Good day, and thank you for joining. Welcome to the First Quarter 2023 Generac Holdings Inc. Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please press star, then one to ask a question. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Mike Harris, Senior Vice President, Corporate Development and Investor Relations. Sir, please go ahead.

Good morning. And welcome to our first quarter 2023 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 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. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable US 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. Our first quarter net sales, adjusted EBITDA and adjusted EPS were higher than expected, primarily due to continued strong shipments of our commercial and industrial products globally. Adjusted EBITDA margins were also better than expected due to favorable price-cost dynamics. Additionally, field inventory levels of home standby generators declined at a rate consistent with our expectations in the quarter. Year-over-year, overall net sales decreased 22% to $888 million, and core sales declined 24% during the quarter. Residential product sales decreased 46% as compared to a strong prior year quarter. That includes the benefit of significant excess backlog for home standby generators, and was also impacted by elevated levels of field inventory for home standby generators as well as a decline in clean energy products. Global commercial and industrial (C&I) product sales increased approximately 30% to an all-time quarterly record, with strength in most regions internationally, and all channels domestically. Adjusted EBITDA margin was negatively affected by significant unfavorable sales mix, and reduced operating leverage, driven by lower home standby shipments and continued energy technology growth investments. These margin headwinds were mostly offset by favorable price-cost dynamics. Now discussing our first quarter results in more detail, while home standby shipments declined significantly in the quarter, leading indicators of demand for the category were exceptionally strong during the first quarter. Baseline power outage activity in the U.S. was well above the long-term average during the quarter, with several larger localized outages in multiple regions, marking the highest level of baseline power outage activity for our first quarter since we began tracking outages in 2010. Home consultations, or sales leads, were up significantly over the prior year period with broad-based growth experienced in almost all states. Additionally, home consultations were approximately flat sequentially during the quarter, which is highly unusual for the seasonally softer first quarter, particularly as we're coming off of a record fourth quarter, and this strength continued in the month of April. For historical perspective, first quarter home consultations were more than four times higher than the comparable period in 2019, supporting our belief that the home standby generator category has reached a new and higher baseline level of demand. Our residential dealer count was more than 8,600 at the end of the quarter, an increase of over 500 dealers from the prior year. While this is a slight decline on a sequential basis due to seasonal headwinds, we expect our dealer count to grow significantly over the coming years as we continue to focus on expanding our installation bandwidth. Activations, which are a proxy for installs, were impacted by severe weather in multiple regions and declined slightly from the prior year period, which included a challenging comparison in the South Central region that saw notable strength in the prior year due to the backlog of activations related to the Texas deep freeze in 2021. The number of home standby generators in field inventory continued to decline towards more normalized levels during the first quarter, with the number of units falling meaningfully and ending the quarter approximately in line with our prior expectations. Days of field inventory relative to historical norms also decreased sequentially in the quarter but remained elevated. We expect field inventory to decline further in the second quarter, resulting in another quarter of lower home standby orders and shipments relative to the higher end market demand before returning to more normalized levels as we enter the second half of the year. Our initiative to increase home standby generator installation capacity remains a top priority for the company. We’ve recently launched our dealer talent network, which is showing early signs of momentum as we help our dealers find the talent needed to successfully grow their businesses. We also recently announced a partnership with the independent electrical contractor trade group, further elevating the Generac brand within the electrical contractor community and providing additional training resources in key markets, including Texas and Florida. Additionally, we have identified a number of project management improvement opportunities that we believe can help dealers optimize overall project timelines, in addition to several product-related enhancements to further simplify the installation process. These initiatives are not only focused on solving near-term installation capacity challenges, but are also designed to provide sustainable solutions for tighter skilled labor markets. We believe these solutions, as well as continuing to expand overall distribution, could further increase Generac’s competitive advantage given our unparalleled scale, focus and expertise in the home standby market. Consistent with the comments provided on our fourth quarter earnings call in mid-February, we expected the first quarter to mark the trough for home standby shipments in the current channel destocking process. We continue to anticipate a return to year-over-year sales growth in the second half of the year, as field inventory returns to more normalized levels. The above-average outage environment and robust growth in home consultations thus far in 2023 further support this expectation. The range of threats that utilities and grid operators face was on full display in recent quarters, as the outage environment has been driven by severe weather, power supply shortfalls and unanticipated spikes in demand. Outage events are no longer limited to one-off major storms. And as reliance on electricity continues to grow, consumers and businesses have demonstrated that they are less willing to accept the deteriorating level of power reliability, and they're taking actions to improve their own resiliency. I'd now like to provide some commentary on our residential energy technology products and solutions. While we're facing temporary headwinds for our residential clean energy offerings, our commitment to success in these markets has not changed. This strategically important area of our business gives us access to a number of highly attractive market opportunities that are supported by strong end demand and further reinforced by unprecedented levels of policy support. We expect this combined addressable market for residential solar module-level power electronics (MLPEs), storage, EV charging, home energy monitoring and management, and grid services will grow at a strong double-digit CAGR through 2026, resulting in a domestic market opportunity of more than $10 billion. During the first quarter, shipments of Power Cell energy storage systems remained under pressure as we continue to rebuild and add to our distribution for these products, following the loss of a large customer that ceased operations in the third quarter of last year. Additionally, we continue to make good progress on our SnapRS upgrade campaign in the quarter. And we remain committed to taking care of our customers and the channel partners that are participating in this program. In addition to our residential storage efforts, our energy monitoring and management capabilities remain well positioned as positive momentum in ecobee’s device sales, together with a number of product awards, resulted in continued market share gains and highlight the consumer appeal of our feature-rich smart thermostat offerings. Ecobee’s already strong customer satisfaction scores have improved further since the 2022 release of our latest generation devices, validating ecobee’s expertise in user interface and user experience development. We're heavily leveraging that expertise in our single pane of glass initiative, which will act as the central hub of our residential energy ecosystem. It's also worth noting that customer interest in our grid services offerings remains strong with another quarter of robust sales growth off of a low prior-year base. We’ve recently announced a strategic minority investment in an enrolling energy resources and EV load management software provider as part of our effort to be the leading solution for EV load management to utilities and consumers. We believe this innovative area of our business will help facilitate the transition to the next-generation grid. Ongoing policy support remains a potential tailwind as regulators and policymakers increasingly recognize the value of flexible digital solutions to the challenges facing an evolving power grid. We continue to expect gross sales from residential energy technology products and services to deliver between $300 million and $350 million for the full year 2023. Operating expenses as a percentage of sales are expected to be elevated in 2023, as we continue to build a home energy technology foundation for growth, to position our combination of hardware and software solutions for long-term success. With new leadership running this part of our business, our teams are focused on more deeply integrating the products and platforms we've acquired over the past four years with an eye towards tightening our focus on the solutions where we believe we can create the most value for the consumer as part of the residential energy ecosystem. With improved focus and execution, and by leveraging our core competencies around sales and marketing, lead generation, distribution, customer support, and global sourcing and logistics, we believe we can create competitive advantages with our residential energy technology products and services that will become evident over time as we continue to develop the Smart Energy home in the future. Switching gears and I want to provide some commentary on our C&I products, which have experienced significant growth over the last few years, and once again outperformed our expectations in the quarter. Global C&I product sales grew 30% over the prior year to an all-time quarterly record. And backlog for these products also remained at record levels at the end of the quarter, as multiple megatrends support demand for backup power and mobile products around the world. Shipments for domestic C&I products grew in the first quarter highlighted by strength across all channels, including national rental equipment, industrial distributors, telecom and other direct customers for beyond-standby applications. Shipments of C&I generators to our North American distributor channel grew significantly again in the first quarter. Order trends and channel backlog also increased at a strong rate. Quoting activity remains robust and close rates improved nicely on a year-over-year basis, highlighting our sustained market share gains and the ongoing strength and demand for backup power in this important channel. As a leading provider of backup power to the North American telecom market, shipments to national telecom customers also increased at a robust rate during the first quarter as compared to a strong prior year, as several of our larger national customers continue to deploy generators to harden their existing sites and build out their fifth-generation (5G) networks. While shipment and order patterns for certain customers in this channel are expected to be lumpy in the second half of the year, investment in telecom infrastructure remains a secular trend as global tower and network hub counts further expand, and the increasingly critical nature of wireless communications requires backup power for resiliency. We also experienced another quarter of tremendous growth for our national and independent rental equipment customers, as they continue to refresh and expand their fleets. This end market is supported by the secular trend of critical need for significant infrastructure investments that will require years to complete. Mobile power products and light towers will be necessary in these essential construction projects. Natural gas generators used in applications beyond traditional emergency standby projects also continue to see increased traction during the first quarter as shipments of these products once again grew at an exceptional rate. We believe we are in the very early innings of growth for this exciting new market opportunity as grid stability concerns and volatile energy markets are expected to further drive demand for these solutions. Additionally, the business models of our direct customers in this vertical are innovating the generator marketplace by developing as-a-service offerings which dramatically reduce the need for the large initial capital outlays that have traditionally been required for businesses to add resiliency to their operations. Internationally, robust momentum continued as shipments increased 17% year over year during the first quarter, with 19% core sales growth when excluding the net impact of contributions from acquisitions and the unfavorable impact of foreign currency. Core total sales growth was driven by strength across key regions, most notably in Europe, where power security for homes and businesses remains a top priority amid ongoing geopolitical and macroeconomic uncertainty. International segment EBITDA margins also increased meaningfully during the quarter, primarily due to favorable price-cost dynamics and improved operating leverage on higher sales volumes. Supplementing our international performance, we're also beginning to see long-term growth potential emerge in new and developing regions such as India, where we're experiencing positive sales momentum for our backup power solutions. This rapidly growing market has unique characteristics for a developing country with the size of its population, broad electrical infrastructure coverage, and an increasing number of homes and businesses with direct natural gas connections. We are currently building out our full range of residential and C&I gas solutions to address this large market opportunity. Additionally, during the quarter, we acquired the remaining 20% minority ownership interest in Pramac, bringing our total ownership to 100%. Pramac is a leading designer and manufacturer of stationary, mobile and portable generators, along with energy storage solutions sold through a broad distribution network across the world. It has been a key driver of our successful international expansion since we first acquired a majority interest in the company in early 2016. Through the combination of focused investment and Pramac's global presence, this has become an important strategic element of our international growth aspirations. As we've been experiencing on the residential side of our business, our global C&I product category is similarly in the very early innings of its own energy technology evolution, and we've made meaningful parts progress towards that evolution here in 2023. In addition to our advanced controls and connectivity solutions, beyond-standby natural gas generators and mobile energy storage systems, we've now added stationary energy storage solutions for behind-the-meter applications, both domestically and internationally to our product portfolio. In February, we acquired REFU Storage Systems, a German-based developer and supplier of energy storage hardware products, advanced software, and platform services for international commercial and industrial customers. We also recently announced our new series of Generac-branded stationary energy storage systems for the North American C&I market, in partnership with a leading supplier of behind-the-meter storage solutions. These developments represent our initial foray into this rapidly growing market, and advancing our C&I storage capabilities will remain a key initiative for Generac in the coming years. The long-term opportunity for energy technology solutions within our C&I product categories is extremely robust. And I'm confident in our ability to leverage our existing positions of strength around the world to compete in these markets. In closing this morning, we believe our first quarter performance represents a trough in the current cycle, as we continue to focus on reducing home standby field inventory levels and as we work to rebuild sales momentum for our Power Cell residential energy storage systems. That said, we're extremely pleased with the continued execution in our global C&I product categories that drove overall results ahead of our prior expectations. And we're encouraged by the progress we're making in addressing the near-term challenges that are impacting our residential product categories. In addition, the robust level of power outage activity and resulting strength in home consultations for home standby generators so far here in 2023 provides incremental support for our expectations to return to year-over-year sales growth in the residential product category in the second half of the year. Importantly, we're maintaining our full year net sales and adjusted EBITDA margin guidance, as we execute on our near-term initiatives, and position Generac for sustained long-term success in our mission to lead the evolution to more resilient, efficient and sustainable energy solutions. I'd now like to turn the call over to York to provide additional details on first quarter results, and discuss our outlook for 2023. York?

Thanks, Aaron. Looking at first quarter 2023 results in more detail. Net sales decreased 22% to $888 million during the first quarter of 2023, as compared to $1.14 billion in the prior year first quarter. The combination of contributions from recent acquisitions and the unfavorable impact from foreign currency had an approximate 2% net favorable impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the first quarter by product class, residential product sales declined 46% to $490 million as compared to $777 million in the prior year. As Aaron discussed in detail, lower shipments of home standby generators and Power Cell energy storage systems drove this decline in residential product sales. Commercial and industrial product sales for the first quarter of 2023 increased 30% to $363 million as compared to $279 million in the prior year quarter. Contributions from recent acquisitions were nearly fully offset by the unfavorable impact of foreign currency during the quarter. The very strong core sales growth was broad-based across most regions internationally, and all channels domestically, with particular strengths in domestic national rental equipment, industrial distributors, telecom and other direct customers for beyond-standby applications. Net sales for other products and services increased 32% to $106 million as compared to $80 million in the first quarter of 2022. The acquisition of Electronic Environments contributed approximately 28% of this growth given their additional service capabilities. Core sales growth for the category was approximately 4% primarily due to growth in our energy technology service offerings, along with continued growth in aftermarket service parts and extended warranty revenue recognition. Gross profit margin was 30.7% compared to 31.8% in the prior year first quarter, due to the significant impact of unfavorable sales mix given a sharp decline in home standby mix compared to prior year. This was mostly offset by realization of previously implemented pricing actions together with lower input costs from improved commodities, logistics, plant efficiency and other cost reduction efforts. Operating expenses increased $22 million or 11% as compared to the first quarter of 2022. This increase is primarily driven by higher marketing, promotion and employee costs, certain legal and regulatory expenses and the impact of recurring operating expenses from recent acquisitions. Adjusted EBITDA before deducting for non-controlling interest as defined in our earnings release was $100 million, or 11.3% of net sales in the first quarter as compared to $196 million and 16.3% of net sales in the prior year. The lower EBITDA percent was primarily driven by the higher operating expenses as a percent of sales, given the lower sales compared to the prior year. I'll briefly discuss financial results for our two reporting segments. Domestic segment total sales, including intersegment sales, decreased 26% to $720 million in the quarter, as compared to $975 million in the prior year, with the impact of acquisitions contributing approximately 3% revenue growth for the quarter. Adjusted EBITDA for the segment was $68 million, representing a 9.4% margin as compared to $170 million in the prior year, or 17.5% of total sales. The lower domestic EBITDA margin in the quarter was primarily due to unfavorable sales mix and reduced operating leverage on lower shipments. In addition, the impact of acquisitions and continued energy technology growth investments negatively affected margins during the quarter. These factors were partially offset by the realization of previously implemented pricing actions and lower input costs. International segment total sales, including intersegment sales, increased 17% to $216 million in the quarter, as compared to $185 million in the prior year quarter. Core sales which exclude the impact of acquisitions and currency increased approximately 19% compared to the prior year. Adjusted EBITDA for the segment before deducting for non-controlling interest is $32 million, or 15% of net sales, as compared to $26 million, or 14% of sales in the prior year. This margin increase was driven primarily by favorable price-cost dynamics, improved operating leverage and higher volumes. Now switching back to our financial performance for the first quarter of 2023 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $12 million, compared to $114 million for the first quarter of 2022. The current year net income includes approximately $13 million of additional interest expense in the prior year due to higher borrowings and interest rates. GAAP income taxes during the current year first quarter were $8 million or an effective tax rate of 35.7% as compared to $29 million or an effective tax rate of 19.7% for the prior year. The increase in effective tax rate was primarily due to a lower benefit from equity compensation on a lower pretax earnings base in the current year quarter. Diluted net income per share for the company on a GAAP basis was $0.05 for the first quarter of 2023 compared to $1.57 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $39 million in the current year quarter, or $0.63 per share. This compares to adjusted net income of $128 million in the prior year or $1.98 per share. Cash flow used in operations was negative $19 million as compared to negative $10 million in the prior year first quarter. And free cash flow as defined in our earnings release was negative $42 million as compared to negative $37 million in the same quarter last year. The modest decline of free cash flow was primarily due to lower operating earnings and a $36 million one-time cash tax payment for tax planning related to a recent acquisition. This was mostly offset by lower working capital investment in the current year quarter as we reduced our material receipts and production rates for residential products and stabilized inventory levels. Total debt outstanding at the end of the quarter was $1.61 billion, resulting in a gross debt leverage ratio at the end of the first quarter of 2.25 times on an as-reported basis. Outstanding debt increased $179 million during the current year quarter, as we used proceeds from those borrowings to fund the $105 million Freddie Mac buyout, the $36 million one-time cash tax payment for tax planning purposes, and a $60 million REFU Storage acquisition. With that I will now provide further comments on our outlook for 2023. As disclosed in our press release this morning, we're maintaining our prior outlook for the full year 2023. We continue to expect the residential product category will be impacted by higher home standby field inventory levels in the second quarter, before returning to year-over-year sales growth in the second half of the year, resulting in a full year decline in the high teens range compared to the prior year. Our outlook for C&I product sales to grow at a mid- to high-single-digit rate during the year remains unchanged as we come up against increasingly challenging prior year comparisons in the second half of the year. As a result, we continue to expect overall net sales for the full year to decline between minus 6% to minus 10% as compared to the prior year, which includes approximately 1% to 2% favorable impact from acquisitions and foreign currency. 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. Consistent with our historical approach, this outlook does not assume the benefit of a major power outage event during the year. Additionally, this outlook does not assume a prolonged, deep recessionary environment that meaningfully impacts consumer spending during 2023. Having said that, demand for our home standby products tend to be driven more by power outages, rather than overall macroeconomic conditions. We continue to expect sales to be more weighted to the back half of the year as field inventory normalizes and consistent with normal seasonality excluding excess backlog, with overall net sales in the first half now being approximately 45% weighted and sales in the second half being approximately 55% weighted. Our gross margin expectations for the full year 2023 are also unchanged, as we anticipate approximately 150 basis points of gross margin improvement over 2022 levels. From a seasonality perspective, we continue to expect our first quarter gross margins will mark a low point for the year. We anticipate sequential quarterly improvements resulting from improved sales mix, with higher shipments of home standby generators, along with lower input costs, improved overhead absorption, and realization of cost reduction initiatives as we move throughout the year. Gross margins are expected to progressively improve throughout the year, with second half 2023 gross margins to be approximately 500 basis points higher than first half 2023 margins. The continued strength in our end markets gives us the confidence to continue to focus heavily on supporting innovation, executing on strategic initiatives and investing for future growth. As a result of these continued investments, we expect operating expenses as a percentage of net sales, excluding intangible amortization expense, to be approximately 20% for the full year 2023 with operating leverage improving throughout the year. Given these gross margin and operating expense expectations, adjusted EBITDA margins before deducting for non-controlling interest are still expected to be approximately 17% to 18% for the full year. From a seasonality perspective, we expected adjusted EBITDA margins to improve significantly throughout the year, primarily driven by sequentially improving gross margin that was previously discussed, and to a lesser extent improved leverage of operating expenses on the expected higher sales volumes in the second half of 2023. Accordingly, we continue to expect second half adjusted EBITDA margin to be approximately 800 basis points higher than first half margins. We're also providing updated guidance detail consistent with modeling adjusted earnings per share and free cash flow for full year 2023. For 2023, our GAAP effective tax rate is expected to be approximately 25% as compared to our previous guidance of 24% to 25%, and the 19.6% full year GAAP tax rate for 2022. The year-over-year increase is driven primarily by expectations for lower share-based compensation deductions, increased mix of high-income and higher-tax jurisdictions, and higher tax on foreign income in 2023 compared to 2022. Interest expense is still expected to be approximately $90 million, assuming no additional term loan principal prepayments during the year and assuming elevated SOFR rates throughout 2023. Interest expense is expected to moderate in the back half of the year as cash flows and our interest rate swaps become more favorable, and we pay down a portion of our outstanding revolver indebtedness. Our capital expenditures are projected to be approximately 3% of our forecasted net sales for the year. Depreciation expense is now forecast to be approximately $60 million compared to the previous guidance of $56 million to $58 million in 2023, due to the addition of REFU Storage-related depreciation expense. GAAP intangible amortization expense expectations are unchanged at approximately $100 million during the year. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, these add-back items should be reflected net of effects using the expected 25% tax rate. Stock compensation expense is still expected to be between $40 million to $43 million for the year. Operating and free cash flow generation is expected to follow historical seasonality with results disproportionately weighted towards the second half of the year in 2023. For the full year, we expect adjusted net income to free cash flow conversion will be strong at well over 100% as working capital levels moderate off peak levels. Our full year weighted average diluted share count is still expected to decrease to approximately 63 million shares, as compared to 64.7 million shares in 2022, which reflects the share repurchases that were completed in 2022. Finally, this 2023 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.

Please press star, then one to enter the queue for questions. First question will come from Tommy Moll of Stephens Inc. Your line is open.

Good morning, and thanks for taking my questions. Aaron, it's good to hear some of the constructive updates on installation capacity in the period. And on a related topic, I wanted to talk about the close rates there. Can you update us on what those look like? Maybe compared to the prior year or pre-pandemic? And as you progress through the year, do you see it landing somewhere in the range of a pre-pandemic kind of level? Or is there something structurally different here? Thank you.

Yes, thanks, Tommy. We actually were very encouraged by the sales lead volume that we saw — as we said, in Q1 it would have been a record Q1 if not for the comparison to the last record Q1 in 2021 when we had the Texas deep freeze. So if you take that out, Q1 would have been a record for consultations. It was pretty robust and in fact that carried through into April as well. Close rates, interestingly enough, we've talked about this on previous calls. We're still well off our pre-pandemic close rates, but they have been recovering; they bottomed at the beginning of last year, so about a year ago. From a close-rate perspective, we're up nicely off those levels from a year ago. As far as whether we think we'll recover to pre-pandemic levels by the end of this year, we've still got a ways to go. We continue to see progress. A big part of that story, as we've mentioned previously, is just getting the lead times back down, which clearly isn't an issue anymore. So the thing we'll watch, of course, with close rates is a potential softening economy in the back half of the year and how that impacts close rates. We are seeing continued uptake in our financing options for homeowners. In fact, we had incredible growth on our financing program in Q1, despite the residential category being down 46%. Financing was up dramatically in the quarter. So we do know consumers are using financing as an option to improve affordability and address concerns around a slowdown in the economy. So again, I'm not giving specific guidance on close rates, but we are continuing to see sequential improvements versus the prior year. I don't think we'll return quite to pre-pandemic levels this year; that's not what our guide contemplates. So maybe that's upside for us as we continue to recover.

One moment please for our next question. Our next question will come from Michael Halloran of Baird. Your line is open.

Good morning, everyone. So, let's stick on that train of thought Aaron, because obviously there's a lot of concern and questions just around the sustainability of that home standby piece from an underlying demand perspective. We've certainly heard the positive commentary on the installation capacity side. Would love to understand why the confidence level is so high that you can maintain that and also maybe put in historical perspective how you've tracked when you had kind of negative economy but positive storms in the past. I know Aaron made a quick reference to it in the prepared remarks. But you know, just kind of laying out why you think things are going to be, from an underlying perspective, pretty stable moving into the back half would be great.

Yes, that's an area of deep focus for us, Mike. We've got some experience around that. Talking to the trends and what gives us confidence for the second half: sales leads are an important leading indicator for the category and they mature over a period of 90 to 120 days from when you do the consultation to when the product actually gets installed. So for near-term visibility — the next quarter to quarter and a half — we think we have a pretty good view on end-market demand. Couple that with the fact that we're currently under-serving the market — we're under-shipping to market demand because we're allowing this destock process to take place — Q1 was artificially low relative to what home standby shipments could have been had we been matching shipping pace with demand pace. We were out of step because of field inventory challenges. Put those together and we expect to pace to improve as we enter the second half of the year. We think we'll return to more normal levels. Also, Q1 is always seasonally challenging for installations, and this Q1 some severe weather created additional installation headwinds. So you have the irony of high consultations but installation constraints. Historically, during an economic slowdown like we had in 2008–2009, while many categories suffered, our residential business actually grew then. There are reasons: about 65% of buyers are over age 60, so they tend to be less affected by economic pullbacks. Financing tools help homeowners afford the products. Most importantly, outages tend to trump the economy. When power is out, generators become a higher priority than other discretionary spending. That's largely how we think about the resilience of the category over time and why we remain confident.

Thank you. One moment please for our next question. Our next question will come from Jeff Hammond of KeyBanc Capital Markets. Your line is open.

Hey, good morning, guys. Just, can you quantify maybe how much inventory you think came out of the channel in 1Q and what you think that number looks like in 2Q? And if I could just sneak in a commercial one, what prevents you from kind of raising the bar there, given the strong start? Thanks.

Yes, thanks, Jeff. On field inventory, it was a meaningful decrease in the inventory numbers in Q1. We discuss inventory in terms of days of field inventory relative to normal. In Q3 last year we were about double where we thought we needed to be; by our Q4 call in February we had reduced that to about 1.7 times. Now we think that range is somewhere in the 1.4 to 1.5 times kind of “normal.” There's some debate about what normal means, but we're looking at our history in the categories and making good progress. We also said it wasn't going to be a linear pull-down because of seasonality — Q1 is normally lower installs — so we didn't expect to go straight from 1.7 to 1.0 by the end of Q2. We feel like we're progressing where we want to be and are buoyed by robust end-market demand. Regarding why we didn't raise guidance based on Q1 outperformance: that outperformance primarily came from C&I. The C&I business outperformed, including Pramac internationally which we've now acquired 100% of. One key vertical in C&I is telecom; we serve major wireless companies and co-locators, and some of those customers have lumpy shipment and installation patterns, particularly in the second half of the year. Those lumpiness and some moving pieces underlie our decision not to raise the back-half guide. Overall indications from telecom customers remain positive in terms of CapEx and network hardening, but the timing is variable.

Thank you. Our next question will come from Christopher Glynn of Oppenheimer. Your line is open.

Thank you. Good morning, guys. I wanted to ask about the home consultations — you mentioned they were up significantly in almost all the states. Can you dive into that a little bit? And also clarify the expectation for residential growth in the second half. Does that explicitly include growth in 3Q? Or if not, are you biased to see at least a bit of top-line positive from residential in 3Q?

Yes, thanks, Chris. We are seeing a return to growth starting in the third quarter. That is the expectation and how we've structured guidance for residential. Regarding home consultations being very broad-based: almost all states saw growth and that is encouraging. Consultations in Q1 were more than four times the comparable pre-pandemic period in 2019, and that broad-based growth suggests the category momentum is different today than pre-pandemic. To give context on the opportunity: home standby generators are still under 6% penetrated in single-family U.S. houses valued over $150,000. Every 1% penetration is a roughly $3 billion market opportunity, and we have about 75% market share. So the runway is substantial. Canada has also had very strong demand due to increasing outage frequency and duration. We believe grid reliability challenges — increased electrification advancing demand spikes — are driving homeowner interest. In many states the top five penetration states are also the top five growth states, suggesting penetration is accelerating rather than saturating. That supports our confidence for growth in the second half and a return to year-over-year residential sales growth starting in Q3.

Thank you. Our next question will come from Mark Strouse of JPMorgan. Your line is open.

Yes. Good morning. Thank you very much for taking our questions. York, I wanted to go back to your comments on pricing — the pricing actions benefiting gross margin. How broad-based was that? Is that residential and C&I? And what does the guidance imply regarding future price action this year?

Yes, Mark. For the first quarter it applied across the business to varying degrees. On the residential side, particularly home standby, the last price increase kicked in on June 1, 2022, so we're still in the process of fully realizing that increase. On the C&I side, there were a number of price increases that came through at the beginning of 2023 in addition to earlier increases in 2022. So I'd say there was more of a price impact in the first half, with continuing benefits in the back half primarily on the C&I side. We haven't yet fully captured all the residential pricing impact in our analysis, but the pricing benefit is fairly broad-based across segments.

One moment please for our next question. Our next question will come from the line of Brian Drab of William Blair. Your line is open.

Hey, good morning. This is Tyler on for Brian. I want to transition to the clean energy products. What are you doing to improve distribution capabilities there? And as a follow-up, within the $300 million to $350 million guide for residential clean energy, can you give directional color on ecobee, Power Cell and grid services and what their potential is for the full year?

Thanks, Tyler. We're working hard to rebuild distribution confidence and replace the loss of a large customer that ceased operations in Q3 last year. We addressed component longevity issues via the SnapRS upgrade campaign; we've taken care of customers and channel partners participating in that program and are getting positive feedback from distribution partners on how we're handling the upgrade. We had to work through some field inventory related to that abrupt closure, though not to the scale of the home standby situation. The market has also experienced some project timing impacts around changes such as NEM 3.0 discussions and IRA finalization timing, which has created some near-term hesitancy. As those items get clearer, we expect recovery through the year. We won't provide product-by-product financial breakdowns, but ecobee is doing very well — strong smart thermostat sales, and we are launching a smart doorbell cam in the second half of the year that complements ecobee's product line. We're seeing placements for the second half. Grid services is growing off a low base and had robust sales growth in Q1. We continue to see meaningful interest from utilities and grid operators in solutions such as our Concerto platform to help manage potential supply shortfalls and EV load. The message is we believe we've bottomed in this area in Q1, we have green shoots, and expect continuing recovery with better distribution and momentum in ecobee and grid services.

Our next question will come from Jerry Revich of Goldman Sachs. Your line is open.

Hi. Good morning, everyone. I'm wondering if you could talk about the fourth quarter margin outlook and outline your expectations for year-over-year cost declines embedded in the guidance, within the context of pricing as well. Also, as you go back towards doing some level of promotions versus not doing them a year ago, how much does that pressure price realization? If you could bridge how much of the year-over-year margin improvement in Q4 we expect from price versus cost versus mix, that would be helpful.

Jerry, we expect adjusted EBITDA margins to get back to the low-20% range by Q4, as we discussed. Sequentially, we expect about an 800 basis point improvement in adjusted EBITDA from first half to second half 2023. Roughly speaking, about 300 basis points of that improvement is driven by mix — home standby mix improving as inventory normalizes and seasonality shifts to the second half. We anticipate about 200 basis points of improvement from input cost declines (commodities, logistics, etc.) and cost reduction initiatives like better plant efficiency and absorption. The remaining roughly 300 basis points of the 800 is operating leverage on higher sales volumes that will flow through to OpEx leverage. Year-over-year, pricing benefits will largely have lapped by Q4, so most of the year-over-year improvement should come from cost improvement and mix improvement rather than incremental pricing.

Our next question will come from Joseph Osha of Guggenheim. Your line is open.

Thanks very much. I wanted to return to the Residential Clean Energy business. As you go through this reset, one question that's come up is around residential home architecture and the fact that you're advancing two parallel inverter architectures at the same time, which drives complexity in other parts of the system. Can you give any clarity on how you intend to move forward with those multiple architectures?

Joe, great question. We have a new team running the business and we've acquired a lot of technology and platforms over the last four years. The first order of business is integrating as much of that technology as possible and tightening focus on where we can add the most value. Regarding multiple inverter architectures, we are somewhat agnostic about which technology “wins.” It's not necessarily a Betamax vs. VHS fight; there are different technical approaches to get similar outcomes. Over time it will become clearer which architecture makes the most sense. We also need solutions that allow us to address the large installed base of existing solar-only homes, which may be DC-coupled or AC-coupled. So our product strategy needs to serve both the new solar-plus-storage installs and the broader solar-only install base. We want to participate in the market where storage attachment rates are still only 15%–20% and growing. We plan to discuss more at our Investor Day in September, and the team is actively working through strategic decisions to deploy technology in the most efficient and value-creating way.

Our next question will come from Kashy Harrison of Piper Sandler. Your line is open.

Good morning. Thanks for taking the question. There's a lot of uncertainty in the market from a banking and financing perspective. Can you give a sense of how the uncertain financing environment is impacting operations for your dealer and channel partners?

Great question. Largely, we haven't seen dealer partners materially impacted. They often pay us by credit card and many value the card rewards. They also use our floor-plan financing program heavily, which has been successful for us. We subsidize the cost for the first 180 days, so dealers get essentially free floor-plan financing for that period, which derisks their ability to carry inventory. In terms of project execution, because many dealers are paid on progress for bigger projects, if the broader project pipeline were to dry up due to macro weakness, they could feel pain there. But we haven't seen evidence of direct compression from the financing landscape at the dealer level. That's our view today.

Our next question will come from George Gianarikas of Canaccord Genuity. Your line is open.

Hi, good morning. Thanks for taking my question. I actually had a power outage during this call and I'm not a Generac customer yet. My question: how do spasms in financial markets impact your C&I business? How much of it is project-related that may be impacted if this continues, particularly projects related to renewables?

Great question. Look at nonresidential construction spending as an indicator. That business tends to be late cycle for us. Residential can be more early cycle. The C&I side could be affected if nonresidential construction slows, but there are strong secular trends that support our C&I demand. Telecom is a major vertical for us and is in a secular up-cycle related to 5G deployments and network hardening. We're also seeing increasing penetration of backup power in businesses that historically didn't prioritize it, driven by the need for resiliency, avoiding revenue interruption, spoilage, or process disruption. Codes and standards are also increasing the need for backup power in some facilities — for example, California telecom requirements for 48 hours backup and requirements in some states for healthcare and elder-care facilities. Those trends can offset softness in other parts of nonresidential construction. York: On renewables, we don't focus on utility-scale or front-of-the-meter projects primarily, so financing issues in that space wouldn't necessarily impact our core businesses directly.

And to add, on the renewables side, our focus is primarily behind-the-meter and C&I stationary storage and not necessarily exposed to front-of-the-meter project financing dynamics.

Our next question will come from Donovan Schafer of Northland Capital Markets. Your line is open.

Hi, thanks for taking the questions. I had a thesis that geographic diversification of outage events could help drive down channel inventory faster, because areas might have weaker installation bottlenecks. You're clear that inventory drawdown was in line with expectations but outage activity was above historical average. Is the disconnect due to installation bottlenecks being more uniform? If outage activity was high but inventory drawdown matched expectations, does installation restriction limit upside? Also, can you give an update on how the various outage events are unfolding — Hurricane Ian, East Coast ice storms, Midwest storms, Quebec outages — have you seen demand from these events, and are installations occurring now?

Donovan, your thesis is reasonable, but consider the timing element. From a sales lead to an install, there is permitting and a conversion process that typically takes 90 to 120 days; historically it could be as long as 180 days in some markets. Those sales leads are a funnel and they take time to mature. So while outages and consultations happened in Q1, many of those consultations will convert into installations later in Q2 and into the second half, which is why we expect to see the read-through as we exit Q2. Installation bandwidth is improving. Q1 is always a difficult install quarter due to winter weather in the Northeast and Upper Midwest. This year, California also had aggressive weather that limited installers. Those headwinds meant consultations rose while installs were constrained. We're making progress on installation bandwidth year-over-year, and we've focused on adding distribution partners, improving product ease of installation, and hiring talent via our dealer talent network. We're helping dealers find and train installation crews. So while installers were uniformly constrained in Q1, we expect improvement and read-through as time progresses and permits and scheduling work through the funnel.

Our next question will come from Praneeth Satish of Wells Fargo. Your line is open.

Thanks. You talked about ecobee being the single pane of glass, but it's somewhat limited in what it can display. With the smart doorbell launching later this year and home standby generator integration, is there thought to upgrading the display and processing capabilities of ecobee and having it compete in smart home with the likes of Amazon and Google?

Yes, absolutely. One of the great things about ecobee is the display and processing capability. I have a beta smart doorbell in my house now: if someone pushes the doorbell, any ecobee thermostat in the home with a compatible display can show the doorbell camera feed. It’s a compelling experience. We want to use ecobee as the central hub for energy in the home. We already integrated generator status into ecobee — it can display fault messages, exercise run status and outage running status. Next we'll integrate features like our LP tank monitoring and water heater disconnect switches and then storage. Ecobee provides a low-cost, high-penetration entry point into the home: almost every home has HVAC and a thermostat. Ecobee's display, processing power and user experience are strong and a natural fit for our single-pane-of-glass strategy for home energy management.

The next question will come from Jordan Levy of Truist. Your line is open.

Quick one on M&A. After closing recent deals, what segments might your appetite be directed toward through the year and how do you view the current opportunity landscape for M&A?

Jordan, thanks. We've been active on M&A, acquiring 30-plus companies over the last decade. We've used acquisitions to grow geographically and enter adjacent spaces and to accelerate our energy technology evolution. We remain active on M&A. Recent deals were bolt-ons: our investment in an EV load management provider to enhance Concerto, REFU Storage in Germany for C&I stationary storage, and prior off-grid energy acquisitions in the U.K. to support rental channels. Looking ahead, areas of interest include accelerating our EV charging capabilities — we plan to get to market with a residential level 2 charger later this year via a private-label partner, but we see long-term opportunity for an organic EV charging capability. Valuations remain high in some tech spaces so we may be selective. International residential storage for outside North America is an area where we could look to acquire to enter new markets. We also consider acqui-hires to bolster our technology teams. We'll remain opportunistic and focused on deals that accelerate our strategic priorities.

Our next question will come from an analyst with Credit Suisse. Your line is open.

Good morning. Thank you. Within the residential clean energy space, we've seen many company announcements on bidirectional chargers. How are you thinking about the effect of vehicle-to-home on home standby demand in the medium term, say three to five years? And as you mentioned, you've acquired many parts of the home-energy puzzle; could you contextualize your in-house and/or M&A-based EV charging ambitions beyond the level two announcement?

Great question. EVs are large batteries and most charging will happen at home. Controlling rate and timing of charging is critical, and a level 2 charger plus home energy management can handle that today. Bidirectional charging (vehicle-to-home) allows using the vehicle battery for resiliency or grid services, but in the medium term (three to five years) we don't see a material negative impact on home standby generator demand. Homeowners likely won't trade resiliency for mobility; many will still want stationary storage or a generator for long-duration outages. There are questions around bidirectional adoption: standards, OEM openness to third-party control of vehicle batteries, warranty and degradation concerns. We’re investing in EV charging beyond the level 2 offering. We’ll launch a level 2 solution later this year and integrate it deeply into home energy management. Longer term, we may pursue additional capabilities — organic development or M&A — as the market and standards mature. We’ll discuss more at Investor Day in September, but we expect EV charging integration into our broader home energy ecosystem and see it as a strategic area of focus.

That will end the Q&A session. I would now like to turn the conference back to Mike Harris for closing remarks.

We want to thank everyone for joining us this morning, and we look forward to discussing our second quarter 2023 earnings results with you in early August. Thank you, again, and goodbye.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.