Good day, and thank you for standing by. Welcome to the First Quarter 2022 Generac Holdings Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Now it is my pleasure to hand the conference over to your first speaker today, Mike Harris, Vice President, Corporate Development and Investor Relations. Thank you. Please go ahead.

Good morning, and welcome to our first quarter 2022 earnings call. I'd like to thank everyone for joining us this morning. 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 and 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. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. We experienced another all-time record in shipments during the first quarter as net sales, adjusted EBITDA and adjusted EPS were all ahead of our previous expectations. The revenue outperformance was primarily driven by continued progress on our capacity expansion plans and effective management of a challenging supply chain environment. This led to higher-than-expected shipments of home standby generators, PWRcell energy storage systems and C&I products globally. The higher revenues drove adjusted EBITDA dollars, which were also ahead of our prior expectations, despite elevated input costs resulting in lower-than-expected margins in the quarter. Demand for our products also exceeded our expectations for the quarter, resulting in an increase in overall backlog from the end of 2021, with the home standby backlog remaining significant and providing us with considerable visibility in the quarters ahead. Year-over-year, overall net sales increased 41% to $1.14 billion and also grew sequentially from the fourth quarter of 2021, which was the previous all-time record. We continue to experience robust and broad-based growth across the business with each of our residential and C&I product classes and Domestic and International reporting segments, all growing at incredibly strong double-digit rates as compared to the prior year on an as-reported basis. Strong momentum in core sales, which excludes the impact of acquisitions and foreign currency, continued in the quarter with 33% growth over the prior year, led by our residential product category. Overall, residential sales growth was again driven by a substantial increase in shipments of both home standby generators and PWRcell energy storage systems as well as the impact from recent acquisitions. The C&I sales increase was led by our mobile and telecom channels domestically, growth across all regions internationally and the contribution from recent acquisitions. Adjusted EBITDA margins of 17.3% were lower year-over-year, primarily due to the impact of higher input costs, driven by ongoing supply chain challenges in the overall inflationary environment. Partially offsetting those cost headwinds were the increasing impact of multiple pricing actions implemented over the past year, favorable sales mix and the early impact of product cost reduction initiatives. Importantly, we expect growing realization of the previously announced price increases as 2022 progresses as well as incremental favorable margin impacts from additional pricing actions, which were enacted during the second quarter, further execution on cost reduction projects and easing input cost headwinds, resulting in sequentially improving margins throughout the year. Now discussing our first quarter results in more detail. Shipments of home standby generators in the first quarter grew at an exceptionally strong rate over the prior year and continue to benefit from the convergence of multiple megatrends that have significantly increased consumer awareness for the category. Power outage activity as measured on a rolling four-quarter basis at the end of the first quarter was approximately in line with the long-term baseline average. Early forecasts for the upcoming hurricane season are pointing to another year of above-average activity. As discussed previously, home consultations faced a challenging comparison with the prior year due to the high-profile Texas winter storm event and several significant outages in other states in the first quarter of last year, but were in line with our expectations for the quarter. For some perspective, home consultations during the first quarter were nearly three times higher than the levels seen in the first quarter of 2020, reinforcing our view that demand for the home standby category has once again achieved and held a new and higher baseline level. Activations, which are a proxy for installs, continued to grow at a solid rate compared to the prior year, led by the South Central and Midwest regions. We ended the quarter with over 8,100 residential dealers, an increase of more than 400 dealers over the past 12 months. We made better-than-expected progress increasing production levels for home standby generators as daily build rates at our Wisconsin facilities further increased over prior year levels and build rates continue to aggressively ramp sequentially at our new Trenton, South Carolina facility. Higher output levels are driving an improvement in lead times, which have been declining to approximately 20 weeks from approximately 27 weeks at the end of 2021. Despite the ongoing improvements in build rates and lead times, home standby backlog remains well above $1 billion. While build rates are projected to further increase throughout the year, we still expect to carry a meaningful portion of this backlog into 2023 even without the benefit of a major outage event in our forecast. In response to higher inflationary pressures, we're also taking additional pricing actions in the home standby category in the second quarter, and we expect to realize the benefit of these additional increases primarily during the second half of 2022. New orders now reflect this higher pricing and orders in backlog will also see a price increase effective June 1. In addition to the several pricing actions we've taken, significant cost-reduction initiatives and moderating input costs are expected to further benefit margins for the product category moving forward. Our clean energy products contributed meaningfully to overall growth in the first quarter as shipments of our PWRcell energy storage systems grew significantly from the prior year period as our team successfully navigated industry-wide supply chain and logistics challenges. Supporting this rapid growth is the continued build-out of our installer network as we ended the first quarter with more than 2,600 trained and certified dealers with approximately 1,100 registered on our PowerPlay sales platform. In response to rising input and expedited logistics costs, we have also recently implemented additional price increases for our clean energy products. In spite of policy-related uncertainty in the near term, we believe the megatrends and secular growth drivers underpinning consumer demand for residential clean energy solutions are as compelling as ever. We remain very optimistic about the new and innovative product offerings we're bringing to market in 2022, including our new PV microinverter product offering called the PWRmicro, which has continued to receive significant prelaunch interest from our channel partners. In addition, our recently launched PowerManager load control device has garnered positive feedback in the market. We expect this industry-leading innovative product to further strengthen our position within the residential energy storage market. We are still expecting clean energy revenue growth well above 50% for the full year with continued strength in PWRcell energy storage systems, along with contributions from the initial rollout of new products. I'd now like to provide a quick update on ecobee. We're seeing good progress in developing cross-selling opportunities for ecobee's hardware solutions with Generac's retail and wholesale partners. Longer term, we're pursuing opportunities with residential and clean energy dealers as well as working to leverage ecobee's existing HVAC dealer base to sell Generac products. In the smart thermostat product category, the ecobee brand resonates well with consumers, and we have exciting new product introductions coming in the second quarter. Additionally, ecobee's dedicated energy services team has seen a number of wins with several utilities and grid operators, including a recently announced demand response program with a local utility provider in Colorado. This is a simple but important example of a program that can be replicated across the country, which allows for the adjustment of ecobee smart thermostats during periods of high demand, resulting in energy conservation, financial benefits for homeowners and improved grid stability. We're also seeing promising commercial developments between ecobee and Generac Grid Services with utilities having an increasing interest in ecobee's product offerings. The Generac Grid Services and ecobee sales teams are jointly bidding on projects. This collaboration offers significant growth potential in a large and rapidly expanding market by leveraging ecobee's growing installed base of more than 2 million connected homes. Our ability to increase our share of the value stack of a Grid Services program is also improving the economics and payback for homeowners, which has the potential to improve demand for ecobee hardware as well as participation in Grid Services programs. Expanding a bit more on Generac Grid Services. The team is executing on its strategic vision and has an increasingly impressive and diverse sales pipeline that includes expanding the cross-selling of Generac equipment, along with other opportunities beyond Software-as-a-Service contracts, driven by our unique hardware-plus-software-plus-services value proposition. Generac Grid Services also experienced strong growth during the quarter in key metrics such as connected assets under management. We signed and closed a number of important software-as-a-service, turnkey and performance contracts. In addition, a growing proportion of hardware orders, including home standby generators and PWRcell energy storage systems, along with other contracts in the final stages of negotiation, have improved our line of sight for a significant ramp in this business during 2022. Importantly, the Generac Grid Services team is making great progress integrating Generac products onto the Concerto software platform to create complete solutions for utilities and grid operators. We are excited about the economic and societal value of these opportunities as we work to facilitate the decentralization, the digitization and the decarbonization of the power grid. Now let me make some comments on our C&I products, which also grew rapidly in the first quarter with strength across multiple end markets and geographies. Specifically, global C&I net sales increased 38% on an as-reported basis and 24% on a core basis as compared to the prior year. Strong growth in net sales for domestic C&I products in the first quarter was led by national telecom and rental equipment customers as well as growing demand for our natural gas generators used in applications beyond traditional emergency standby projects. We also have a substantial backlog for C&I products, which increased further during the first quarter, supporting our expectations for solid growth to continue in the category. Shipments of C&I stationary generators through our North American distributor channel grew again in the first quarter, and improving close rates helped drive growth in orders and backlog in this channel. Shipments to national telecom customers increased significantly during the first quarter as compared to the prior year, benefiting from elevated levels of capital spending by several of our larger telecom customers. The catalyst for the investment in backup power in this important vertical continues to be driven by the elevated power outage environment over the last several years, the power security mandate in California and the growing number of connected wireless devices alongside the build-out of high-powered and increasingly critical 5G communications infrastructure. We also experienced very strong growth with our national and independent rental customers this quarter. These customers are investing heavily in fleet equipment. We remain optimistic about the long-term demand outlook for mobile products given the megatrend of the critical need for infrastructure improvements and recently passed legislation supporting infrastructure spending. We're also very excited about the opportunity to bring our mobile energy storage solutions, which we recently added through the Off Grid Energy acquisition in the U.K., to the North American market in 2022. We have already seen meaningful order activity from key domestic channel partners for these products. Additionally, we're experiencing significant momentum in project wins for our natural gas generators used in applications beyond traditional standby power generation such as their use in Energy as a Service, microgrid solutions and other distributed generation projects. A diverse range of customers from national and regional commercial accounts to municipalities and beyond are showing substantial interest in these solutions. We believe this demand is being driven by the need for enhanced resiliency and grid stability that these larger blocks of power offer for grid operators while simultaneously providing a tangible and meaningfully improved return on investment for the asset owners. Strong momentum also continued in our International segment as well with shipments increasing 49% year-over-year on an as-reported basis during the first quarter, with 27% core net sales growth when excluding the benefit of the Deep Sea and Off Grid Energy acquisitions and the unfavorable impact of foreign currency. The core sales growth was driven by strength across all regions, most notably in Europe and Latin America. Overall demand remains very strong across our International segment with backlog further increasing since our fourth quarter earnings call. The European region is seeing particularly strong demand for portable generators, mobile products and C&I generators due in part to the Russian invasion of Ukraine. In the near term, a heightened focus on energy independence and security has emerged in the region. But longer-term implications of the conflict remain uncertain given the troubling and very fluid nature of the situation. In addition to strong core growth, our recent international energy technology acquisitions, Deep Sea Electronics and Off Grid Energy, reported impressive results in the first quarter. Numerous sales synergies are developing for Off Grid Energy's mobile storage systems through Generac's global distribution footprint, resulting in incremental demand in new geographies and driving significant backlog for these products. We have also begun additional product development projects within the mobile storage category to significantly expand the power capacity range of the product lineup. Global demand for Deep Sea's controls and automation products are at all-time highs, and order intake has surpassed our previous expectations. With respect to synergies, we are further embedding Deep Sea controls and technology into our legacy C&I products globally. Additionally, Deep Sea provides important capabilities that are core to the growth of our portfolio of grid-connected Energy as a Service and microgrid solutions. Our International segment has also experienced much stronger profitability despite inflationary headwinds and supply chain challenges. First quarter adjusted EBITDA margins expanded to 15.2% from 6.2% in the prior year period due to the accretive margin profiles of the Deep Sea and Off Grid acquisitions, improved overhead absorption and better operating leverage on significantly higher volumes. In closing today, I'm extremely proud of Generac team's efforts in delivering record net sales results and navigating the difficult operating environment to deliver overall results that exceeded our previous expectations. We'll be discussing in detail our 2022 forecast update during the outlook portion of our prepared comments this morning. But in short, we're raising our net sales guidance for full-year 2022 and maintaining our overall guidance for adjusted EBITDA dollars, which reflects the visibility provided from our increased backlog and confidence in our ability to execute. Supply chain challenges in the overall inflationary environment have persisted, but we believe we've also taken appropriate measures to offset these ongoing headwinds. While we are tactically executing on our near-term initiatives, we remain focused on the longer-term megatrends for our business and their alignment with the strategic pillars of our Powering a Smarter World enterprise strategy. As we execute on our strategic plan, we're building out an ecosystem of connected energy technology solutions for both the residential and C&I markets to address the challenges faced by the aging electrical grid and the serious supply and demand imbalances that are developing. We remain confident and squarely focused on building out the solutions portfolio as the modernization of the power grid is expected to significantly expand our addressable markets and ultimately lead to further growth opportunities for our business in the years ahead. I now want to turn the call over to York to provide further details on our first quarter 2022 results and our updated outlook for 2022. York?

Thanks, Aaron. Looking at first quarter 2022 results in more detail. Net sales increased 41% to $1.14 billion during the first quarter of 2022, another all-time record as compared to $807 million in the prior year first quarter. The combination of contributions from acquisitions and the unfavorable impact from foreign currency had an approximate plus 7% impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the first quarter by product class. Residential product sales grew to $777 million as compared to $542 million in the prior year, representing a 43% increase despite a strong prior year comparable. Contributions from the ecobee and Chilicon acquisitions and the impact of foreign currency contributed approximately 5% of revenue growth for the quarter. Home standby generator sales made up the majority of the residential product core sales growth, increasing by approximately 50% over the prior year as we continue to expand production capacity for these products. Shipments of PWRcell energy storage systems also grew at a significant rate as compared to the prior year as the U.S. residential solar-plus-storage market continues to grow and as we expand our distribution network for our clean energy solutions. Partially offsetting this strength, portable generators faced a tough prior year comparison due to the significant outages caused by the severe winter storm impacting several states in the first quarter of 2021, including the high-profile Texas winter storm event. Commercial and industrial product net sales for the first quarter of 2022 increased 38% to $279 million as compared to $202 million in the prior year quarter. Contributions from the Deep Sea and Off Grid acquisitions and the unfavorable impact of foreign currency had a net positive impact of approximately 13% on net sales growth during the quarter. The very strong core revenue growth was broad-based, driven by growth across all regions, highlighted by robust telecom and rental volumes. Net sales for the other products and services category increased 28% to $80 million as compared to $63 million in the first quarter of 2021. Contributions from acquisitions and the impact of foreign currency contributed approximately 8% of revenue growth during the quarter. Strength in aftermarket service parts continues to be a key driver of the core sales growth in this category due to the heightened power outage activity in recent years and a larger and growing installed base of our products in the field, which is also leading to higher levels of extended warranty revenue. Also contributing to the increase were continued growth in our services offering in certain parts of our business and higher Grid Services subscription revenue. Gross profit margin was 31.8% compared to 39.9% in the prior year first quarter as the challenging supply chain and overall inflationary environment drove higher input costs during the quarter. Specifically, the lagging impact of elevated commodity prices and other component surcharges, higher inbound logistics and expediting costs, increased labor rates and continued plant ramp-up costs all pressured margins in the current year quarter. The increasing realization of multiple price actions previously implemented and favorable sales mix partially offset these margin headwinds. Operating expenses increased $73 million or 55% as compared to the first quarter of 2021. This increase was primarily driven by the impact of recurring operating expenses from recent acquisitions together with the increase in intangible amortization expense. In addition, higher employee costs and additional variable expenses from the significant increase in sales volumes also contributed to the increase. Operating expenses as a percentage of revenue, excluding intangible amortization, increased approximately 50 basis points as compared to the prior year period due to the impact of recent acquisitions that have a higher operating expense load relative to sales given their start-up nature. Adjusted EBITDA, before deducting for noncontrolling interest as defined in our earnings release, was $196 million or 17.3% of net sales in the first quarter as compared to $214 million or 26.5% of net sales in the prior year. The decline in EBITDA margin was driven by the previously discussed decline in gross margins. I will now briefly discuss financial results for our two reporting segments. Domestic segment sales increased 39% to $965 million in the quarter as compared to $693 million in the prior year, with the impact of acquisitions contributing approximately 5% of the revenue growth for the quarter. Adjusted EBITDA for the segment was $170 million, representing a 17.7% margin as compared to $207 million in the prior year or 29.9% of net sales. The lower Domestic EBITDA margin in the quarter was primarily due to significantly higher input costs and the impact of acquisitions, partially offset by the increasing realization of previously implemented pricing actions and favorable sales mix. International segment sales increased 49% to $171 million in the quarter as compared to $115 million in the prior year quarter. Core sales, which excludes the impact of acquisitions and currency, increased approximately 27% compared to the prior year. Adjusted EBITDA for the segment before deducting for noncontrolling interest was $26 million or 15.2% of net sales as compared to $7.1 million or 6.2% of net sales in the prior year. The significant expansion in International EBITDA margins was primarily due to strong margin contributions from the Deep Sea and Off Grid Energy acquisitions, and improved overhead absorption and operating leverage on the significantly higher sales volumes. Now switching back to our financial performance for the first quarter of 2022 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $114 million as compared to $149 million for the first quarter of 2021. GAAP income taxes during the current year first quarter were $28.6 million or an effective tax rate of 19.7% as compared to $35.4 million or an effective tax rate of 19.1% in the prior year. The year-over-year increase in effective tax rate was primarily due to a lower discrete benefit from equity compensation in the current year quarter as compared to the prior year. The effective tax rate in the first quarter is seasonally below our full-year 2022 guidance due primarily to the timing of vesting of certain equity awards and the related benefit recognized for tax purposes. Diluted net income per share for the company on a GAAP basis was $1.57 in the first quarter of 2022 compared to $2.33 in the prior year. Adjusted net income for the company as defined in our earnings release was $135 million in the current year quarter or $2.09 per share. This compares to adjusted net income of $153 million in the prior year or $2.38 per share. As disclosed in our reconciliation schedules in our earnings release, our adjusted net income and EPS for the current year no longer adjust for cash taxes due to the expiration of our significant tax shield that originated from our LBO transaction in 2006. Cash flow from operations was negative $10 million as compared to positive $153 million in the prior year first quarter. Free cash flow as defined in our earnings release was negative $37 million as compared to positive $126 million in the same quarter last year. The decline in free cash flow was primarily due to a much higher working capital investment in the current year quarter. The higher working capital investment was primarily driven by a seasonal inventory build for certain product categories, increasing production rates and further increases in inventory levels due to the challenging supply chain environment and extended logistics in-transit times. As of March 31, 2022, we had approximately $500 million of liquidity, comprised of $206 million of cash on hand and $290 million of availability on our ABL revolving credit facility, which matures in May 2026. Also, total debt outstanding at the end of the quarter was $1.09 billion, resulting in a gross debt leverage ratio at the end of the first quarter of only 1.3x on an as-reported basis. In addition, recall our term loan doesn't mature until December 2026. We do not have any required principal payments on this facility until the maturity date, and it has a low cost of LIBOR plus 175 basis points. We also have interest rate swap arrangements that fix our interest rate exposure on approximately $500 million of this debt through the maturity date of December 2026. With that, I will now provide further comments on our updated outlook for 2022. As Aaron previously discussed, our strong execution and ability to maneuver through this challenging supply chain environment allowed us to exceed shipment expectations during the first quarter of 2022. In addition, the higher-than-expected inflationary environment that has manifested over the last couple of months has required us to implement another round of price increases here in the second quarter of 2022. As a result of these factors, we are raising our top-line guidance for full-year 2022 as net sales are now expected to increase between 36% to 40% as compared to the prior year on an as-reported basis, which includes an approximate 5% to 7% net impact from acquisitions and foreign currency. This is an increase from the previous guidance of net sales growth between 32% to 36%. This revenue outlook now assumes shipments of residential products increased at a mid- to high-40% rate during 2022, up from prior expectation for a low-40% rate. And revenue for C&I products is still expected to grow at a high-teens rate compared to the prior year despite larger-than-expected FX headwinds. Importantly, this guidance still assumes a level of power outage activity during the year in line with the longer-term baseline average. As a result, consistent with our historical approach, this outlook does not assume the benefit of a major power outage event during the year. Given we still expect to be producing at full capacity for home standby generators throughout the year, the upside of a major power outage would be more limited to incremental portable generator shipments during 2022, meaning any extra lift for home standby generators from a major power outage would most likely result in incremental revenue in 2023. As we ramp capacity and our supply chain for home standby and clean energy products and as incremental price realization kicks in over the remainder of the year, we're expecting quarterly revenue to increase sequentially over the next couple of quarters, with net sales in the first half approaching 47% weighted as a percent of full-year sales. Looking at our gross margin profile. As we have discussed at length, cost pressures have continued to impact our profitability thus far in 2022. We expect first quarter 2022 to be the peak of this year-over-year price/cost headwind as price realization has a more meaningful positive impact on our gross margins, certain inflationary pressures progressively ease for the remainder of the year and as the benefits of our focused cost-reduction initiatives further materialize. As a result of these factors, we expect quarterly gross margin percent to increase sequentially throughout 2022, with fourth quarter gross margin expected to recover back to first quarter 2021 levels in the 40% range. This would result in gross margin percent for the full-year 2022 to be approximately in line with 2021 levels. Looking at operating expenses as a percent of sales. Excluding amortization expense, we expect full-year 2022 OpEx percent to increase approximately 100 basis points compared to full-year 2021, primarily due to the impact of recent acquisitions that have a higher operating expense load relative to sales given their start-up nature. Adjusted EBITDA margins for the full-year 2022 before deducting for noncontrolling interests are now expected to be approximately 21.5% to 22.5% compared to the previously expected range of approximately 22% to 23%. The additional price increases required to offset the higher-than-expected inflationary pressures are resulting in this modest EBITDA percent dilution from previous expectation. Importantly, the midpoint of this guidance range would result in adjusted EBITDA dollars in line with our previous guidance. From a seasonality perspective, adjusted EBITDA margins are projected to improve significantly as we move through the year, primarily driven by improving gross margins as previously discussed. We expect that the first quarter marked the low point for adjusted EBITDA margins for the year with the progression of sequential improvement approximately level loaded by quarter, resulting in fourth quarter 2022 adjusted EBITDA margins returning to the 26% range, similar to Q1 2021 levels. Several additional guidance items that we provide to assist with modeling adjusted earnings per share and free cash flow also require updating for the full-year 2022. Our GAAP effective tax rate is now expected to be between 23% to 24% for the remaining quarters of the year, resulting in a full-year 2022 GAAP effective tax rate of approximately 23%. This compares to our previous full-year 2022 guidance of 24% to 25%. This decrease is driven primarily by the higher-than-expected equity compensation deduction in the first quarter as well as lower state income taxes expected during the full-year 2022. For full-year 2022, we now expect interest expense to be approximately $42 million to $44 million, an increase from the previous guidance of $41 million to $43 million, reflecting higher than previously expected levels of LIBOR rates throughout 2022, while still assuming no additional term loan principal payments during the year. Depreciation expense is now forecast to be approximately $54 million to $56 million in 2022 given our assumed CapEx guidance as compared to $56 million to $58 million previously expected. GAAP intangible amortization expense in 2022 is now expected to be at the high end of the previously expected range of $95 million to $100 million. Stock compensation expense is expected to be between $32 million to $34 million for the year. As a result of these updated guidance items and our first quarter performance, net income as a percent of sales is expected to be similar to our prior guidance. Our full-year weighted average diluted share count is expected to be approximately 65.0 million to 65.5 million shares. Our capital expenditures are still projected to be approximately 2.5% to 3% of our forecasted net sales for the year. For full-year 2022, operating and free cash flow generation is still expected to follow historical seasonality and be disproportionately weighted toward the second half of the year. Given the very strong organic sales growth expected during 2022, we still expect the conversion of adjusted net income to free cash flow to be approximately 70% to 80% for the full year as a portion of cash flows will be invested in working capital to support this growth. Finally, this updated 2022 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

We will now begin the question-and-answer session. Your first question comes from the line of Mike Halloran with Baird. Please go ahead.

Hey, good morning everyone.

Good morning, Mike.

Good morning.

So can we just dig into the home standby side a little bit? Obviously, you seem pretty comfortable with the in-home consultation to the consultations in general being in line with your expectations. But backlog came down. How much of that is a comment on demand coming in a little bit versus your capacity ramping to cover some of that incremental backlog? And maybe just what you're seeing in the channel in general from a customer demand perspective at this point, book-to-bill or anything like that?

Yes. Mike, I think I'd point to a couple of things that we talked about in the prepared remarks, and I'll give you a little bit more color beyond that. The HSB backlog did come down as projected. Our demand was in line with our expectations. Home consultations were approximately three times the 2020 Q1 levels, so they're significantly elevated when you look past the Texas event last year, which was a unique set of circumstances. None of our guidance contemplated that reoccurring nor does any of our guidance contemplate any major events happening this year. If something does happen, we'll obviously end the year with even greater demand than we project at this point. On the execution side of things, we executed better than we thought we would in Q1. Our output levels for home standby were better. We were able to navigate a couple of supply chain challenges that we're facing and continue to face. Our Wisconsin factories continue to outpace our projections. We're getting a lot of output out of the factories. In Trenton, South Carolina, we've been aggressively ramping that factory and that output grows every week. The combination of increased output and demand being in line still leaves us with an incredible backlog for HSB well above where we would have thought at this point, especially compared to our Investor Day assumptions in September. So pretty exciting times for the HSB category.

So a question on pricing then as a follow-up. Maybe a sense for the cumulative amount of pricing you guys have put in over the last arbitrarily 12 months or so. But did I hear you right, Aaron, in the prepared remarks that you suggested that the backlog was repriced for the current marketplace?

It will be on June 1st. Correct.

Okay. And cumulative pricing?

Cumulative pricing, I think high-teens is kind of what we would call over the last close to 15 months, maybe 18 months.

Including this latest round that we implemented in April.

Including this latest round in April, which is the repricing of the backlog with a June 1 effective date.

Got it. Thanks guys. Appreciate your time.

Thanks Mike.

Your next question is from the line of Tommy Moll with Stephens. Please go ahead.

Good morning. And thanks for taking my questions.

Hey Tommy.

Aaron, I wanted to stick with the theme of pricing here. What insight do you have on how elastic demand is for home standby? And any insight into what portion of the underlying unit volumes are financed versus purchased outright by the homeowner?

Those are great questions, Tommy. York can tackle the finance piece. Historically, financing was a relatively small piece, but it's growing rapidly. It may be around 10% of volume, but it's increasing. On elasticity, we track a lot of data and metrics very closely: inbound consultation requests, proposal costs and close rates. The high-teens pricing impact I mentioned relates to the product itself, which is maybe half of the total project cost. Labor and other materials have also increased. When we look at average proposal costs, the project has gone from roughly $9,000–$10,000 historically to about $11,000–$11,500 on average today. That extra $1,000–$1,500 doesn't seem to be dampening demand for the category. That durability speaks to the underlying megatrends driving the need for resiliency and the new baseline demand. Historically, the category has been durable through economic cycles; for example, it performed well around the 2008–2009 period. Also consider the product cost relative to home values: many home values have risen faster than the project cost, so as a percentage of home value the project cost is not up significantly. We feel pretty good about the impact of pricing to date.

Yes. And I appreciate the context. Aaron, sticking on the home standby theme. As we think about some of the factors into next year, you mentioned that you've achieved and held a higher level of underlying demand versus the pre-pandemic baseline. Once we get through most or all of your backlog and assuming away any major outage event next year, what are some of the things that you can do to drive that awareness higher or to drive that underlying demand higher? I'm thinking largely around customer acquisition spend. There's a lot of focus on units next year once it's a 'normal environment.' What is within your control to drive that demand?

Great question and something we're constantly focused on. We test many things. We've hesitated to roll out bigger demand-generation programs while backlog is large because we don't want to frustrate customers with lead times. One program we're testing is reengaging hundreds of thousands of unclosed leads accumulated over the last several years. Reengaging those leads — especially after localized outages or on the back of promotions — can move the needle on close rates. We've stood up an internal team to outbound call those unclosed leads and early returns on the pilot are pleasing. That program could be scaled quickly with outsourced resources or internal support. Another lever is promotional activity: extended warranties, free first year of monitoring and similar promotions. We have done fewer promotions over the last two years and there's opportunity there. We're proactive about moving the category forward — we always have been — and we have many levers to pull: marketing, promotions, dealer growth, training and distribution expansion. We've moved the category to a new higher baseline and we're confident it will continue to expand.

Your next question is from Ross Gilardi with Bank of America. Please go ahead.

Good morning, guys.

Hey, Ross.

Maybe we could just expand on your last comment there, Aaron. So if you take your new guide, you're at $5.1 billion to $5.2 billion in revenue in 2022. And your three-year target from your Investor Day, I think, was $5.5 billion or $5.6 billion. How are you thinking about that now? Is it realistic to think you'll raise to $5.5 billion sometime soon? Within the $5.5 billion, is the home standby business larger or smaller than where it will finish in '22? If we see HSB come off a bit in the next one to three years, do you have enough other growth levers to comfortably get to $5.5 billion?

When we laid out guidance at Investor Day, we didn't say growth would be linear. There are exogenous events outside our control — like Texas — and you don't know if you'll get a strong hurricane season. Our guide back at Investor Day assumed limited major events. Since then we've added ecobee and other initiatives not baked into that guide. We're seeing tremendous potential in Grid Services, clean energy and other areas. We constantly evaluate TAM and SAM across categories and channels, and our addressable market is much larger than it was a couple of years ago based on acquisitions and organic growth. We grew 50% last year and are guiding to 36%–40% this year. We're taking advantage of opportunities and leveraging what we've built. Will growth at these rates continue? I can't say today, but signs point to much bigger market opportunities driven by the megatrends we are aligned with.

And dealer inventories, are they normalized yet? When you talk about production, you seem to say Wisconsin is squeezing more output. Is Trenton hitting Investor Day production targets or is Wisconsin overcompensating?

Trenton is on pace with expectations. The outperformance in Q1 came from additional output out of Wisconsin. We've added automation across facilities and the daily production rates are strong. Regarding dealer inventories, days of inventory are at the high end historically, which is typical seasonally as we come out of winter. Spring weather has been delayed in parts of the Midwest, which has slowed installs. Permitting in some areas, especially California, continues to be a hurdle and limits installation pace. Dealers are also struggling with labor constraints. We are focused on increasing install capacity with our dealer base and through new dealers. We believe there are buyers for the units in the field based on IHC volume and demand signals.

We believe there's buyer demand for those in-field units based on IHC volume, which should help increase install bandwidth over time.

Your next question is from Philip Shen with Roth Capital Partners. Please go ahead.

Hey guys, thanks for taking my questions. First one is a follow-up on the price increase. My sense is it was around 6% that's effective June 1. Can you talk through if that's right? And then also, what is the chance that we could see more price increases in Q3 and Q4? Is that a low probability or is it on the radar because of the inflation you see ahead?

You're pretty close on that price increase. It depends on SKU and model, but mid-single digits, 5%–6%, for the last round in home standby, and a bit more aggressive in some clean energy products. As for Q3 and Q4, our guidance contemplates additional pricing, including repricing the backlog as of June 1, which will read through quicker than prior price increases. We believe Q1 is the low point and Q4 should recover back toward early 2021 gross margin levels, driven by pricing realization, cost reductions and easing input pressures. We were optimistic earlier that commodity and logistics costs would moderate, but recent events, including the Russia-Ukraine conflict, have reaccelerated some inflationary trends. We are monitoring these dynamics closely and will act as needed.

In our latest guide we've assumed steel prices at the higher levels after the Russia-Ukraine invasion. Copper has moderated somewhat since then and inbound logistics costs are starting to show signs of easing. If costs continue to rise from today's levels, we would evaluate additional pricing actions, but we believe we have reacted quickly to the current environment.

Okay. In terms of capacity expansion, what else do you need to see before you make the next expansion official? Where are you in that process and how close are you to taking the next steps and revealing location or capacity targets?

We've been evaluating expanding either the Trenton facility or adding another facility for home standby production. We have ordered additional tooling needed for a capacity increase; tooling lead times are long and would hit in early 2023. Where we deploy that tooling is the current question. We've already seen a new, higher baseline for the category and we need to build in surge capacity to handle demand surges. If we see an active hurricane season we'll want to move faster on capacity expansion. We also have similar challenges on the C&I side and are evaluating capacity expansion there. We recently filled our facility near Mexico City faster than expected as U.S. and Canadian demand increased. Clean energy capacity needs are also being evaluated. It's an active, ongoing process given rapid growth.

Your next question is from Jeff Hammond with KeyBanc. Please go ahead.

Hi, guys. Good morning. So I know you covered some on price/cost, but I just want to level set on your confidence in the second half margin ramp. Just as it relates to the start-up freight and component surcharges, do you need those to relieve to hit that margin ramp?

Looking at our commentary, gross margins are expected to rise roughly 8 percentage points from Q1 to Q4. About half of that should be price realization and the other half easing of cost inputs. Steel has come off its peak and inbound freight costs are beginning to moderate. We also expect better overhead absorption as we ramp, particularly in Trenton, and have line of sight on bill-of-material cost reductions. Our guide embeds current commodity levels, including elevated steel prices, but we have a clear path to that gross margin improvement.

Okay. Great. And I don't know if I missed it, can you give us the updated lead time on home standby? And then any updates on net metering discussions and trade circumvention impacting clean energy?

Lead times on HSB are about 20 weeks today, down from around 27 weeks at year-end, but still extended and backlog north of $1 billion. We're continuing to improve. On net metering, impacts vary by state. Florida's proposed changes were vetoed. California is reevaluating draft rulemaking. We don't have dramatic penetration in California, so it's not a material immediate issue for us. In general, as more homes produce onsite power, retail-rate net metering is not sustainable long term and will transition to different compensation structures. That dynamic can actually accelerate storage demand. Regarding trade circumvention, residential solar channel partners do not expect meaningful demand disruption at the residential level; impacts are more likely in the utility-scale segment. Overall, no major near-term disruption to our clean energy business based on current discussions with channel partners.

Your next question is from Brian Drab with William Blair. Please go ahead.

All right, good morning. This is Blake Keating on for Brian. Have the lockdowns in China affected any of your suppliers or your supply chain overall? Do you see that as a potential risk moving forward if lockdowns continue?

It's not helpful. We do have supply chain in that region and the lockdowns have created additional challenges. We're working around it. We have accumulated more safety stock as a buffer and that helps. In some instances we've had to expedite logistics, including air freight, because of the lockdowns. If lockdowns extend, it could have an impact, but we've broadened our supply base over the last couple of years and have fewer single-source dependencies for critical categories. That derisks the business and reduces the impact of any single disruption.

Got it, thank you. I will pass along.

Thanks, Blake.

Your next question is from Mark Strouse with JPMorgan. Please go ahead.

Sorry about that. Can you hear me now?

Yes, now we can hear you.

Sorry, guys. I was on mute. Thanks for taking my questions. I did want to ask about the new Chilicon product. Are the new micros still on track for introduction later this quarter?

They are. We'll be shipping our first beta sites late in Q2 and expect to ramp full production and shipments in the second half. We budgeted a modest part of our clean energy guide for the year related to PWRmicro; it will be a slower ramp compared to PWRcell, but channel interest is strong. We need to prove ourselves, but we're bullish about the opportunities and the potential impact of this product launch over time.

Great, okay. That's it from me. Thank you.

Thanks, Mark.

Your next question is from Jerry Revich with Goldman Sachs. Please go ahead.

Yes, hi. Good morning everyone.

Hi, Jerry.

Aaron, I'm wondering given the initiatives you spoke about earlier on the call in terms of growing the database and improvement in conversion rates today versus five or 10 years ago, how do you feel about the peak-to-trough move in residential standby demand in this cycle compared to what feels like a 30% magic number we've seen post-Katrina, Rita and Sandy? How are you thinking about that within the context of how you're positioned today?

That's an interesting question. Compared to Sandy and other events a decade ago, the category is in a very different place today — higher awareness, broader distribution, stronger brand recognition and a different consumer mindset on the need for backup power. Outages are more frequent and longer, and reliance on continuous power is greater. The category is much more durable and less dependent only on episodic events. We have many more levers to pull, including Grid Services, which can provide an ROI for generators and drive additional demand. While I won't give a specific numerical peak-to-trough comparison to prior events, I feel confident the category is in a stronger position and has more durable demand characteristics.

Can you expand on Grid Services and how close we are to seeing contracts move forward that include home standby as part of programs with utilities?

Grid Services has won a number of deals; in Q1 the team won several important contracts — some small, some large. We are building that business out and it gives us confidence about future opportunities. It's a mix of products: PWRcell, thermostats via ecobee, home standby and other assets. Thermostats are an attractive utility-facing solution because they are lower cost and can reach more ratepayers, including low- and moderate-income households. We're having high-quality conversations with utilities and see strong enthusiasm for the full suite of products. This is an important traction area and should deliver value across utilities' rate bases.

Your next question is from Maheep Mandloi with Credit Suisse. Please go ahead.

Hey, good morning and thanks for taking the questions. On the HSB backlog, can you help us understand how much is coming from California and Texas? Thinking about growth in those markets beyond 2022, should we expect a similar run rate to your core markets? What are you seeing over the last year in those markets?

We don't break out backlog by region or state. Demand in California and Texas has been strong and we've seen distribution growth in those markets. California permitting is a constraint that limits installation pace despite high interest. Many homeowners who were priced out or frustrated by long lead times during the surge after Texas are now reengaging. We believe these are growth markets and important contributors to home standby penetration as awareness deepens and distribution expands.

Thanks.

Your final question is from Kash Harrison with Piper Sandler. Please go ahead.

Good morning everybody. Thank you for taking my questions. Circling back to the commentary around home consultations being three times above 2020 levels — should we think about the 'normalized' baseline level excess backlog as more or less being three times your U.S. residential revenues from back in Q1 2020 since PWRcell and ecobee weren't contributing much to revenues back then?

That's an interesting way to think about it. You'd need to factor in current close rates and the fact that IHCs are a proxy, not a full representation of all channels. We also have growth outside the U.S. contributing. I wouldn't state with certainty that the new baseline equals three times prior revenues without unpacking HSB growth, close rates and backlog composition. It's an area worth examining but in short, the baseline is materially higher.

You would need to forecast future close rates and storm activity — a lot of variables. Also, remember our clean energy and global C&I businesses are growing and are accretive to overall revenue growth.

That's helpful. For a follow-up, can you circle back to the relationship between HSB lead times and backlog? You mentioned lead times around 20 weeks from 27 to 30 at year-end but you still have over $1 billion in backlog and expect to carry some into 2023. What do you consider 'normal' lead times, and are there seasonal dynamics that would prevent lead times from reducing linearly quarter to quarter?

Historically normal lead times for HSB have been about zero to two weeks — we inventory product so it's generally available for quick install. We won't get back to that level by year-end. Lead times will remain elevated even as we ramp production. Also, since our weekly production volumes are higher, each week of backlog represents more units than before. Our guidance does not assume a major outage event. If a major event occurs, much of the incremental home standby demand would likely be realized in 2023 rather than 2022 due to capacity timing, with portable generator shipments potentially capturing more of any near-term uplift this year. In summary: expect meaningful backlog into next year, improving lead times but not back to historical near-term norms, and no assumed major event in guidance.

And that concludes the question-and-answer session. Now I'll hand the conference back to Mr. Harris for final comments.

We want to thank everyone for joining us this morning. We look forward to discussing our second quarter 2022 earnings results with you in early August. Thank you again, and goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect. Have a great day.