesses right I mean business is today without power you just you can't operate and we used to we used to point to certain markets or certain applications that were quote unquote critical for backup power I would say almost every business today, we'd say.

Aaron P. Jagdfeld: And, you know, we used to point to certain markets or certain applications that were, quote unquote, critical for backup power. I would say almost every business today would say they critically rely on a continuous source of power. So without that, whether it's inventory spoilage or whether that's, you know, an interruption of revenues, significant disruption to their businesses exists when you get these outages.

Michael Patrick Halloran: Critically rely on.

Michael Patrick Halloran: The source of power, so without that whether its inventory spoilage or whether thats, an interruption of our revenues.

Michael Patrick Halloran: No significant disruption to their business as exists when you get these outages and outages over time have been on the rise and I think youre, just seeing that manifest itself.

Aaron P. Jagdfeld: And outages over time have been on the rise. And I think you're just seeing that manifest itself in, you know, a broader penetration rate for backup power in these, you know, these buildings that represent the C&I market in North America. And we've been very pleased with the resiliency there.

Michael Patrick Halloran: In a broader penetration rate for backup power in these these buildings that represent the C&I market in North America.

Michael Patrick Halloran: And we've been very pleased with the resiliency there and so that's largely offsetting the.

Aaron P. Jagdfeld: And so that's largely offsetting, you know, the weakness, the cyclical weakness that we were forecasting here for rental and telecom. And we're saying, hey, look, we like the trends for that industrial distributor channel continue to be pretty solid. Quoting's hanging in there.

Michael Patrick Halloran: The weakness the cyclical weakness that we were forecasting here for rental and telecom and we're saying Hey look we like the the.

Michael Patrick Halloran: Trends for that industrial distributor channel continue to be pretty.

Michael Patrick Halloran: Pretty solid for inclusion in their holdings hanging in there.

Aaron P. Jagdfeld: You know, the quote to sale conversion process has continued to hang in there, and we continue to invest in it. And I think all of those things, when you line them up, are really what are helping us offset the broader weakness in those other markets. Thank you.

Michael Patrick Halloran: The court to sale conversion process.

Michael Patrick Halloran: <unk> has continued to hang in there and we continue to invest in it and I think all of those things when you line them up.

Michael Patrick Halloran: Or really what are helping us offset the broader weakness in those other markets.

Operator: One moment for our next question. And our next question comes from Jeff Hammond from KeyBank Capital Markets. Your question, please. Hey, good morning, gentlemen. Hey, Jeff. Hey, so just back on residential one, maybe just speak to destocking and what you think it's done. You know, if not, how much left?

Speaker Change: Thank you one moment for our next question.

Michael Patrick Halloran: And our next question comes from the line of Jeff Hammond from Keybanc capital markets. Your question. Please.

Jeffrey David Hammond: Hey, good morning, gentlemen, Hey, Jeff.

Jeffrey David Hammond: Hey, so just back on residential one maybe just speak to the Destocking and when do you think it's done.

Operator: And then it just seems like IHC activation trends were kind of still pretty weak. And so just want to come back to, you know, I know it was kind of in line in the quarter, but what gives you confidence in the unchanged view and kind of the ramp into the second half outside of, you know, just seasonality? Yeah, yeah, thanks. Thanks, Jeff.

Jeffrey David Hammond: How much left and then it seems like IHG activation trends were kind of still pretty weak and so just wanted to come back to like.

Jeffrey David Hammond: I know it was kind of in line in the quarter, but what gives you confidence and unchanged view and kind of the ramp into the second half outside of just seasonality.

Aaron P. Jagdfeld: So yeah, from the destocking perspective, again, we exited the quarter of February and March with activations and shipments pretty much in line. So we felt like, and again, based on all the data we have and based on, you know, the extended period here of de-stocking that we've been experiencing really since the third quarter of 2022, we feel like we're finally through that. And so that it's in line with our prior expectations.

Speaker Change: Yes. Thanks, Thanks, Jeff So from a from a Destocking perspective again, we exited the quarter February and March Activations and shipments were pretty much in line. So we felt like and again based on all the data we have and based on the.

Jeffrey David Hammond: <unk>.

Jeffrey David Hammond: The extended period here of Destocking that we've been experiencing really since the third quarter of 2022.

Aaron P. Jagdfeld: And that largely is behind, I think, the, you know, again, as I mentioned previously, the ability to kind of post those mid-teens increases year over year in home standby shipments. So we don't have that field inventory headwind.

Jeffrey David Hammond: We feel like we're finally through that and so thats in line with our prior expectations and that largely is behind I think.

Jeffrey David Hammond: As we.

Jeffrey David Hammond: Mentioned previously.

Aaron P. Jagdfeld: Now that that's primarily gone, in terms of the weaker trends recently here, activations and IHCs, you know, maybe a little bit underneath what we were anticipating, but not dramatically off the pace. So, you know, we feel pretty good about seasonalally, you know, Frankly, January was a solid month. With outages, February, March, not so good. In fact, February and March were really quiet. April, on the other hand, came back strong.

Jeffrey David Hammond: The.

Jeffrey David Hammond: The ability to kind of post those mid teens.

Jeffrey David Hammond: Increases year over year in in home standby shipments. So we don't have that field inventory headwind.

Jeffrey David Hammond: Now that that's primarily gone in terms of the weaker trends recently here Activations and <unk>, maybe a little bit underneath what we were anticipating but not dramatically off the pace. So we feel pretty good about seasonally AP.

Jeffrey David Hammond: Frankly January was a solid month with outages February March not so good in fact, they were February March were really quiet April on the other hand came back strong and so.

Aaron P. Jagdfeld: And so, you kind of get into the seasonal timeframe here for these types of products, and we're seeing, you know, the kinds of upticks that you would expect to see in these key metrics that we track, both leading and lagging indicators. And, you know, I think that these are homeowners that are just less sensitive to movements in interest rates.

Jeffrey David Hammond: You kind of get into the seasonal timeframe here for these types of products and we're seeing that.

Jeffrey David Hammond: Kind of the uptick that you would expect to see in these key metrics that we track, both leading and lagging indicators. So we feel we feel pretty good about that guide and hanging on to that guide for the year.

Jeffrey David Hammond: I think that.

Jeffrey David Hammond: Again, we've said this that the category itself is less sensitive to some of the interest rate movements and things that you might see in other typical.

Jeffrey David Hammond: What you might call consumer discretionary types of.

Jeffrey David Hammond: Categories.

Jeffrey David Hammond: Power outages create.

Jeffrey David Hammond: I think a difference they elicit a different response right I mean, it's just it's an emotional category a lot of times also the demographic that's traditionally buying these products.

Jeffrey David Hammond: These are these are they skew older.

Jeffrey David Hammond: It's older Americans with their homeowners.

Jeffrey David Hammond: The aging in place trends that we've talked about.

Jeffrey David Hammond: Previously are very much intact and I think that these are homeowners that are just less sensitive to movements in interest rates. It doesn't mean around the edges that we won't see.

Aaron P. Jagdfeld: It doesn't mean around the edges that we won't see, you know, decreases in market demand. And I think that largely played out here in the back half of last year as, you know, interest rates have been high now for a while. It's not, this isn't a new phenomenon.

Aaron Jagdfeld: Creases market demand decreases and I think that's largely played out here in the back half of last year.

Aaron P. Jagdfeld: Interest rates are at high now for a while it's not this isn't a new phenomenon. So I think whatever impact that higher interest rates may have had on the margins on the edges of the market. We think that's largely baked in at this point I do think that.

Aaron P. Jagdfeld: So, you know, whatever impact that higher interest rates may have had on the margins, you know, on the edges of the market, we think that's largely baked in at this point. I do think that, you know, again, just thinking forward to the balance of the year, I'll also point out, you know, that the Colorado State University hurricane forecast was, I think it was, what was it, the most active York forecast ever?

Jeffrey David Hammond: Then just thinking forward to the balance of the year I'll just also point out that the Colorado State University.

Jeffrey David Hammond: Hurricane forecast was I think it was what was it the most active York forecast ever ever. So I mean, we don't pre season personally we don't tend to put a lot of stock in those forecast because.

Jeffrey David Hammond: Yes.

Jeffrey David Hammond: I have a hard time, believing that if you can't tell me what the weather is going to be next Saturday. How can you tell me what it is going to be in September but.

Aaron P. Jagdfeld: But, you know, again, I think we're looking at longer-term trends around air temperatures, water temperatures, and the relaxing of the El Nino events. I think those are things that are important to how, you know, forecasters think about the long term, the bigger cycles around things like hurricanes. So that's coming as well.

Jeffrey David Hammond: Again, I think we're looking at longer term trends around air temperatures water temperatures.

Jeffrey David Hammond: <unk> of the El Nino.

Jeffrey David Hammond: Events.

Jeffrey David Hammond: I think those are things that are important to how forecasters think about the long term the bigger cycles around things like hurricanes, so thats coming as well, but our guidance assumes baseline outage activity doesn't assume any behaviors and I think that the.

Aaron P. Jagdfeld: But our guidance assumes baseline outage activity and doesn't assume any majors. And I think that, I think it's important also to mention, like, the category is seasonal, so the second half is always stronger than the first half. So definitely, you would, you know, if you're assuming a baseline level of outage activity, you would expect a nice sequential increase from first half to second half in that home standby business to support our guide. Thank you.

Jeffrey David Hammond: I think it's important also to mention like the category is seasonal so second half is always stronger than the first half so definitely.

If youre, assuming baseline level of outage activity you would expect a.

Jeffrey David Hammond: A nice sequential increase from first half to second half in that home standby business to support our guide.

Operator: One moment for our next question, and our next question comes from the line of Brian Drab from William Blair. Your question, please. Hi, thanks.

Aaron P. Jagdfeld: Yes.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And our next question comes from the line of Brian Drab from William Blair. Your question. Please.

Operator: I was wondering if we could just focus in on energy technology for a minute. And, you know, I'm looking at the slide from the investor event last year. And, you know, about 40% of the incremental revenue between 2023 and 2026 in the bridge here is from, you know, incremental revenue from energy technology and CNI and residential. And can you just give us an update on how you feel about, you know, capturing that 700 million incremental revenue and what's the updated outlook for CNI and residential? Thanks.

Brian Paul Drab: Hi, Thanks, I was wondering if we could just focus in on energy technology for a minute and im.

Brian Paul Drab: I'm looking at the slides from the Investor event last year and about 40% of the incremental revenue between 2023 and 2026 and the bridge here is from.

Brian Paul Drab: It's incremental revenue from energy technology in C&I and residential.

Brian Paul Drab: Can you just give us an update on how you how you feel about capturing that $700 million.

Operator: Incremental revenue in.

Brian Paul Drab: The updated outlook C&I and Rajiv thanks.

Aaron P. Jagdfeld: Yeah, thanks, Brian. So, obviously, you know, we gave those guidance points last fall. You know, we're not in a position today to update you. Unknown Executive, George Gianarikas, Praneeth Satish, Vikram Bagri, Alfred Moore, Kris, I would say we are weaker today; the near-term market dynamics are clearly more negative coming off of, you know, the... Pull ahead from NEM 3.0 in California and then just higher interest rates. I think the impact that that's having on those markets and then the demand for those products. So that's the bad news.

Rajiv: Yeah. Thanks, Bryan So I mean, obviously, we gave those guidance points last fall.

Rajiv: We're not in a position today to update the next couple of years, but we can talk specifically to energy Tech and how we're thinking about that obviously the market for solar plus storage the market for EV charging.

Rajiv: The market for some of the products that are within that complex.

I would say are weaker today, the Martin of near term market dynamics are are clearly more negative coming.

Kris Rosemann: Coming off of the pull ahead from them three point all in California, and then just higher interest rates I think the impact that that's having on those markets.

Rajiv: The demand for those products. So that's the that's the negative news. The good news is we're still not in the market with our new products. We're on target for our launch plans later this year and I think we're optimistic that as we turned the corner into 2025 look interest rates are not going to remain high forever.

Aaron P. Jagdfeld: The good news is we're still not in the market with our new products, and we're on target for our launch plans later this year. And, you know, I think we're optimistic that as we turn the corner into 2025, interest rates are not gonna remain high forever. And so I think, and the NEM 3.0 pull-ahead, pull-in, you know, I think it's pretty well documented that the market is finally kind of emptying itself of some of the channel inventory challenges that the OEMs that are our providers to that market today have experienced here over the last several quarters. I think that's starting to abate. I think it's perfect timing.

Aaron P. Jagdfeld: And so I think in the NIM three point I'll pull ahead pull in I think it's.

Rajiv: It's pretty well documented that that seems like the market has finally kind of emptying itself of of some of the channel inventory challenges that the Oems that are providers to that market today have experienced here over the last several quarters I think that's starting to abate I think it's perfect timing by the time, we get into the market I think the market is going to be.

Aaron P. Jagdfeld: By the time we get into the market, I think the market's gonna be where we need it to be so that we can start to see success. So I wouldn't say we're in a position today to think differently other than in the near term, right? And so in the near term, this year, we're probably gonna be a little bit on the low end of our range.

Rajiv: Are we needed to be so that we can start to see success. So I wouldn't say, we're in a position today to think differently other than near term right and so near term. This year, we're probably going to be a little bit on the low end of our our range again, it's not a big part of our business today. So.

Aaron P. Jagdfeld: Again, it's not a big part of our business today, so a small move, and that's part of the residential, the other residential products being softer that we talked about in our prepared remarks. Some of that is the Solar Plus storage and EV charging just being a little bit more muted here in terms of market demand in the short term. But again, if you're talking about the next, you know, through 2026, for the next two or three years, we don't think that that's probably gonna change dramatically because I think the market's gonna come back by the time we're, you know, in a position to Thank you.

Aaron P. Jagdfeld: So a small move and that's part of the residential the other residential products being softer that we talked about in our prepared remarks.

Rajiv: Some of that is the solar plus storage and EV charging just being probably a little bit more muted here in terms of market demand in the short term, but again if you are talking about over the next through 2026.

Aaron P. Jagdfeld: Just two or three years, we're just where we don't think that thats, probably going to change dramatically because I think the market is going to come back by the time were.

Aaron P. Jagdfeld: In in a position to to participate in that.

Aaron P. Jagdfeld: Yes.

Speaker Change: Thank you one moment for our next question.

Aaron P. Jagdfeld: Yes.

Operator: One moment for our next question. And our next question comes from the line of Jerry Revich from Goldman Sachs. Your question, please. Yes, hi. Good morning, everyone.

Rajiv: And our next question comes from the line of Jerry Revich from Goldman Sachs. Your question. Please.

Operator: Aaron York, can you just expand on the comments around gross margins in the quarter? We're pleasantly surprised, sounds like the cost came in better than you expected as well. So what's the magnitude of improvement that you're seeing from supply chain normalization and going back to normal efficiency levels, and freight normalization? And to what extent can that continue?

Jerry David Revich: Yes, hi, good morning, everyone.

Jerry David Revich: Hi, Jerry guarantee.

Jerry David Revich: Can you just expand on the comp.

Operator: Comments around gross margins in the quarter were pleasantly pleasantly surprise sounds like cost came in better than you expected as well too.

Jerry David Revich: What's the magnitude of improvement that you're seeing from supply chain normalization and going.

Operator: Back to normal efficiency levels freight normalization.

Jerry David Revich: Can that continue can you flesh out that part of the gross margin performance in the quarter and opportunity.

York A. Ragen: Yep, absolutely. I know we were pleased with the gross margin performance that did beat expectations. It was well over a percent increase versus expectation. And the reality is we guided that input costs would improve throughout the year in 2024. The reality is, we just saw the realization of that improvement sooner than we expected here in Q1. So, that's great. So the fact that they came in ahead of, you know, sooner than expected. So we got the beat in Q1.

Speaker Change: Absolutely, yes, no. We were pleased with the gross margin performance that did beat expectation.

Speaker Change: Well over a percent increase there versus expectation and the reality is we we guided that input costs would improve throughout the year in 2024.

Speaker Change: The reality is we just saw the realization of that improvement sooner than we expected here in Q1 so.

York A. Ragen: Yeah.

York A. Ragen: So that's great. So the fact that they came in ahead of sooner than expected. So we got the beat in Q1, and then I guess that what that does it just de risks.

York A. Ragen: And then I guess that what that does is just de-risk. That assumption in the second half, that gross margin improvement that we expect from first half to second half, we're seeing it now, so it de-risks that assumption. That's what's going on behind the gross margin beat. Thank you.

Speaker Change: That assumption in the second half that that gross margin improvement that we expect in this from first half to second half we're seeing it now so it de risks that that that that assumption. So.

Speaker Change: The.

Speaker Change: That's what's going on behind.

York A. Ragen: The gross margin beat.

York A. Ragen: Beat.

Operator: One moment for our next question, and our next question comes from the line of Stephen Gengaro from Stifo. Your question, please. Thanks. Good morning, everybody.

York A. Ragen: Okay.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And our next question comes from the line of Stephen <unk> from Stifel. Your question. Please.

Operator: So, my question, I guess it's two parts. And one is, has there been any change to the competitive landscape given that your biggest competitor has kind of been taken private? And then, and it's maybe if you can kind of blend into that answer, the sort of the margin mix question, I imagine the strength of home standby relative to other residential products is a margin positive for the balance of this year. And any way to sort of quantify or think about that? Yeah, I mean, definitely. You know that is the case, right?

Stephen: Thanks, Good morning, everybody.

Speaker Change: Good morning.

Operator: So my question I guess, it's two parts one is is.

Stephen: There been any change to the competitive landscape given that you get your biggest competitor has kind of been taken private and then and then just maybe.

Operator: If you could kind of blend into that answer just sort of the <unk>.

Speaker Change: <unk> mix question I imagined.

Operator: The strength in home standby relative to other residential products.

Speaker Change: Margin positive for the balance of this year and any way to sort of quantify or think about that.

Aaron P. Jagdfeld: I mean, the margin profile of the standby products for residential is greater. Every product we offer here in the company, frankly, so it's, you know, it's a very strong margin product for us. And so the margin mix to that point. Unknown Executive, George Gianarikas, Vikram Bagri, Alfred Moore, Kris Rosemann, Generac Holdings Inc. Yeah, so that's played out.

Speaker Change: Yes, I mean definitely yes.

Speaker Change: That instead as the case right.

Speaker Change: The margin profile of the standby products for residential is greater than ever.

Speaker Change: Every product we offer here in the company frankly, so it's yes.

Speaker Change: Very strong margin product for us and so the margin mix to that point would be would be favorable gross margins were up 5% year over year in Q1, I'd say half of that was a better mix as home standby grew mid teens.

Aaron P. Jagdfeld: In terms of the competitive landscape, yeah, you know, there have been, you know, there's a couple of developments in the competitive landscape. As you mentioned, one of our competitors here was, is in the process, I think, of being taken private. They haven't been taken through private equity; they were a private company already, but they were acquired by private equity, as a carve out of a bigger enterprise there. We don't believe that it's closed yet, or haven't been told that it's been a closed transaction yet.

Speaker Change: Yes, so thats played out in terms of the competitive landscape, yes, there have been.

Speaker Change: There's a couple of kind of developments in the competitive landscape as you mentioned one of our competitors here was is in the process I think of it being taken private they haven't or being taken through private equity and were a private company already but being acquired by private equity.

Speaker Change: As a carve out of the bigger enterprise there, we don't believe thats closed yet or haven't been haven't been told it's been a closed transaction, yet, but but I mean, just to see how that plays out I mean, if you take private like that with.

Aaron P. Jagdfeld: But, but I mean, you know, that plays out. I mean, if you're gonna take private like that, with, you know, kind of the, there's a debt load, we went through that when we went from privately owned to private equity owned back in, you know, 2006. And it's, it's different to operate a company with, you know, a high degree of leverage and a large amount of debt.

Speaker Change: The.

Aaron P. Jagdfeld: There's a debt load we went through that when we we went from.

Aaron P. Jagdfeld: Privately owned a private equity owned.

Speaker Change: Back in two.

Aaron P. Jagdfeld: 2006 timeframe.

Speaker Change: And it's different operating company with a high degree of leverage and a large amount of debt. So I think that will.

Aaron P. Jagdfeld: If I were in somebody's shoes, there that's something that is an adjustment period in and takes.

Aaron P. Jagdfeld: So, you know, I think that if I were, you know, if I were in somebody's shoes there, that's something that, you know, is an adjustment period and takes, you know, takes time to kind of work through.

Speaker Change: Next time to kind of work through it.

Aaron P. Jagdfeld: It's also a complicated carve out of 150 plus year old company. So that may that may be.

Speaker Change: Complexity is well I don't know that it will impact the competitive landscape that much I think.

Speaker Change: Where that company, where they compete quite well with US is on the C&I side of the business.

Aaron P. Jagdfeld: And they've got quite a nice C&I business.

Aaron P. Jagdfeld: Good competitor there on the residential side, there are quite a bit smaller.

Aaron P. Jagdfeld: It's also a complicated carve out of a, you know, 150-plus year old company. So that may, you know, that may be a complexity as well. I don't know that it will impact the competitive landscape that much.

Aaron P. Jagdfeld: They may see opportunities there, but.

Aaron P. Jagdfeld: I think.

Aaron P. Jagdfeld: This is this is a place where we've done well I think to use our scale to our advantage.

Aaron P. Jagdfeld: And Thats I think largely why as we said in our prepared remarks. This morning, we actually think we've improved our share position here.

Aaron P. Jagdfeld: Over the last several quarters so.

Aaron P. Jagdfeld: I think, you know, where that company competes quite well with us is on the CNI side of the business. You know, and they've got quite a nice CNI business; they're a good competitor there. On the residential side, they're quite a bit smaller.

Speaker Change: We continue to spend heavily on driving leads for the category driving awareness for the category investing in our distribution investing in our sales processes.

Aaron P. Jagdfeld: All of those things continue to.

Speaker Change: Provide nice returns for us in the way of continued gains in share.

Speaker Change: And.

Speaker Change: Again, a market opportunity that's still remains really.

Aaron P. Jagdfeld: You know, they may see opportunities there, but, you know, I think this is a place where we've done well, I think, to use our scale to our advantage, you know, and that's, I think, largely why, as we said in our prepared remarks this morning, we actually think we've improved our share position here, you know, over the last several quarters. So, you know, we continue to spend heavily on driving leads for the category, driving awareness for the category, investing in our distribution, investing in our sales processes, and all of those things continue to provide nice returns for us in the way of, you know, continued gains in share and, you know, again, a market opportunity that still remains. Really, you know, I think pretty huge, you know. I think we've been doing this with Home Standby for a long time, but penetration rates are still only, what, 6.5%? Yeah, six and a quarter percent, Chris.

Aaron P. Jagdfeld: Pretty huge.

Aaron P. Jagdfeld: We've been we've been doing this with home standby for a long time.

Aaron P. Jagdfeld: Penetration rates are still only what six 5% six 6.25% Chris so.

Aaron P. Jagdfeld: So, you know, I think there's a ton of runway left here for us when you think of every 1% of penetration being, you know, kind of a two and a half to $3 billion market opportunity. Now, there's a ton of runway left here. And it's worth the, you know, it's worth being, I think, being a net investor here, if you will, in the category. Thank you

Speaker Change: I think there for us.

Aaron P. Jagdfeld: When you think of every 1% of penetration being.

Aaron P. Jagdfeld: Kind of a two $5 billion to $3 billion market opportunity.

Speaker Change: There's a ton of runway left here and it's worth the it's worth being I think.

Speaker Change: Being.

Aaron P. Jagdfeld: Net.

Speaker Change: Our net investor here, if you will in the category.

Speaker Change: Thank you one moment for our next question.

Operator: One moment for our next question, and our next question comes from the line of Donovan Schafer from Northland Capital Markets. Your question, please. Hey guys, thanks for taking my question. So, hey, I want to dig in and kind of unpack the industrial distributor channel a little bit. You know, because that was a positive development this quarter, offsetting some of the other CNI kind of sub sectors or channels or whatever you want to call them.

Aaron P. Jagdfeld: And our next question comes from the line of Donovan Schafer from Northland Capital markets. Your question. Please.

Donovan Due Schafer: Hey, guys. Thanks for taking my question.

Operator: No.

Donovan Due Schafer: Hey, I wanted to dig in and kind of unpack in industrial distributor channel a little bit.

Operator: Because that was a positive development this quarter offsetting some of the other.

Donovan Due Schafer: C&I kind of sub sub sectors of channels or however, you want to call it.

Operator: So, and, you know, Aaron, you provided some good information about like, you know, this is something you guys have kind of been building for the better part of the last decade. But it doesn't get a lot of discussion in terms of like the mechanics and the kind of, I don't know, origin story or whatever.

Operator: So and.

Operator: Aaron you provided some good information about like there is something you guys have kind of been building for a better part of the last decade.

Operator: But it doesn't it doesn't get a lot of discussion in terms of like the mechanics and.

Operator: To kind of I don't know origin story or whatever and so it would be good I wanted to try and get a handle on kind of significance in some some things. So the first thing would just be can you give us a general sense of.

Operator: And so it'd be good, I want to try and get a handle on kind of its significance in some ways. So, like, the first thing would just be, you know, can you give us a general sense of, like, what portion of CNI revenue that that could make up, and then what, what portion of that would be distributors that you actually own? And some of this is also getting at the issue of like, you know, is this a case where stuff could get shipped to distributors but doesn't necessarily have an end user? And so you can have like a channel built up here or, or does the, do the dynamics not work like that?

Operator: But.

Operator: What portion of C&I revenue that can make up and then what portion of that would be distributors that you actually own and some of this is also getting at the issue of like.

Operator: Is this a case where stuff could get ships distributors, but doesn't necessarily have an end user and so you can have like a channel buildup here or does the do the dynamics not work like that so anytime something shifts to a distributor and you recognize revenue there is a project or a.

Aaron P. Jagdfeld: So anytime something, you know, shifts to a distributor and you recognize revenue, there's a project or an end user that's going to be taking delivery, just how that works and its size and significance. Yeah, I mean, it's a significant portion of our total domestic C&I sales. So you know, again, it's, You know, I think when you kind of step back, it's close to 70% of the total for, you know, domestic CNI.

Aaron P. Jagdfeld: End user that's going to be taken delivery, just how that works and its size and significance.

Aaron P. Jagdfeld: Yes, I mean, thats a significant portion of our total domestic C&I sales. So again it's.

Aaron P. Jagdfeld: So it's 70-75% of the market, with the balance being again, you know, mobile products and telecom products, and again, those are down, largely here. So, you know, as we've documented, they go in cycles. We're a big player in those markets in rental and in telecom. But when those large customers are not spending CapEx, they're, you know, they, that disproportionately impacts us because we, you know, we supply a lot of equipment to those areas.

Aaron P. Jagdfeld:

Aaron P. Jagdfeld: Yes, I think when you kind of step back.

Aaron P. Jagdfeld: It's close to 70% of the of the total for domestic C&I. So it's 70% to 75% of the total with the balance being again.

Aaron P. Jagdfeld: The mobile <unk>.

Aaron P. Jagdfeld: Products and telecom products and again those are down.

Aaron P. Jagdfeld: Largely here.

Aaron P. Jagdfeld: So.

Aaron P. Jagdfeld: We've documented they go in cycles.

Aaron P. Jagdfeld: A big player in those markets in rental and in telecom, but but windows large customers are not spending capex there.

Aaron P. Jagdfeld: That disproportionately impacts us.

Aaron P. Jagdfeld: Because we supply a lot of equipment into those areas. So.

Aaron P. Jagdfeld: So, you know, to have the industrial distribution channel, you know, grow as it has been is a really important counterweight, I would call it a "counterweight" if you will, to some of those larger customers or larger concentrations of product, you know, and customers in rental and telecom. You know, you're right; we don't talk a lot about the industrial distributor business, mainly because, you know, we spend an inordinate amount of time talking about residential, you know, our consumer power businesses and, you know, residential standby and energy tech. But underneath the covers here, this has been, I think, a really nice success story. We've got a great team that executes well.

Aaron P. Jagdfeld: In the industrial distribution channel.

Aaron P. Jagdfeld: Grow as it has been as a really important I would call. It counter weight. If you will to some of those larger customers or larger concentrations of a product.

Aaron P. Jagdfeld: Customers in rental in telecom.

Aaron P. Jagdfeld: Youre right, we don't talk a lot about the industrial distributor business.

Aaron P. Jagdfeld: Mainly because we're spending an inordinate amount of time talking about residential.

Aaron P. Jagdfeld: Consumer power businesses and the residential standby in energy Tech.

Aaron P. Jagdfeld: And but underneath the covers here. This has been I think a really nice success story, we've got a great team there that executes well you may have.

Aaron P. Jagdfeld: You know, you may recall, Donovan, we announced that we're building a new factory here in Wisconsin, in Beaverdam, because we believe in the growth of those products and, you know, the importance of that to our business overall. And it's an area where we needed some capacity. You know, we've been building bigger and bigger products. We also did a pretty massive investment in our R&D space here in Waukesha, Wisconsin.

Aaron P. Jagdfeld: You may recall, we announced.

Aaron P. Jagdfeld: We're building a new factory here in Wisconsin, and Beaver Dam.

Aaron P. Jagdfeld: Because we believe in the growth of those products.

Aaron P. Jagdfeld: And the importance of that to our business overall, and it's an area, where we needed some capacity.

Aaron P. Jagdfeld: We've been building bigger and bigger products. We also did a pretty massive.

Aaron P. Jagdfeld: This is our technical headquarters, specifically to go after larger opportunities in the CNI space and natural gas, in particular, and some of the things that we've been talking about with, you know, natural gas beyond standby kind of market opportunities. Even though that's cooled off here recently in the higher interest rate environment, we do think that that's, you know, really important. And I would say this, you know, one of the things that may be the unsung hero of our success when the markets around telecom, in particular, when they cycle on, one of the reasons that we've done well there is because we can provide kind of coast-to-coast coverage with our distribution to, you know, provide the kind of service and support that those large accounts demand for their fleets.

Aaron P. Jagdfeld: Investment in our R&D space here in Waukesha, Wisconsin.

Aaron P. Jagdfeld: Art. This is our technical headquarters specifically to go after larger.

Aaron P. Jagdfeld: Opportunities in in the C&I space in natural gas in particular, and some of the things that we've been talking about with them.

Aaron P. Jagdfeld: With with natural gas.

Aaron P. Jagdfeld: Beyond standby market opportunities, even though that's cooled off here recently and the higher interest rate environment. We do think that that's that's really important and I would say this one of the things that maybe the unsung hero of our success.

Aaron P. Jagdfeld: The market's around telecom in particular, when they cycle on one of the reasons that we've done well there is because we can provide.

Aaron P. Jagdfeld: Coast to coast coverage with our distribution too.

Aaron P. Jagdfeld: Provide the kind of service and support that those large accounts demand for their fleets and that's kind of a really important aspect of our industrial distributor channel again, the sales don't flow through there, but the service and support is is is a part of what they provide for us. So the two are kind.

Aaron P. Jagdfeld: And that's kind of a really important aspect of our industrial distributor channel. You know, again, the sales don't flow through there, but the service and support is, you know, a part of what they provide for us. So the two are kind of interrelated in terms of telecom and the IDC; we call it our IDC channel, our industrial distributor channel. You know, the products that go through IDC are very bespoke, highly customized; no two buildings, in terms of their electrical requirements, are the same.

Aaron P. Jagdfeld: Inner interrelated in terms of telecom and the IV, we call it our IDC channel or industrial distributor channel.

Aaron P. Jagdfeld: Yes.

Aaron P. Jagdfeld: The products that go through IDC are very bespoke.

Aaron P. Jagdfeld: Highly customized no two buildings in terms of their electrical requirements are the same so we produce.

Aaron P. Jagdfeld: So, you know, we produce, it's basically a configure-to-order business with a long sales cycle, with quoting, and then, you know, it turns into an order, and then you've got lead time for these products that can be anywhere from, you know, as short as 8 to 10 weeks and, as long, in some cases, as long as 52 weeks, depending on the size of the products and the type of products. So, you know, there are a lot of influencers in the process, from specifying engineers to even the architects that work on these projects, and certainly the owner operators, the electrical contractors, the general contractors, everybody plays a role in selecting the solution that is needed for a particular application.

Aaron P. Jagdfeld: Basically a.

Aaron P. Jagdfeld: And configure to order business with a long sales cycle with quoting and then it turns into an order and then you've got lead time for these products that can be anywhere from as short as eight to 10 weeks and is long in some cases out to 52 weeks, depending on the size of the products and the type of products. So.

Aaron P. Jagdfeld: Theres a lot of influencers in the process from specifying engineers to even the architects that work on these projects and certainly the owner operators electrical contractors to general contractors everybody plays a role in selecting.

Aaron P. Jagdfeld: The solution that is needed for a particular application so.

Aaron P. Jagdfeld: So over the last decade, you know, on top of building out that industrial distributor channel, the actual distributors themselves, and strengthening that channel, we've been focused on engaging with all of those decision makers up and down the value chain there, and I think that's really helped us quite a bit in terms of getting Generac specifically named in a specification. That's really important. If you're not specifically named, you know, that becomes challenging for somebody to find your product or even your distribution on a particular bid project.

Aaron P. Jagdfeld: The last decade on top of building out that industrial distributor channel the actual distributors themselves strengthening that channel we've been focused on engaging with all of those decision makers up and down the value chain, there and I think that's really helped us quite a bit in terms of getting <unk> specifically named in a specification that is really important.

Aaron P. Jagdfeld: If youre not specifically named.

Aaron P. Jagdfeld: That becomes challenging for somebody to find your product or even your distribution on a particular bid project.

Aaron P. Jagdfeld: So, you know, those are the things that I think, engaging with those specifying engineers in that community and spreading the word about, you know, in particular, the importance and the advantages of natural gas over diesel, which, you know, we're the largest natural gas gen set provider for backup power in the world, and we hold an advantage there over others that we like to talk to distributors about. So I think that is part of, again, part of this story overall: natural gas backup power is growing more quickly than diesel backup power outside of the large data center market. I have to qualify that now, and, you know, that's not a part of the market we play in.

Aaron P. Jagdfeld: So those are the things that I think engaging with those specifying engineers in that community and.

Aaron P. Jagdfeld: And spreading the word about in particular, the the importance and the advantages of natural gas over diesel, which we're the largest natural gas Gen set provider for backup power in the world and we hold an advantage there over others.

Aaron P. Jagdfeld: We like to talk to distribution about so I think that is part of again part of this story overall as natural gas backup power is growing more quickly than diesel backup power outside of the large datacenter market I have to qualify that now and that's not part of the market. We plan. So in the served market, where we play we're seeing gas.

Aaron P. Jagdfeld: So in the served market where we play, we're seeing gas growth rates exceeding diesel growth rates, and that's been the same for some time, and we're a beneficiary of that, and so is our distribution. So you're seeing all of that play out in that, you know, in the strength that we're talking about here in the industrial distributor channel. Thank you. Please take a moment for our next question. And our next question comes from the line of Kashi Harrison from Piper Sandler. Your question, please. Good morning, and thanks for taking the questions, or questions, I should say.

Kasope Oladipo Harrison: Growth rates exceeding diesel growth rates and that's been the same for some time.

Kasope Oladipo Harrison: And we're a beneficiary of that and so as our distribution. So youre seeing all of that play out in that.

Kasope Oladipo Harrison: And the strength that we're talking about here on the industrial distributor channel.

Kasope Oladipo Harrison: Thank you one moment for our next questions.

Aaron P. Jagdfeld: And our next question comes from the line of Kashi Harrison from Piper Sandler Your question. Please.

Kasope Oladipo Harrison: Alright, good morning, and thanks for taking the questions or a question I should say.

Operator: So, you know, Aaron, I think you indicated that HSB activations were down modestly year-over-year. Can you just help us quantify that? What does modestly mean?

Aaron P. Jagdfeld: So.

Kasope Oladipo Harrison: And I think you indicated that our HSV activations were down modestly year over year.

Kasope Oladipo Harrison: Can you just help us quantify that.

Kasope Oladipo Harrison: Modestly mean and then.

Kasope Oladipo Harrison: You also indicated HSV shipments in Activations were aligned in February and March and so I was just wondering if you.

Aaron P. Jagdfeld: And then you also indicated HSB shipments and activations were aligned in February and March. And so I was just wondering if, York, you could just help us think through 2Q residential revenues. I'm just trying to understand how we get from, you know, being up 2% in 1Q to being up low double digits for the full year. Thank you. Yeah, Kesh, so from an activation standpoint, I mean, modestly, it's kind of in the mid-single-digit range, which is, again, not too far off from our expectations.

Aaron P. Jagdfeld: York You could just help us think through <unk> residential revenues I'm, just trying to understand how we get from <unk>.

York: Being up 2% and <unk> being up low double digits for the full year. Thank you.

York: Yeah Kash so.

York: From an activation standpoint, I mean modestly it's kind of at mid single digit range, which is again not too far off of our expectations.

York A. Ragen: In terms of year over year, you know, we just kind of expected it to be a little bit softer coming out of, you know, the IHC's in Q4 were, you know, lower as a result of the, you know, weaker power outage environment. And frankly, Q3, we really didn't have much of a season last year in terms of the outage environment. And I think when you look historically, you know, the category is still up.

York: In terms of year over year, we just.

York A. Ragen: We kind of expected it to be a little bit softer coming out of there.

York A. Ragen: We had yes.

York A. Ragen: In Q4.

York A. Ragen: There were lower as a result of the weaker power outage environment, frankly, Q3, we really didn't have much of a season last year in terms of the outage environment. So kind of the back half of last year, maybe it wasn't it didn't play out as strongly as it might have historically and as a result, you see that play out.

York A. Ragen: And fewer installs here.

York A. Ragen: Year over year in the quarter, but again not dramatically, so which I think is good and I think when you look historically.

York A. Ragen: It's up dramatically from where it was, you know, kind of go to 2019 ranges, you know, those levels of activations, and we're up, you know, we're up significantly from that area. So, you know, the category is quite a bit bigger today than it was then. But, you know, I think just a little bit off near term from the, you know, weaker power outage environment in the last couple of quarters. Yeah.

York A. Ragen: The category is still up it's up dramatically from where it was kind of you go to 2019.

York A. Ragen: Ranges those those levels of Activations and we're up we're up significantly from from that area. So the category is quite a bit bigger today than it was then.

York A. Ragen: But I think just a little bit off near term here from from the weaker power outage environment in the last couple of quarters, Yes, and then your comment about like.

York A. Ragen: And then your comment about residential paces from Q1 to Q2. We did in Q1, but we still undersold the market. We were still bringing field inventory down.

York A. Ragen: As residential paces from Q1 to Q2.

York A. Ragen: We did in Q1, we still did under ship the market, we are still bringing field inventory down and buy.

York A. Ragen: And again, by the tail end of the quarter and we get into Q2, we feel like we're back to normal for the most part. So we still did undership the market. If you recall, we undershipped 2023 by around 300 million, probably a little less than a quarter of that was what we undershipped the market in Q1. So we got back to normal.

York A. Ragen: Again by the tail end of the quarter and we get into Q2, we we feel like we're back to normal for the most part so we still did under ship market. If you recall, we ownership 2023 by around $300 million.

York A. Ragen: I guess I would say a quarter of that.

York A. Ragen: Probably a little less than a quarter of that was what we under shipped with the market in Q1 here. So we got back to normal.

York A. Ragen: So you won't have that in Q2, that undershipping, and then just the seasonality of the business picks up from Q1 to Q2 in that category. So that, Again, you've got to look back at what historical seasonality looked like, and that again supports the guide for residential products in the future. Thank you.

York A. Ragen: So you won't have that in Q2 that under shipping and then just the seasonality of the business picks up from Q1 to Q2.

York A. Ragen: In that category. So that's.

York A. Ragen: So again Thats you got to look back at what historical seasonality looks like in that again.

York A. Ragen: Supports the guide for residential products in the future.

Speaker Change: Thank you one moment for our next question.

Operator: One moment for our next question. And our next question comes from the line of John Windham from UBS. Your question, please? Hi. Yeah, thanks for taking the questions. I'll keep it quick as we're running a bit long.

York A. Ragen: And our next question comes from the line of John <unk> from UBS. Your question. Please.

Jonathan Mark Windham: Hi, Thanks for taking the questions I'll keep it quick.

Operator: Just any sort of comments around you mentioned some weakness in the non-HSB residential market. But one of the really strong markets right now is storage deployments. Residential storage deployments are up 200 percent year on year in California. Just some comments about the competitive landscape and your ability to compete in that market. Thanks. Appreciate all the insight into that. Yeah, thanks.

Jonathan Mark Windham: Running a bit long just any sort of comments around you mentioned some weakness in the non hsp.

Operator: Residential market, but one of the really strong markets right now is storage deployments residential storage deployments up 200% year on year in California, just some comments about the competitive landscape and your ability to compete in that market. Thanks, I appreciate all the insight to that.

Aaron P. Jagdfeld: Yeah. So, you know, storage attach rates are up dramatically. Solar plus storage install rates.

Speaker Change: Yes. Thanks.

Operator: So storage attach rates are up dramatically solar plus storage install rates.

Aaron P. Jagdfeld: As we understand it, certainly new solar projects are down significantly. You know, 50-60% year-over-year in California. And so you are seeing greater attachment rates because of the M3.0 position. And that's where, you know, storage, you know, I think you're seeing just the absolute numbers are probably up because of that higher attach rate. California for us, you know, that's a market largely dominated by Tesla. You know, it's not a market that we've historically been strong in. So we're just, you know, we're really not participating dramatically in that. I will say, our storage business is up year-over-year. So it's, you know, it's not double; it's not 200%.

Aaron P. Jagdfeld: As we understand them are certainly new solar projects are down significantly.

Aaron P. Jagdfeld: 50% to 60% year over year in California, and so you are seeing greater attachment rates because of that <unk> three point al.

Aaron P. Jagdfeld: Our position and Thats where storage.

Aaron P. Jagdfeld: I think youre seeing and just the absolute numbers are probably up because of that higher attach rate of California for us.

Aaron P. Jagdfeld: That's a market largely dominated by Tesla.

Aaron P. Jagdfeld: It's not a market that we've historically been strong in so we're just.

Aaron P. Jagdfeld: Really not participating dramatically and that I will say I mean, our storage business is up year over year.

Aaron P. Jagdfeld: So it's not double it's not 200%, but but that's an area that we are seeing some growth off of a pretty hard bottom as we've described.

Aaron P. Jagdfeld: But that's an area that, you know, we are seeing some growth off of a pretty hard bottom, as we've described over the last several years. But actually, you know, as we also called out, I think that the bigger challenge in the other residential products is actually portable generators. We haven't talked a ton about that.

Aaron P. Jagdfeld: Over the last several years, but actually as we also called out I think that the.

Aaron P. Jagdfeld: The bigger challenge in the other residential products actually was portable generators, we haven't talked a ton about that mentioned in our prepared remarks prepared remarks that both domestically because of the softer outage environment over the last several several quarters and then internationally international portable Gen sales were down hard Q1 year over year.

Aaron P. Jagdfeld: And our prepared remarks, but both domestically because of the softer outage environment here over the last several quarters, and then internationally. International portable gen sales were down hard in Q1 year-over-year. You know, there was a lot of power security concerns a year ago in the year-ago quarter in Europe, largely related to the Russia-Ukraine war. And that's, you know, that's abated somewhat. And so we've seen the portable gen demand come off hard in the international markets for us, which is specifically kind of the European markets.

Aaron P. Jagdfeld: There was a lot of power a lot of power security concerns.

Aaron P. Jagdfeld: <unk> in the year ago quarter in Europe, largely related to the Russia, Ukraine War and.

Aaron P. Jagdfeld: That's that's abated somewhat and so we've seen the portable gen demand come off hard in the international markets for US, which is specifically kind of the European markets and then our chore business, which we don't talk about a ton, but thats suffered from.

Aaron P. Jagdfeld: And then our chore business, which we don't talk about a ton, but, you know, that suffered from, that really suffered last year. The longer-term trends there coming out of the pandemic, there's a lot of kind of buy-ahead on equipment, both at the end-market level, as well as the distribution level. And you know, you can see all the public comps out there that are involved in this space in the residential chore product space.

Aaron P. Jagdfeld: Thats really suffered last year.

Aaron P. Jagdfeld: Yes.

Aaron P. Jagdfeld: The large longer term trends there coming out of the pandemic. There's a lot of kind of buy ahead on equipment. Both at the end market level as well as the distribution level and you can see all of the public comps out there that are involved in this space on the residential product space and it's been a pretty brutal market over the last.

Aaron P. Jagdfeld: It's been a pretty brutal market over the last, really the last year and a half. And, you know, we were hoping that if we got, you know, a little bit of spring weather here, that was kind of built into the forecast, it would be helpful. But what we found is that distribution partners didn't sell through their snow season; it was a weak snow season, which, you know, with high snow inventories, they were reticent to invest in spring chore products.

Aaron P. Jagdfeld: Really the last year and a half.

Aaron P. Jagdfeld: And.

Aaron P. Jagdfeld: We were hoping that debt.

Aaron P. Jagdfeld: If we got a little bit of spring weather here and that was kind of built into the forecast.

Aaron P. Jagdfeld: That that would be helpful, but what we found as distribution partners. They didn't sell through their snow season was a weak snow season.

Aaron P. Jagdfeld: Rich with high snow inventories they were reticent to invest in spring chore products. So thats been delayed a bit now thankfully weather is picking up here trends more near term or a little more positive, which our products, but it's still been a it's been a rough go. So it's really char and then those energy markets that have been softer and then the <unk>.

Aaron P. Jagdfeld: So that's been delayed a bit now. Thankfully, weather's picking up here trends more near term or a little more positive with chore products, but it's still been a rough go. So it's really a chore and then those energy tech markets that have been softer, and then the portable generator pullback that we talked about, which were kind of headwinds for us in the quarter. Thank you. One moment for our next question, and this next question comes from the line of Jordan Levy from Truist. Your question, please? I just wanted to see, on the cost side, if, more specifics around what.

Jordan Alexander Levy: <unk> generator.

Jordan Alexander Levy: The pullback that we talked about which were which were headwinds for us in the quarter.

Jordan Alexander Levy: Thank you one moment for our next question.

Aaron P. Jagdfeld: And our next question comes from the line of Jordan Levy from <unk>. Your question. Please.

Jordan Alexander Levy: Good morning, all and thanks for squeezing me in I appreciate George will comment on gross margins here.

Jordan Alexander Levy: I just wanted to see on the cost side, if you could give us some more specifics around what the input cost reductions.

Operator: Unknown Executive, George Gianarikas, Vikram Bagri, Alfred Moore, Kris Rosemann, Generac Yeah, no, I think it's a number of things in terms of, well, steel is probably our largest input. And, and, and we've really still seen those steel costs, I guess, over the longer term have come down. And as we've been turning through our higher-cost inventory, we're just seeing those lower steel costs come through again, maybe a little bit faster than we originally anticipated.

Speaker Change: Realizing in the first quarter and as a quick second part of that question. Just curious on the sensitivity of costs overall to copper prices, specifically, given what that commodity has done over the last months.

Operator: So steel is an important factor, obviously, logistics, freight costs, while those came down throughout last year and, again, we're starting to turn through that inventory and the realization of those lower freight costs. We're starting to see, you know, that that's part of the improvement, just better plant efficiencies. I think that's better plant absorption.

Operator: Yes.

Operator: Yes, no I think it's a number of things in terms of steel.

Operator: Steel is probably our largest input.

Operator: And and we really do those steel costs.

Operator: Over the longer term have come down and as we've been turning through our in our higher cost inventory.

Operator: We're just seeing those lower steel costs come through again, maybe a little bit faster than we had originally anticipated. So steels are important factor, obviously logistics freight costs.

York A. Ragen: We're seeing that as well, in terms of strong execution there. So I would say those are probably the biggest factors in sort of how we were able to realize the better, the better gross margin faster than we originally anticipated. And copper, I guess copper, it does have an impact, but I would say it's less so than... And there's lags there, I mean... Yeah, on the steel side, yeah.

Operator: While those came down throughout last year and again, we're starting to turn through that.

York A. Ragen: That inventory and the realization of those lower freight costs, we're starting to see.

York A. Ragen: That's part of the improvement just better plant efficiencies I think thats.

York A. Ragen: Better plant absorption, we're seeing that as well in terms of strong execution. There so I would say.

York A. Ragen: Those are probably the biggest factors on on sort of how we were able to realize the better.

York A. Ragen: The better gross margin faster than we originally anticipated.

York A. Ragen: In copper I guess copper that it does have an impact, but I would say it's lesser so then there's lag sooner I mean, if you add to the steel side, yet and so copper has gone up.

York A. Ragen: And so copper has gone up, but that, I would say, is... Thank you. One moment for our next question. And our next question comes from the line of Vikram Bagri from Citi. Your question, please. Good morning, everyone.

Vikram Bagri: But that I would say it is.

York A. Ragen:

Vikram Bagri: In terms of lower impact relative to steel.

Vikram Bagri: Thank you one moment for our next question.

York A. Ragen: Okay.

Vikram Bagri: And our next question comes from the line of Vikram Beggary from Citi. Your question. Please.

Operator: I wanted to ask about R&D expenses, which increased noticeably in the quarter. I was wondering if you could share where the R&D dollars are being spent. In your previous question, answer to a previous question, you mentioned that there are no plans for launching products that directly target the data center market. So I imagine R&D is being largely focused on energy technology. If you can share the progress of next-gen MLPE storage products, you know, is the target to compete?

Vikram Bagri: Good morning, everyone.

Operator: I wanted to ask about R&D expense, which increased noticeably in the quarter. I was wondering if you can share with you our R&D dollars are being spent.

Operator: When a previous question or answer to a previous question. You had mentioned that there are no plans of launching products that directly target. The data center market. So I imagine R&D as being largely focused on energy technology.

Operator: If you can share the progress of Nextgen MLP storage projects.

Operator: In that market, at a lower price point with lower failure rates and ease of installation, and get our new features or USPs, we should keep in mind that gives you an edge against the competition in that market. And then lastly, you had mentioned OPEX would be roughly 23% of sales last quarter, but it wasn't mentioned today. I wanted to make sure the guidance has not changed given the R&D spending update and your comments on lead generation spending this quarter.

Operator: Is the target to compete.

Operator: In that market at a lower price point with lower fee rates.

Operator: And ease of installation and get our new features of the USPS, we should keep in mind that give you an edge against the competition in that market and then lastly, you had mentioned opex will be roughly 2% of sales.

Operator: Last quarter. It wasn't mentioned today I wanted to make sure. The guidance has not changed given the R&D spending update on your comments on lead generation spending this quarter. Thank you.

Operator: I, Yeah, this is the last part on the OPEX guidance. I mentioned in our prepared comments that the outperformance in Q1 on the gross margin would get roughly offset by a little bit higher than higher OPEX. Again, as we continue to invest in those strategic initiatives, it's early. So we basically held the EBITDA margin guide where we had it from last quarter.

Speaker Change: Yes. This is.

Operator: The last part on the Opex guidance I did in our prepared comments, we did mention that the the outperformance in Q1 on the gross margin would get roughly offset by a little bit higher the higher Opex again, as we continue to invest in those strategic initiatives. It's early so we basically held the EBITDA margin.

Operator: Our.

Operator: Guide, where we had it from last quarter.

Aaron P. Jagdfeld: With the offset, the gross margin outperformance slightly offset by the OPEX side, yeah, and then on the victim side of the R&D side, yeah, we're spending very heavily on a lot of those R&D dollars. I mean, it's, it's across the board on all of our products, but obviously the energy tech products. We are knee-deep in our next-generation storage devices, the residential side that we'll be bringing to market here later this year.

Aaron P. Jagdfeld: With the offset the gross margin outperformance slightly offset by the Opex side and then on the Vikram on the R&D side, Yes, we're spending very heavily largely a lot of those R&D dollars.

Aaron P. Jagdfeld: It's across the board on all of our products, but obviously the energy tech products.

Aaron P. Jagdfeld: We are knee deep in our next generation storage devices.

Aaron P. Jagdfeld: On the residential side.

Aaron P. Jagdfeld: We will be bringing to market here.

Aaron P. Jagdfeld: And then, of course, our rooftop solar products, power generation products, and inverter products that we continue to invest in. We have our next generation of those products coming to market in early 2025. So there's a tremendous amount of effort right now.

Aaron P. Jagdfeld: Later this year and then of course, our rooftop solar.

Aaron P. Jagdfeld: Products power generation products seen Burger products that.

Aaron P. Jagdfeld: We continue to invest in we have our next generation of those products coming to market.

Aaron P. Jagdfeld: In early 'twenty five so there is a tremendous amount of effort right. Now we've been building teams. You may you may have seen our announcement, we opened a tech center in Reno, Nevada, we've been filling that with people we've got a tech offices.

Aaron P. Jagdfeld: We've been building teams. You may have seen our announcement. We opened a tech center in Reno, Nevada, and we've been filling that with people.

Aaron P. Jagdfeld: We've got tech offices in Portland, Maine. We've got tech offices in Vancouver. We've got tech offices in Bend, Oregon, in L.A., and in Denver.

Aaron P. Jagdfeld: In Portland, Maine, We've got tech offices in Vancouver, We've got tech offices in Bend, Oregon in L. A in.

Aaron P. Jagdfeld: And so we've really cast a pretty wide net here as we build out, you know, the talent level needed to compete with, obviously, some very formidable companies there that supply not only storage but also on the inverter side. So, you know, from a USP standpoint, we'll talk more about these product launches as we get closer, but we believe we've got, you know, we've got some novel approaches to certain elements of the tech, but we also think that there is, you know, the integration of all of these products together more seamlessly.

Aaron P. Jagdfeld: In Denver, and so we've really cast a pretty wide net here as we build out the Tam.

Aaron P. Jagdfeld: Don't level needed to compete with obviously, some very formidable companies there that supply not only storage, but also on the inverter side, so from a USP standpoint.

Aaron P. Jagdfeld: Again, we will talk more about these product launches as we get closer, but we believe we've got.

Aaron P. Jagdfeld: We've got some some some novel approaches to certain elements of the tech, but we also think that there is.

Aaron P. Jagdfeld: The integration of all of these products together more seamlessly.

Aaron P. Jagdfeld: Today, if you want to put together, you know, a solar system with a storage device, with an EV charger, with thermostatic controls, with even a generator for longer-term backup, you know, load management, all of these different devices, you know, that's three, four, five different apps you've got in your hand. We're working on a project that is unifying all of these technologies on a single platform, And that was the central part of our strategy in the Ecobee acquisition.

Aaron P. Jagdfeld: Day, if you want to put together.

Aaron P. Jagdfeld: Our solar system with a storage device with an EV charger with thermostat controls with even a generator for longer term backup.

Aaron P. Jagdfeld: Load management all of these different devices.

Aaron P. Jagdfeld: That's 345 different apps, you've got in your hand, we're working on a project that is unifying all of these technologies on a single platform really utilizing the <unk> experience that was a central part of our strategy in the <unk> acquisition.

Aaron P. Jagdfeld: You know, the ML and AI that they deployed today in the thermostatic controls environment and the really high-quality user experience that they bring together, we want to bring that to all these products. And we think that'll be unique to the marketplace when you look across the market today. We don't think anybody has, you know, the breadth of offering that we have and putting it all together on a single platform to help, you know, homeowners, in particular, to help them control their energy bills.

Aaron P. Jagdfeld: The ml and AI that they deploy today and a thermostat a controls environment and then they really high quality user experience that they that they bring together we want to bring that to all of these products and we think that'll be unique to the marketplace. When you look across the market today, we don't think anybody has.

Aaron P. Jagdfeld: The breadth of offering that we have and putting it all together on a single platform to help.

Aaron P. Jagdfeld: Homeowners in particular to help them control.

Aaron P. Jagdfeld: Not only resiliency, which is central to our approach here, but also comfort and cost, which are, you know, as electrical rates and utility rates continue to drive upward. Cost is going to be, I think, one of these things that, you know, is going to creep up on ratepayers in a way you're already seeing evidence of it in certain markets like California. And it's going to drive homeowners to investigate other solutions, distributed solutions, solutions that help them, you know, give them more information and more control over the power that they generate, the self-generation that they store, that they export back to the grid, and the resiliency that they absolutely demand in their own homes.

Aaron P. Jagdfeld: And not only resiliency, which is central to our approach here, but also comfort.

Aaron P. Jagdfeld: And cost which are.

Aaron P. Jagdfeld: As electrical rates utility rates continue to drive upward.

Aaron P. Jagdfeld: Cost is going to be I think one of these things.

Aaron P. Jagdfeld: It is going to creep up on ratepayers in a way youre already seeing evidence of it in certain markets like California, and its going to drive homeowners to investigate other solutions distributed.

Aaron P. Jagdfeld: Good solutions solutions that help them.

Aaron P. Jagdfeld: Give them more information and more control over the power that they generate the self generation that they store that they export back to the grid and the resiliency that they that they absolutely demand.

Aaron P. Jagdfeld: So, you know, I think that over time, this will become more evident as these products get into the market. But I think, with our brand and our distribution and our sales and marketing competencies, I think you're going to see that we believe we'll have success there in the long term. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Kris Rosemann for any further remarks. We want to thank everyone for joining us this morning. We look forward to discussing our second quarter 2024 earnings results with you in late July.

Aaron P. Jagdfeld: In there in their own home. So I think that over time this will become more evident as these products get into the market.

Kris Rosemann: But I think with our brand and our distribution and our our sales and marketing competencies I think youre going to see that we believe we will have success there.

Kris Rosemann: In the long term.

Kris Rosemann: Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Chris most women for any further remarks.

Kris Rosemann: We want to thank everyone for joining us. This morning, we look forward to discussing our second quarter towards 24 earnings results with you in late July Thank you again and goodbye.

Kris Rosemann: Thank you again and goodbye. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. [inaudible]

Kris Rosemann: Thank you ladies and gentlemen, you participation in today's conference. This does conclude the program you may now disconnect good day.

Kris Rosemann: Yeah.

Kris Rosemann: Okay.

Kris Rosemann: [music].