Good day and thank you for standing by. Welcome to the Second 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 be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Harris, SVP, Corporate Development and Investor Relations. Please go ahead.

Good morning, and welcome to our second 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 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. Our second quarter net sales were in line with our prior expectations as stronger-than-expected C&I product shipments offset residential products, which were lower than expected as a result of a softer consumer spending environment that impacted shipments of home standby generators and chore products. This had an unfavorable mix effect on gross margins, resulting in slightly lower adjusted EBITDA margins than previously expected. Year-over-year, overall net sales decreased 23% to $1 billion, and core sales declined 26% during the quarter. Residential product sales decreased 44% as compared to a strong prior year quarter that benefited from significant excess backlog reduction for home standby generators. The current year quarter continued to be impacted by elevated levels of field inventory for home standby generators as well as a decline in chore product shipments year-over-year. Global C&I product sales increased approximately 24% to an all-time quarterly record with broad-based growth across nearly all regions and channels. Adjusted EBITDA margins were negatively affected by the significant unfavorable sales mix as well as reduced operating leverage driven by lower home standby shipments and continued investments for future growth. Importantly, continued favorable price cost dynamics have created a meaningful margin tailwind, providing a partial offset to the unfavorable sales mix. Second quarter home standby shipments grew at a strong sequential rate, but declined significantly on a year-over-year basis as the second quarter of 2022 included the reduction of excess backlog and we continue to meaningfully under-ship end market demand in the current quarter as we focused on further reducing field inventories of home standby generators. Baseline power outage activity in the U.S. was well above the long-term average, but meaningfully weighted toward the final weeks of the quarter. Home consultations or sales leads were roughly flat from the prior year period and increased sequentially off an unseasonably strong first quarter. Additionally, home consultations during the second quarter were still more than four times higher than the second quarter of 2019, further supporting our view that consumer interest in the product category has achieved a new and higher baseline level. Our residential dealer account returned to sequential growth in the quarter, ending at approximately 8,700, an increase of 500 dealers from the prior year. We continue to invest in growing the installation capacity of our channel partners, and we are making good progress towards our initiatives to increase dealer count, train non-dealer contractors, streamline the installation process and raise home standby category awareness across trade groups. We believe these efforts are important to the longer-term growth trajectory of the product category as the megatrends that support the demand growth outlook remain firmly intact. Activations, which are a proxy for installs, improved sequentially over the first quarter, but declined from a strong comparable period in 2022 that included the benefit of a backlog of installations in certain regions during the prior year. Activations were also below our prior expectations for the quarter, primarily due to the weaker consumer spending environment for home improvement. But despite this relative softness, activations during the quarter were more than double second quarter 2019 levels. Close rates were flat sequentially and remained meaningfully higher than the comparable period of 2022, but underperformed our expectations as a result of the shift in consumer spending patterns. The number of home standby generators in field inventory further declined in the quarter, while days of field inventory relative to historical norms also decreased sequentially. However, with close rates and activations lower than expected in the quarter, the field inventory normalization process is now expected to extend further into the second half of the year. As a result, we expect the elevated field inventory levels to further impact home standby shipments in the second half relative to our prior expectations with the return to year-over-year growth in home standby shipments now anticipated in the fourth quarter. We believe the stronger outage environment in the final weeks of the second quarter and the resulting strength in IHC support this expected return to growth later in the year. Longer term, the megatrends that are driving awareness for backup power solutions are as compelling as ever. Homeowners and business owners are becoming increasingly sensitive to the growing frequency of power outages driven by extreme weather and grid operators are struggling to solve the growing supply demand imbalances that are a byproduct of the accelerated energy transition that is underway. Importantly, these are not short-term issues as the transition to the next-generation power grid will be an uneven process and is expected to take decades to complete. We believe our unparalleled suite of solutions is well positioned to solve many of the energy-related challenges that consumers and businesses will inevitably face. I now would like to provide some commentary on our chore products, which consists of a broad lineup of outdoor specialty power equipment used for property maintenance in large residential and light commercial applications. These products, which are increasingly shifting towards battery-powered solutions, experienced significant growth in recent years as homeowners have been spending more time and money on property maintenance since 2020. However, shipments in the second quarter declined from the prior year and were below our prior expectations as higher channel inventories in the industry, unfavorable weather trends and shifting consumer spending patterns impacted demand for chore products. This weaker than previously expected demand environment is expected to persist in the second half of the year, also contributing to our lower outlook for residential product sales. Now moving to our residential energy technology products and solutions. Second quarter sales were in line with our prior expectations and grew at a strong rate sequentially as shipments of our PowerCell energy storage systems improved and ecobee sales hit an all-time record for the quarter. Ecobee drove strong sales growth over the prior year and continues to take share in the smart thermostat market by strong positioning with professional contractors and new placement with key retailers. The ecobee team is progressing towards the launch of a smart doorbell camera in the second half of this year, which will provide for increased homeowner engagement with our home energy management platform. As the central hub of our home energy ecosystem, we firmly believe that ecobee’s feature-rich devices and significant expertise in user experience will prove to be key differentiators for Generac’s residential energy technology efforts. Although we are making progress in our future product roadmaps and rebuilding the confidence of solar installers, the broad residential solar and storage market in the U.S. is showing signs of slowing. As a result, we now expect our suite of residential energy technology products and solutions to deliver gross sales at the low end of our previous range between $300 million and $350 million for the full year 2023 as weaker solar and storage industry demand dynamics are expected to persist throughout the balance of the year. To better compete in these large and growing market opportunities, we are continuing to invest heavily in the world-class talent and R&D infrastructure that is required to achieve next-level quality while developing and commercializing innovative solutions. We believe our competitive advantages are built around the combination of these ongoing investments, differentiated monitoring and management capabilities and a unique and seamless user experience, combined with our core competencies around sales and marketing, lead generation, distribution, customer support and global sourcing. I’d now like to provide commentary on our C&I products, which once again outperformed our expectations. Global C&I product sales grew 24% over the prior year to an all-time quarterly record as multiple megatrends continue to support demand for backup power and mobile products around the world. Domestic C&I product sales grew at a robust rate in the second quarter, highlighted by strengthened shipments to a number of key customers for beyond standby applications, industrial distributors and national rental equipment companies. Shipments of natural gas generators used in applications beyond traditional emergency standby projects continued to see tremendous growth during the second quarter. We believe we are in the very early innings of this exciting new market opportunity as grid stability concerns and volatile energy markets are expected to further drive demand for these solutions. Leveraging our position as the leading provider of natural gas generators we are building an increasingly comprehensive solution set to enable the deployment of our products in multi-asset applications, such as pairing our smart grid-ready generators with our emerging C&I storage, connectivity, advanced controls and grid services solutions. Shipments of C&I generators through our North American distributor channel grew once again at a strong rate and channel backlog also increased sequentially during the quarter. Quoting activity for C&I products remains robust, highlighting the ongoing strength in demand for backup power in this important channel that serves a wide range of end markets. In addition, we experienced another quarter of robust growth against a strong prior year comparison with our national and independent rental equipment customers as they continue to refresh and expand their fleets. While order patterns from rental companies have moderated after several quarters of exceptional performance, this end market has substantial runway for growth, supported by the critical need for future infrastructure-related investments. As the leading provider of backup power to the North American telecom market, sales to national telecom customers increased slightly during the second quarter as compared to a strong prior year comparison. Although we continue to expect shipments and order trends for these products to be uneven during the second half of the year, we believe 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. Positive momentum also continued during the second quarter for our International segment as total sales increased 10% year-over-year with the combined impact of acquisitions and favorable foreign currency effects contributing approximately 4% to sales growth. Core total sales growth was driven by strength in nearly all regions as well as global sales of our controls and automation solutions from our Deep Sea and Motortech acquisitions. While energy security concerns in Europe have moderated from peak levels seen in prior quarters, we continue to see positive momentum in important long-term international growth markets, including India, the Middle East and Australia. As the global energy transition accelerates, demand for electricity around the world grows and the threat of increasingly severe and volatile weather persists, we believe that the demand we are seeing in these markets supports our view that the need for power resilience is a global issue. Accordingly, we are continuing to invest and build out our international product and distribution capabilities to serve these large and diverse growth opportunities. As disclosed in our press release this morning, we are raising our full year sales growth guidance for global C&I products to the mid-teens range from prior expectations for a mid-to-high single-digit increase. In addition to the strong second quarter performance, the increased guidance is being primarily driven by continued strong backlog and operational execution for our domestic C&I products. In closing this morning, our C&I product category has continued to perform extremely well as our global teams have driven strong execution. But a softer than previously expected consumer environment impacted second quarter results and is the main driver in the reduction in our second half outlook for residential products. We view the headwinds in our residential product categories as temporary and we remain confident in the robust, longer-term outlook for our broad portfolio of backup power products and energy technology solutions. This confidence combined with our history of strong cash flow generation and healthy financial profile allows us to maintain a long-term focus on executing our "Powering a Smarter World" enterprise strategy. We will continue to make the necessary investments to capitalize on the megatrends that drive the future growth opportunities inherent in this strategy. We look forward to providing a more detailed update on our longer-term strategic vision at our upcoming Investor Day in late September. I will now turn the call over to York to provide further details on second quarter results as well as the outlook for 2023. York?

Thanks, Aaron. Looking at second quarter 2023 results in more detail, overall, net sales decreased 23% to $1 billion during the second quarter of 2023 as compared to $1.29 billion in the prior year second quarter. The combination of contributions from recent acquisitions and the favorable impact from foreign currency had approximately a 3% net favorable impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the second quarter by product class, residential product sales declined 44% to $499 million as compared to $896 million in the prior year. As Aaron discussed in detail, lower shipments of home standby generators, PowerCell energy storage systems and chore products drove this decline in residential product sales. In particular, for home standby, the year-over-year declines were due to a tough prior comparison where we were working down excess backlog, combined with the current year that is impacted by field inventory destocking. Commercial and industrial product sales for the second quarter of 2023 increased 24% to $384 million as compared to $309 million in the prior year quarter. Contributions from recent acquisitions and the favorable impact of foreign currency contributed approximately 2% revenue growth in the quarter. This very strong core sales growth was driven by broad-based growth across nearly all regions and channels, highlighted by an increase in domestic shipments to direct customers for beyond standby applications, industrial distributors and the national rental equipment channel. In addition, international shipments of C&I power generation products and controls and automation solutions also contributed to this growth. Net sales for other products and services increased 37% to $117 million as compared to $86 million in the second quarter of 2022. This increase was primarily due to the acquisition of Electronic Environments given their additional service capabilities. We called out that this acquisition closed last year on June 30. Gross profit margin was 32.8% compared to 35.4% in the prior year second quarter due to the significant impact of unfavorable sales mix given the sharp decline in home standby mix compared to the prior year. This was partially offset by previously implemented pricing actions and lower input costs from improved commodities, logistics and plant efficiencies that are providing an important tailwind to margin trends that are expected to continue in the second half of 2023. Operating expenses increased $2 million or 1% as compared to the second quarter of 2022. This increase was primarily driven by increased employee costs to drive and support future growth, higher marketing and promotion spend and the impact of recurring operating expenses from recent acquisitions. This was mostly offset by lower variable operating expenses on the lower sales volumes. Adjusted EBITDA, before deducting for noncontrolling interest, as defined in our earnings release, was $137 million or 13.6% of net sales in the second quarter as compared to the $271 million or 21% of net sales in the prior year. This lower EBITDA percent was primarily driven by the higher operating expenses as a percent of sales, given the lower sales volumes compared to prior year and to a lesser extent, the lower gross margins. I will now briefly discuss financial results for our two reporting segments. Domestic segment total sales, including intersegment sales, decreased 28% to $815 million in the quarter as compared to $1.13 billion in the prior year, with the impact of acquisitions contributing approximately 3% revenue growth for the quarter. Adjusted EBITDA for the segment was $103 million, representing 12.7% of total sales as compared to $242 million in the prior year or 21.5% of total sales. The lower domestic EBITDA margin in the quarter was primarily driven by the significant impact of unfavorable sales mix and reduced operating leverage on the lower shipments. The impact of acquisitions and continued investments in future growth also negatively affected margins during the quarter. These margin headwinds were partially offset by favorable price and cost benefits. International segment total sales, including intersegment sales, increased 10% to $224 million in the quarter as compared to $203 million in the prior year quarter. Core sales, which excludes the impact of acquisitions and currency, increased approximately 6% compared to the prior year. Adjusted EBITDA for the segment before deducting for non-controlling interest was $33 million or 14.9% of net sales as compared to $30 million or 14.5% of net sales in the prior year. This stronger margin performance was primarily driven by favorable price and cost benefits. Now switching back to our financial performance for the second quarter of 2023 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $45 million, as compared to $156 million for the second quarter of 2022. The current year net income includes approximately $15 million of additional interest expense compared to the prior year due to higher borrowings and interest rates. In addition, GAAP income taxes during the current year second quarter was $16 million or an effective tax rate of 25.9% as compared to $46 million or an effective tax rate of 22.5% for the prior year. The increase in effective tax rate was primarily due to a lower benefit from equity compensation in the current year quarter. Diluted net income per share for the company on a GAAP basis was $0.70 in the second quarter of 2023 compared to $2.21 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $68 million in the current year quarter or $1.08 per share. This compares to adjusted net income of $185 million in the prior year or $2.86 per share. Cash flow from operations was $83 million as compared to $24 million in the prior year second quarter, and free cash flow, as defined in our earnings release was $54 million as compared to $6 million in the same quarter last year. The increase in free cash flow was primarily due to significantly lower working capital investment in the current year quarter as inventory levels have stabilized, partially offset by lower operating earnings, higher interest payments and higher CapEx. Total debt outstanding at the end of the quarter was $1.62 billion, resulting in a gross debt leverage ratio at the end of the second quarter of 2.8x on an as-reported basis which is expected to moderate in the second half of the year as LTM EBITDA begins to increase. With that, I will now provide further comments on our outlook for 2023. As disclosed in our press release this morning, we are updating our outlook for the full year 2023. The softer than previously expected consumer spending environment for home improvement has impacted our outlook for residential products most notably for shipments of home standby generators. As a result of the softer consumer environment, we are seeing lower close rates and activations relative to prior expectations which is causing higher field inventories and lower distributor sentiment compared to our previous guidance commentary. As a result of these factors, we now expect residential product sales for the full year 2023 to decline in the mid-20% range compared to the prior year, which compares to our prior expectation for a decline in the high teens range. Partially offsetting this incremental weakness in residential products, we are raising our outlook for C&I product sales which are now expected to grow at a mid-teens rate during the year as compared to our prior guidance of a mid to high single-digit rate. Overall net sales for the full year are now expected to decline between minus 10% to minus 12% as compared to the prior year, which includes approximately 2% net favorable impact from acquisitions and foreign currency. This compares to the previous guidance range of a decline between minus 6% to minus 10%. From a quarterly pacing perspective, we now expect a slight year-over-year decline in overall net sales for the third quarter with the return to year-over-year growth in the fourth quarter. This guidance assumes a level of power outage activity during the remainder of the year that is in line with the long-term baseline average. And consistent with our historical practice, this outlook does not assume the benefit of a major power outage event during the year. Looking at our gross margin expectations for the full year 2023, we now anticipate approximately 100 basis points of gross margin improvement over 2022 levels. We still expect sequential quarterly improvements in gross margins in the third and fourth quarters with third quarter gross margins projected to be approximately 150 to 200 basis points higher than the second quarter of 2023. The anticipated sequential improvement in gross margins in the second half is expected to be driven by improved sales mix with higher shipments of home standby generators, lower input costs and the realization of cost reduction initiatives as compared to the first half of the year. Given the significant megatrends that support our long-term growth opportunities, we remain focused on driving innovation, executing our strategic initiatives, and investing for the future. As a result of these ongoing investments, we expect operating expenses as a percentage of net sales to be approximately 20% to 21% for the full year 2023. Given these gross margin and operating expense expectations, adjusted EBITDA margins before deducting for non-controlling interests are now expected to be approximately 15.5% to 16.5% for the full year 2023 compared to the previous guidance range of 17% to 18%. From a quarterly pacing perspective, we still expect adjusted EBITDA margins to improve throughout the remainder of the year, primarily driven by sequentially improving gross margins as previously discussed, and to a lesser extent, improved leverage of operating expenses on an expected higher sales volume. Accordingly, we now expect third quarter adjusted EBITDA margins to be approximately 300 to 350 basis points higher than the second quarter of 2023. And exit EBITDA margins for the fourth quarter of 2023 are expected to be in the low 20% range. Additionally, as Aaron discussed, we continue to make significant operating expense investments in our residential energy technology products and solutions to capitalize on the significant opportunities presented by the rapidly growing solar storage and energy management markets. As a result, we currently expect these investments to unfavorably impact our EBITDA margins by approximately 400 basis points for the full year 2023. We continue to expect operating and free cash flow generation to follow historical seasonality of being 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 to be strong, well over 100% as working capital moderates off of peak levels. We’re also providing updated guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2023. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add-back items should be reflected net of tax using the expected effective tax rate. For 2023, our GAAP effective tax rate is still expected to be approximately 25% as compared to the 19.6% full year GAAP tax rate for 2022. The year-over-year increases are driven primarily by expectations for lower share-based compensation deductions, increased mix of income in higher tax jurisdictions, and higher tax on foreign income in 2023 compared to 2022. Interest expense is now expected to be approximately $92 million compared to the prior guidance of approximately $90 million, assuming no additional term loan principal prepayments during the year and current expectations for SOFR rates throughout 2023. Interest expense is expected to moderate in the third and fourth quarters as cash flows on our interest rate swaps become more favorable and as we expect to pay down a portion of our outstanding revolver indebtedness. Our capital expenditures are still projected to be approximately 3% of our forecast net sales for the year. Depreciation expenses now forecast to be approximately $62 million compared to the previous guidance of approximately $60 million in 2023. GAAP intangible amortization expenses are now expected to be approximately $102 million during the year as compared to the previous guidance of approximately $100 million. Stock compensation expense is still expected to be between $40 million to $43 million for the year. And our full year weighted average diluted share count is still expected to approach 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. As a reminder, we have $278 million of authorization remaining on our current share repurchase program. This concludes our prepared remarks. At this time, we’d like to open up the call for questions.

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

Good morning, and thanks for taking my questions. Aaron, I wanted to start on the topic of channel inventory for the home standby product category. Last quarter, I think you were at about 1.5 times normal. Where do you sit now and am I hearing you correctly that embedded in your outlook is that that converges to the normal level by fourth quarter?

Yes, Tommy, that’s obviously the central question here and has been a topic as we’ve discussed over the last several quarters. You’re right, we said somewhere in the 1.4 to 1.5 times range is where we were last time we talked in April. Today, we believe that number is closer to 1.2 to 1.3 times as we exited the first half. And with the assumption of a softer consumer spending environment in particular around residential investment projects, we’re really looking at a more moderated close rate. It’s interesting because we actually are seeing a lot of inbound activity in terms of sales leads. They’re just not converting at the rate that we thought they would, and that’s really the crux of it. We’re just not going to drain the inventory as quickly because we’re not going to convert those leads to activations at the rate that we thought we would here in the second half and that is going to create basically a situation where that elevated field inventory is going to persist a bit longer than we had originally thought. So through the year it’ll start to taper off and there’s definitely — and I think you’ve done this with channel checks, we do our own channel checks and we know what field inventory looks like really with a high degree of accuracy region to region and dealer to dealer, wholesaler to wholesaler, retailer to retailer. And so we see regions where actually there isn’t a field inventory issue anymore. And we see other regions where field inventories are still higher than normal. So it’s become more of a mixed bag around the field inventory story. Whereas I would say you wind the clock back two or three quarters, it was everywhere. So the field was full of inventory in all regions. So now we’re starting to see some of that normalization be achieved in certain regions and in fact go beyond that. We’ve got a couple of regions, you get up into Canada in the Quebec markets in particular where they’ve had a number of outages and we can’t get them enough product, they don’t have the installation bandwidth. So we get back to that issue and that’s obviously another area we’ve been focused on. So hopefully that gets the answer to your question.

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

Hey, morning everyone. So following up a little bit on that, there’s a lot of moving pieces here from a channel perspective and on the home standby side, related to that inventory question. You’ve got high inventory. You’ve taken your outlook down a little bit with slower consumer conversion, but the IHCs are higher, you’re gaining distribution, and inventory is at least normalizing a little bit. Can you help sync from a forward commentary how you think this demand curve starts playing out? Maybe just a little behind the hood on the sellout from a channel perspective, how you think those sequentials kind of work from a sellout perspective versus what normal might look like and just any context to the true underlying run rate if you try to normalize for these moving pieces?

I think we lost Mike.

We lost Mike. Mike, can you repeat your question?

Yes, no problem. There’s a lot of moving pieces here from a channel perspective and in the home standby side, I want to tie that to inventory, installs, sell-through, and underlying run rate. How do you think the demand curve plays out across dealers, wholesalers, and retailers? What channels normalize first and how should we think about the pace of sellout versus normal?

Yes, Mike. There are a lot of moving pieces. When you think about sell-in versus sellout, channel to channel, when we look at the different metrics in each channel we see different things going on. Our dealer channels, which are more turnkey project channels, feel like they’re in better shape than some of the other channels. When we look at our wholesale channels and in particular retail channels, retail is lagging for us right now. If you look at sell-through at retail and foot traffic at retailers, some of the larger retailers have commented that foot traffic has slowed and we are definitely seeing that in our residential product categories that we sell through retail. With the notable exception being ecobee, which continues to do well as we called out in our prepared remarks, likely due to higher energy prices and the opportunity to use ecobee devices to reduce energy costs. In terms of pacing, we see dealers recovering first, followed by wholesalers, and then retailers will be further behind. The 1.2 to 1.3 times is an across-the-board view. Dealers are better than that, wholesalers probably a little worse, and retailers are quite a bit worse at this stage. We do believe this will start to normalize through the third quarter and into the fourth quarter. End market demand is interesting — sales leads or IHCs remain strong, even up sequentially from Q1, they’re just not converting at the same level. We’re not sure yet if that conversion is delayed or if customers are deciding not to buy at all. We have stood up a team focused on nurturing unclosed leads; we have a large file of unclosed leads from the last several years and re-engaging those homeowners at the right time with perhaps the right offer represents an opportunity for closure. We’ve had better close rates historically on re-engagement after an outage or similar event, so that’s where we’re putting a lot of effort in the second half. We haven’t perfected it yet, but we’re doing a ton of work to stimulate demand, particularly with customers who have already gone through an in-home consultation. We see end market interest as strong, but conversion needs to improve to accelerate clearing field inventory levels, and we are making progress, just not as quickly as we had hoped.

I think the key is seasonal. We do expect the home standby category to pick up in the second half of the year versus the first half, especially as inventory begins to normalize throughout the second half. It may not improve as much as we thought three months ago because of the softer consumer environment we’re seeing.

And the next question comes from Jeff Hammond of KeyBanc Capital Markets Inc. Your line is now open. Conversion needs to improve to accelerate clearing field inventory levels, and we are making progress, just not as quickly as we had hoped. York Ragen, Chief Financial Officer, said: I think the key is seasonal. We do expect the home standby category to pick up in the second half of the year versus the first half, especially as inventory begins to normalize throughout the second half. It may not improve as much as we thought three months ago because of the softer consumer environment we’re seeing.

Hey guys. Just back on this close rate dynamic, I’m just wondering if you’re getting feedback from your dealer network on kind of why the close rates are lower. Is it financing costs or the higher costs? Because I know you had been contemplating lead time or close rates getting better as lead times shortened. So that seems to be the big surprise and just looking for more feedback color.

Yes. That is a surprise to us as well. Comparable industries with larger-ticket home improvement projects — pools, patios, furniture — are seeing similar consumer hesitancy. We think higher interest rates intended to tamp down inflation are starting to affect larger-ticket home improvement purchases. Previously, we thought close rates improved due to shorter lead times after peaking, but in this quarter they flattened out and our new guidance contemplates that they won’t increase further this year. Feedback from the channel suggests homeowners are taking more time to decide on bigger purchases. The good news is we have the leads even if they didn't close, so we can re-engage. Historically, re-engaging after an outage or at a good time produces higher close rates because the in-home consultation has already taken place. That’s where a lot of our effort is focused in the second half: the nurturing effort to convert the unclosed IHCs.

The next question comes from Mark Strouse of J.P. Morgan. Your line is now open.

Yes. Good morning. Thanks for taking our questions. Sorry to beat a dead horse here. I just want to ask on field inventory levels, again, a different way of looking at it, just how you’re thinking about what normal inventory levels are? The 1.2x to 1.3x that you’re talking about today, does your outlook assume that that goes back to 1.0x? Or based on the channel checks that you mentioned earlier, is there a chance that that potentially goes even lower, at least temporarily, given what you’re talking about with the macro? And then a quick follow-up: Just to be clear, from what I’m hearing the margin issues in guidance are a mix issue. You’re not signaling any change in pricing, correct?

Thanks for the question. On field inventory, we said 1.2 to 1.3 times as we exit the first half. Our assumption is that 1.0x is normal. We used around 2019 pre-COVID levels as a reference point for normal. That is debatable — it’s possible the channel decides its normal is lower; dealers in particular often hold very little field inventory because they don't have space or cash to stock, so for some smaller dealers, normal could be near zero and that would be consistent with a 1.0x metric aggregated across channels. The stocking tends to be more at retailers and wholesalers and larger regional dealers. If you look at days-based measures, there is seasonality — the second half is typically stronger for home standby and velocity increases, which affects days of field inventory. So we think 1.0x is a reasonable normalization point, but it’s possible the channel normalizes at a different level; we try to be balanced in our view. On margins, York?

On the margin side, yes, the EBITDA percent guidance is down primarily due to mix. On the gross margin side it’s all mix; there are no pricing reduction assumptions in our guidance. There is some operating deleverage on lower sales, which is a smaller piece of the decline, but to be clear, there’s no pricing reduction assumed in our guidance.

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

Yes. Hi. Good morning, everyone. I’m wondering if you could just — so margins are going to be about 16% this year. Your targets for 2024 were in the mid-20s, and obviously a lot has changed since. But I’m wondering, is there an opportunity for margin expansion off of current levels? How would you bridge what’s reasonable to expect compared to that 24% to 25% margin target you laid out at the Analyst Day. York, I think you alluded to it in terms of 400 basis point drag from the solar investments. But can you expand on that and what you folks view as a reasonable margin expectation in the medium term?

A couple things. I mentioned in my prepared comments that Q4 exit EBITDA margins are expected to be in that low-20% range. So we do expect margins to pick up from here, especially as home standby shipments normalize. Regarding the previous Investor Day target for 2024, our Energy Technology business is taking a bit longer to get to the level we outlined, and this year has been more of a reset for our Clean Energy business. We’ll provide a clear update and revised longer-term targets at Investor Day on September 27. At that time we’ll set revised expectations for the long term.

And the next question comes from the line of Kashy Harrison with Piper Sandler. Your line is now open. We expect to be in that low-20% range. So we do expect margins to pick up from here, especially as home standby shipments normalize. Regarding the previous Investor Day target for 2024, our Energy Technology business is taking a bit longer to get to the level we outlined, and this year has been more of a reset for our Clean Energy business. We’ll provide a clear update and revised longer-term targets at Investor Day on September 27. At that time we’ll set revised expectations for the long term.

Good morning and thank you for taking the questions. Can you just give us a sense of the revenue gap between sales into the channel and sales out of the channel? Are you underselling this year by $100 million, $200 million, $300 million? And then on the C&I side of the business just how do you think about the repeatability into 2024? Given some of these cross currents surrounding construction from the infrastructure bill and 5G, how do you think about the repeatability of C&I?

Thanks, Kashy. We haven’t disclosed a specific gap between sell-in and sell-out, but we are significantly under-shipping the market right now as we work through field inventory. That under-shipping is reflected in our residential guidance. We can see field inventory coming down in our data, so we know we’re under-shipping the market. We expect to continue to grow sequentially through the year as the field inventory drag reduces in the back half. On C&I, the business has been very strong. We are starting to come up against tougher comps. Some national rental customers have moderated order patterns after several quarters of exceptional performance; a couple have cut CapEx guidance, but we are well locked and loaded for this year given backlog. The question is 2024: visibility is limited and we wouldn’t provide full-year guidance on that now. For telecom, demand is lumpy and can accelerate or decelerate quickly; that’s expected. The long-term trend remains positive as tower and network hub counts expand. Within our core C&I products, we’re also seeing growth in beyond-standby applications where generators can be monetized for grid support. This is an early and exciting market opportunity driven by grid transition and stability needs, and we see meaningful runway there.

We can see field inventory coming down in all of our data, so we know we’re under-shipping the market.

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

Hi, good morning and thanks for taking my question. On the strategy to increase close rates, you mentioned that price reductions across the residential portfolio are not part of the plan. Why not? Why isn’t that an option to help improve close rates, particularly in an environment where your input costs are going down?

Thanks for the question. When we talk about price it’s useful to consider net price: promotion dollars often sit in operating expense for accounting purposes. We are using more promotion than before and testing what works: we’ve run national promotions and plan to run others later this year. Those promotions are included in our guidance. There’s a point at which promoting more may not move consumers who are deciding not to spend due to broader concerns like inflation or employment. Historically, outages have helped overcome softer consumer environments. Our guidance contemplates a normal outage environment. We have seen some above-normal outage activity late in the second quarter and into July, and we continue to monitor the impact on close rates. So we do have a level of promotion in our guidance and we’re testing to find the right balance.

And that promotional activity is included in our guidance.

And your next question comes from the line of Donovan Schafer with Northland Capital Markets. Your line is now open.

Hey guys. Thanks for taking the questions. Chore usually doesn’t get much attention, but this quarter you called it out. Do you think these smaller pieces can unfold in ways that meaningfully move the business? The polar vortex in Texas drove portable generator demand; a similar event could matter. Regarding chore products, California’s ban on new small gasoline engines under 25 horsepower goes into effect at the end of this year. Any thoughts on the potential magnitude of growth for electrified chore products in response to regulations and incentives? And on portables, with new portable battery products and dual-fuel units, what growth do you expect next year or so in these categories?

Thanks, Donovan. The regulatory environment is changing. California’s ban on small engines will impact portable generators and chore products but not home standby at this point. We haven’t seen evidence of a rush to buy internal combustion engine chore or generator products purely to avoid the regulation. The chore category is a smaller part of our business, which is why it doesn’t always get emphasized. The Mean Green acquisition centers on electrified commercial mowers; interest in these products is rising, but they’re expensive and conversion is more difficult. The Inflation Reduction Act provides potential subsidies that will be clarified by Treasury later this year, which should help. We are the leader in electrified commercial mowers and are electrifying the rest of our chore platform using Mean Green technology. That positioning should prepare us for regulatory shifts. On portable generators versus storage, there are differences: multi-day outages are hard to service with portable batteries due to cost and duration; internal combustion portable generators remain a cost-effective emergency solution. Regulators may need to consider emergency exemptions, as generators perform a different role than storage. We are introducing portable storage products for short-duration outages and they will have a role, but the economics and the nature of emergencies matter. Overall, regulatory shifts create both opportunities and complications and we’ll continue to watch developments, especially in California where state incentives may also play a role.

And your next question comes from the line of Praneeth Satish with Wells Fargo. Your line is now open.

Thanks. Good morning. Maybe I just wanted to get an update on the international market and where you stand on rollouts into countries like India. What do competitive dynamics look like overseas and are you introducing new HSB or C&I product offerings for these regions? When could we see an acceleration of revenue contributions in the international segment?

Thanks for the question. Internationally, today the business is primarily C&I for us. Pramac is a well-respected brand and has performed very well; EBITDA margin in that business has improved dramatically over our ownership. We are getting benefits from global scale across engine platforms and Deep Sea controls. Outside the U.S. and Canada, diesel remains the dominant fuel for C&I; natural gas penetration is much lower. Introducing our gas products to new regions presents a good opportunity where natural gas pipelines are available, offering continuity of fuel supply and cleaner emissions. We’ve focused on India through acquisitions; Pramac acquired Captiva and we’ve invested in that market with nice growth off a small base. Australia is another opportunity where strict gas codes mean fewer competitors; we have compliant products there. The Middle East has been a strong growth market and we see Latin America, including Argentina and Brazil, as areas with growing awareness. On residential, HSB is growing internationally though it is overshadowed by large C&I growth; we have introduced an HSB product in India and are seeing traction. I don’t expect international to contribute meaningfully to results in the very near term, but longer term we expect gas C&I products and HSB to grow faster than traditional C&I outside North America.

And your next question comes from the line of Stephen Gengaro with Stifel. Your line is now open.

Thanks and good morning everybody. When we look at the inventory, the HSB inventories that everyone’s been talking about, is there any detail you can give us on location of inventory relative to recent power outages?

We haven’t talked about field inventories at that level of granularity. We do see evidence of pockets where field inventories are at or below normal because of elevated outage activity. Canada has been an active market lately with a number of outages, and we see field inventories there quite low. Other areas of the U.S. like the Midwest and Michigan continue to experience both summer and winter outages; the grid in Michigan is older, largely above ground, fragmented with many smaller grid operators, and underinvested, which increases outage frequency. Those states with two seasons of weather often have strong penetration and growth rates. Without providing more detail, that’s the context: where we’re seeing stronger activity, the field inventories are lower and normalizing faster.

The next question comes from Blake Keating with William Blair. Your line is now open.

Hi. Good morning. This is Blake on for Brian. Just quickly, I wanted to ask about the demographic you mentioned, that the largest piece of customers in home standby are generally older and less affected by the macro. Can you provide additional color? Are they actually being impacted by the macro and what is causing the slowdown in consumer outlook for home standby?

Thanks. Over time the category has broadened and the average age of buyers has come down, but it still skews older and toward homeowners. Older buyers can sometimes be more resilient, but inflation and fixed incomes can make portions of that demographic vulnerable. We haven’t seen a major demographic shift from last year to this year. The broader trend is that consumer spending on home improvement is softening and that has impacted close rates. Close rates are not falling — they’ve flattened. We thought they would continue to improve toward pre-COVID levels; instead they’ve flattened this quarter. We expect they’ll get back eventually, but the pace is slower than we anticipated.

And your next question comes from the line of Keith Housum with Northcoast Research. Your line is now open.

Good morning guys. I know we’re running long so I’ll keep it to one question. In terms of the Clean Energy solution set and the redesign of the product portfolio going into 2024, can you provide an update on whether you’re on track and what challenges that segment is facing right now with cropping demand?

That category has been well documented. We entered the market, saw early growth, and then experienced challenges including the loss of a major customer and product quality issues with the SnapRS device. We are on a next-generation roadmap for our storage solutions and I’m excited about the product. We’ll discuss more at Investor Day, though we won’t get too granular for competitive reasons. We are investing heavily — we noted in the call there’s a 400-basis-point drag on EBITDA from these investments. The market for solar and storage is tougher right now due to higher interest rates and changes like NEM 3.0 in California, which has impacted demand. We had targeted $300 million to $350 million of sales for this portfolio for the year; we now expect to come in at the low end of that range given industry softness. We remain optimistic long term and are investing to achieve excellence in these products. You should see new products beginning to hit in 2024, and we’ll provide more at Investor Day.

The next question comes from Vikram Bagri of Citigroup. Your line is now open.

Good morning everyone. When talking about margin improvement, you talked about better product mix, cost cuts and lower input costs and the absence of promotions to clear the inventory was not a driver. It seems like you plan on continuing promotions given persistently high inventories. Can you give directionally what the impact of these promotions was on gross margins and operating margins, dollar terms or percentage terms? And how long or what magnitude of promotions do you plan on running to achieve both improving conversion rates and reducing inventories?

On promotions, we run them in the ordinary course to drive awareness and help homeowners get over the tipping point. I would call the impact modest on margins overall. Home standby products are our highest margin products, so selling more of them provides a significant mix benefit that tends to overshadow the promotion impact. The promotions we’ve included in guidance are not a significant driver and only have a slight drag relative to the expected sequential improvement in EBITDA margins from higher home standby shipments, operating leverage of fixed SG&A and continued realization of lower input costs from commodities and logistics as we work through inventory.

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

We want to thank everyone for joining us this morning. We look forward to discussing our third quarter 2023 earnings results with you in early November as well as providing an update on our longer-term strategic vision at our upcoming Investor Day on September 27. Thank you again, and goodbye.

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