Good day and thank you for standing by. Welcome to the Second Quarter 2024 Generac Holdings Inc. Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kris Rosemann. Please go ahead.

Good morning, and welcome to our second quarter 2024 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, Kris. Good morning everyone, and thank you for joining us today. Our second quarter results were ahead of previous expectations for adjusted EBITDA and adjusted EPS driven by lower input costs and operating expenses relative to our prior forecast. We are raising our 2024 full-year outlook this morning as a result of the recent increase in power outage activity, including the impact of Hurricane Beryl. Year-over-year, overall net sales in the second quarter were nearly flat compared to the prior year at $998 million. Residential product sales increased 8% from the prior year due to strong growth in home standby generator shipments. Global C&I product sales decreased 10% from a strong prior-year second quarter as softness in the telecom and rental markets was partially offset by an increase in shipments to our industrial distributor customers. Additionally, gross and adjusted EBITDA margins expanded significantly from the second quarter of 2023 as a result of favorable sales mix and the realization of lower input costs. Home standby shipments were in line with our prior expectations during the quarter, increasing at a mid-teens rate from the softer prior-year period that included a meaningful headwind from excess field inventory levels. Power outage activity during the second quarter was above the long-term baseline average primarily due to strong storms in May that impacted multiple markets in Texas. Early in the third quarter, Hurricane Beryl made landfall in the Houston area, driving year-to-date power outage activity well above the long-term baseline average and increasing demand for home standby and portable generators. After a slow start to the year, home consultations in the second quarter increased modestly over the prior year and grew at a strong rate on a sequential basis. More importantly, home consultation activity increased significantly during the month of July due to Hurricane Beryl. Additionally, close rates have improved during the first-half of 2024 as we continue to execute initiatives to improve sales lead conversion, including data-driven lead optimization practices, sales tool enhancements, and improved lead nurturing practices. Although we expect close rates to improve over time, they have historically moderated immediately following a major outage event in the affected region. We remain focused on making further investments to bring new and broader demographic categories into the home standby generator market and increase engagement with our end customers, particularly in regions that have not experienced material outage activity in recent periods. We ended the second quarter with our residential dealer count at approximately 8,900, an increase of 200 dealers from the end of 2023. We also continue to strengthen our relationships with non-dealer contractors as we further grew our Aligned Contractor Program, an effort that helps us expand our installation bandwidth while allowing contractors to purchase product through their preferred channel. We view our dealer and aligned contractor networks as an important competitive advantage for our business. And we continue to invest heavily in these relationships with a focus on further developing tools and resources to optimize the selling, service, and installation capabilities of our distribution partners. Activations or installations of home standby generators were down modestly during the first-half of 2024, reflecting the lower power outage environment from late 2023 through the first quarter of 2024. However, activations have returned to strong year-over-year growth in the month of July, and we expect continued growth in installations as we move through the seasonally stronger second-half and impacts from the recent increase in outage activity. As the clear leader in residential backup power, we are uniquely positioned to respond to major outage events such as Hurricane Beryl. Our ability to leverage our strong financial position to invest in inventory for storm response combined with our logistics capabilities allows us to rapidly deploy product into outage-impacted areas. Our industry-leading distribution network and our scalable call centers provide 24-7 consumer support and service in our customers' time of need. We are also increasing our advertising spend in the aftermath of the storm to leverage our expertise in marketing to drive awareness for our products and generate sales leads for our distribution partners, not only in the impacted region but also more broadly across the nation. Simultaneously, we are ramping up our efforts to increase sales and installation bandwidth by adding more dealers and aligned contractors to our distribution network. Finally, we are increasing our production rates for home standby generators to respond to increases in demand for these products as we have built our supply chain and operating footprint capacities to allow for the rapid expansion of output to respond quickly to market changes. As a result, we are raising our overall 2024 outlook due to anticipated higher demand for home standby and portable generators following the recent increase in power outage activity. The effect of Hurricane Beryl is also expected to drive higher levels of awareness for backup power long-term as home and business owners seek protection from future power outages. With only approximately 6% penetration of the addressable market of homes in the U.S., we believe there are significant opportunities to further grow the residential standby generator market. Now moving to our residential energy technology products and solutions, the overall market for residential solar and storage continues to be negatively impacted by structural changes to California's net metering program as well as higher borrowing costs which will continue to weigh on 2024's results for these products. Although market conditions are challenging in the near-term, we recently announced the execution of the previously awarded grant from the U.S. Department of Energy to provide energy storage systems to Puerto Rico with funding from the Puerto Rico Energy Resilience Fund. The grant provides for up to $200 million in project funding over a five-year term, which is an increase from the $100 million initially awarded when we announced our participation in the program in the fourth quarter of last year. The first shipments of energy storage systems for this program are expected to begin later this year, with the bulk of program installations occurring in 2025 and 2026. Ecobee continues to execute well, gaining market share and driving robust margin improvement over the prior year. Ecobee's connected homes count is now approaching four million, and services attach rates continue to increase with strong growth in both energy services and home monitoring services. Importantly, we are leveraging ecobee's expertise in developing hardware and software experiences that are intelligent and intuitive as their development teams are leading our efforts around building the common platform that will serve as the heart of the Generac residential energy ecosystem. As disclosed in our press release this morning, we also agreed to make an incremental $35 million minority investment in Wallbox, allowing for the expansion of our commercial agreement globally to include both residential and commercial EV charging solutions across our distribution networks. Additionally, we have aligned on a software development approach that will deepen the integration of Wallbox EV chargers with our dealer and customer platforms. We believe that the ability to manage EV charging as part of our residential and C&I energy technology ecosystems will become increasingly important as growing electric vehicle penetration and the resulting increased demand for electricity have a rising impact on home and business owners as well as grid operators around the world. As we continue to build out our energy technology solutions, we believe that the combination of our internal initiatives, strategic investments, and core competencies will allow us to effectively compete in these large and growing markets. As we bring increasingly competitive solutions to market over the coming quarters, starting with our next-generation energy storage system later this year, we will accelerate our efforts in expanding and engaging our distribution network. This will allow us to gain market share by leveraging our expertise in providing superior channel and customer support, as well as our proficiency in delivering qualified sales leads to distribution partners and our brand strength. We believe our unique and comprehensive approach to residential energy management will provide further differentiation as we develop the smart energy home of the future. Switching now to our C&I product category. As previously expected, global C&I product sales declined 10% from the prior year, driven by a decrease in shipments to both domestic telecom and rental customers. This decline was partially offset by continued growth with our North American industrial distributors, as shipments to this channel again grew at a robust rate in the second quarter, and quoting activity remained resilient. We continue to expand our market share, primarily due to our ongoing focus on operational execution, leading to reduced product lead times and further optimization of our domestic distributor channel. This includes additional investment in certain territories where we believe we have potential to improve our share regionally through M&A or further development of our independent distribution partners. As expected, shipments to National Telecom and rental equipment customers declined in the quarter from the strong prior year period, and we continue to believe these end markets will remain soft for the balance of the year. However, we see long-term growth opportunities in both markets despite the near-term cyclical weakness. We believe the critical need for future infrastructure projects provides substantial runway for growth in the rental channel. In the market for backup power for telecom applications, our long-term growth expectations are supported by the secular trend of growing global tower and network hub counts and the increasingly critical nature of wireless communications and services that require significantly greater power reliability. As previously announced in late June, we acquired the C&I Battery Energy Storage System product offering from SunGrid Solutions located in Cambridge, Canada. This small, but strategic acquisition brings us engineering and manufacturing expertise to better serve the growing market for behind-the-meter energy storage solutions for commercial and industrial applications, including where it is deployed as a critical component in multi-asset microgrids. We have an expanding pipeline of commercial projects in which we expect to provide stationary battery storage alongside our traditional generator product offerings. Additionally, we're seeing a number of projects in which EV charging equipment is also included. We believe our commercial agreement with Wallbox is important to helping expand our opportunity to win these and other similar projects. As we leverage our leading position in natural gas generators and our newly acquired capabilities in energy storage with the SunGrid acquisition, we believe we are uniquely positioned to deliver comprehensive solutions for the developing microgrid market, which is focused on providing C&I customers with important energy resiliency as well as lower overall energy costs. Internationally, total sales were lower year-over-year, primarily related to declines in intercompany shipments from our Mexican operations to the telecom market in the U.S. as well as lower shipments in Europe, most notably for portable generators. Increases in shipments to other key regions, such as Latin America and India, partially offset the softness. As previously discussed, our expanded agreement with Wallbox also includes incremental collaboration in international end markets. This is another example of our longer-term international growth strategy, as we bring a broad portfolio of solutions to more markets around the world, building on the strong track record of growth and margin expansion in our international segment over the past several years. In closing, this morning, our second quarter margin outperformance and increased 2024 outlook highlight the fundamental momentum occurring within our business. Significant year-over-year margin expansion and robust free cash flow generation in the first-half of 2024 have supported our continued investments in accelerating our Powering a Smarter World Enterprise strategy, while also enhancing shareholder value through continued share repurchases. Once again, Hurricane Beryl highlighted the vulnerability of the electrical grid and the need for resiliency. Beryl became the earliest Category 5 hurricane to form in the Atlantic on record, providing further evidence that the changing weather patterns continue to threaten the continuity of power that we are increasingly dependent on. Additionally, the rapid adoption of intermittent generation sources and growing demand from electrification trends, as well as the adoption of artificial intelligence are providing additional stresses on our nation's aging power grid. These secular trends will continue to manifest in lower power quality and higher power prices for all ratepayers in the decades to come. By expanding on Generac's core resiliency value proposition and helping optimize for efficiency, consumption, cost, and comfort, we remain confident that our products and solutions are uniquely capable of helping home and business owners solve the challenges around resiliency and rising utility costs. I'll now turn the call to York to provide additional details on our second quarter results and our increased outlook for 2024.

Thanks, Aaron. Looking at second quarter 2024 results in more detail, net sales were $998 million during the second quarter of 2024 as compared to $1 billion in the prior year second quarter. The combination of contributions from acquisitions and the favorable impact from foreign currency had a slight positive impact on revenue during the quarter. Briefly looking at consolidated net sales for the second quarter by product class, residential product sales increased 8% to $538 million as compared to $499 million in the prior year. Growth in residential product sales was primarily driven by a mid-teens increase in shipments of home standby generators and strong growth for portable generators domestically. This was partially offset by a decrease in portable generator shipments in Europe given a strong prior year comparison, ongoing softness in the domestic clean energy market, and lower chore product sales. Commercial and industrial product sales for the second quarter of 2024 decreased 10% to $344 million as compared to $384 million in the prior year quarter. Foreign currency and acquisitions contributed approximately 1% growth in the quarter. The core sales decline was primarily due to the expected weakness in sales to our domestic telecom and national equipment rental customers. This was partially offset by a robust increase in C&I product shipments through our domestic industrial distributor channel and growth in certain other key international markets. Net sales for other products and services decreased slightly to $116 million as compared to $117 million in the prior year quarter. Gross profit margin was 37.6% compared to 32.8% in the prior year second quarter, primarily due to favorable sales mix given stronger home standby shipments and the realization of lower input cost including lower freight and steel cost as well as improved production efficiencies. Second quarter gross margins exceeded our expectations as we were able to deliver the implied gross margin ramp in the second half of the year sooner than expected given improving input cost. Operating expenses increased $30 million or 12% as compared to the second quarter of 2023. This increase was primarily due to ongoing investment in resources to drive future growth across the business including salaries, benefits, stock compensations and bonuses, and higher marketing and promotional spend to create incremental awareness for our products. As a result of these factors, adjusted EBITDA before deducting for non-controlling interest, as defined in our earnings release, was $165 million or 16.5% of net sales in the second quarter as compared to $137 million or 13.6% of net sales in the prior year. Adjusted EBITDA margins came in ahead of our expectations during the quarter as a result of the gross margin outperformance as well as lower operating expenses compared to prior forecast. I will now briefly discuss financial results for our two reporting segments. Domestic segment total sales including intersegment sales increased 1% to $827 million in the quarter as compared to $815 million in the prior year quarter. A strong growth in the residential product category was mostly offset by expected weakness in C&I product shipments. Adjusted EBITDA for the segment was $140 million, representing a 16.9% margin as compared to $103 million in the prior year or 12.7% of total sales. This margin improvement was primarily driven by favorable sales mix and the realization of lower input costs, partially offset by higher operating expense investments to support future growth initiatives. International segment total sales including intersegment sales decreased 18% to $185 million in the quarter as compared to $224 million in the prior year quarter. The approximate 18% total sales decline for the segment was primarily driven by a decrease in intercompany shipments from our Mexican operations to the domestic telecom market as well as lower shipments in most European markets, most notably for portable generators. This softness was partially offset by increased sales in other key regions such as Latin America and India. Adjusted EBITDA for the segment before deducting for non-controlling interest was $25 million, or 13.6% of total sales, as compared to $33 million, or 14.9% of total sales in the prior year. This margin decline was primarily due to reduced operating leverage on lower shipments during the quarter. Now, switching back to our financial performance for the second quarter of 2024 on a consolidated basis, as disclosed in our earnings release, GAAP net income for the company in the quarter was $59 million as compared to $45 million for the second quarter of 2023. GAAP income taxes during the current year's second quarter were $20 million or an effective tax rate of 25% as compared to $16 million or an effective tax rate of 25.9% for the prior year. The decrease in effective tax rate was primarily driven by certain unfavorable discrete tax items in the prior year period, which did not repeat in the current year. Diluted net income per share for the company on a GAAP basis was $0.97 in the second quarter of 2023, compared to $0.70 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $82 million in the current year quarter, or $1.35 per share. This compares to adjusted net income of $68 million in the prior year, or $1.08 per share. Cash flow from operations in the current year's second quarter was $78 million, as compared to $83 million in the prior year's second quarter. And free cash flow, as defined in our earnings release, was $50 million, as compared to $54 million in the same quarter last year. This change in free cash flow was primarily driven by higher cash income tax payments in the current year quarter, partially offset by higher operating earnings. Additionally, during the second quarter, we repurchased 355,640 shares of our common stock for approximately $51 million. There is an approximately $449 million remaining under our current repurchase authorization as of June 30th. In early July, we amended and replaced our existing $530 million term loan B credit facility, which was set to mature in December 2026 with a new credit facility that has an aggregate principal amount of $500 million after we made a $30 million cash prepayment in connection with the term loan amendment. This new credit facility has a maturity date of July 3, 2031. The new credit facility maintains the existing low rate of SOFR plus 175 basis points while also eliminating a 10 basis point credit spread adjustment that was included in the previous term loan B credit facility. Quarterly principal payments equal to $1.25 million will begin in October 2024 with a lump sum due at maturity in July 2031. Total debt outstanding at the end of the quarter was $1.56 billion, resulting in a gross debt leverage ratio at the end of the second quarter of 2.25 times on an as-reported basis, a continued reduction from 2.5 times at the end of 2023. As we expect to generate strong free cash flow in the second-half of 2024, we will continue to execute a disciplined and balanced capital allocation strategy. With that, I will now provide further comments on our updated outlook for 2024.

As disclosed in our press release this morning, we are increasing our overall outlook for full-year 2024. Given the elevated demand for backup power in the state of Texas due to the recent power outages, including Hurricane Beryl that made landfall in early July, we now expect overall 2024 net sales growth to be approximately 4% to 8% as compared to the prior year. This is an increase from the previously expected range of 3% to 7%. Again, as a result of the recent outage activity in Texas, we are increasing our expectations for 2024 home standby generator sales growth to be in the high teens range, and portable generator sales are also now expected to be well above our prior forecast. Partially offsetting these strong trends in Texas, we are seeing continued softness in residential clean energy and chore markets, resulting in only a modest reduction in our outlook for those products. As a result, overall residential product sales for the full-year are now expected to grow at a mid-teens rate as compared to our prior forecast for low double-digit growth. Our full-year 2024 sales growth outlook for the remaining product categories is unchanged from our prior forecast. From a pacing perspective, we anticipate year-over-year net sales growth will accelerate as we move through the second-half of the year, with third quarter net sales growth in the high single-digit range and fourth quarter net sales growth in the low to mid-teens range. This guidance assumes power outage activity that is aligned with the longer-term baseline average for the remainder of the year and does not assume the benefit of an additional major power outage event for the rest of the year. Our gross margin expectations for the full-year 2024 have also increased relative to our previous guidance, given the second quarter outperformance and higher sales mix from home standby generator sales in the second-half of the year. We now expect gross margins to improve by approximately 350 to 400 basis points over the full-year 2023. This is an increase from the 300 to 350 basis point improvement previously expected. Gross margins are projected to grow sequentially through the remainder of the year due to continued favorable mix, price, and cost, with fourth quarter gross margins improving over third quarter gross margins by approximately 50 basis points. As a result of this increased outlook for gross margins, adjusted EBITDA margins before deducting for non-controlling interest are now expected to be approximately 17% to 18% for the full-year 2024. Additionally, we also expect adjusted EBITDA margins to grow sequentially through the remainder of the year, driven by the above-mentioned gross margin improvement, and additional operating leverage on higher shipments as we move throughout the second-half of the year. This will result in fourth quarter adjusted EBITDA margins improving over third quarter adjusted EBITDA margins by approximately 200 basis points resulting in fourth quarter adjusted EBITDA margins of approximately 20%. As is our normal practice we will also provide additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full-year 2024. For the full-year our GAAP effective tax rate is still expected to be approximately 25% to 26%. This is expected to result in a GAAP effective tax rate of approximately 25% for each of the remaining two quarters of the year. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add back items should be reflective net of tax using the 25% expected effective tax rate. Gross interest expense is now expected to be approximately $92 million to $94 million as compared to the prior guidance of $90 million to $93 million. This guidance assumes no additional term loan or revolver principal prepayments during the year. Stock compensation expense is now expected to be between $52 million to $54 million for the year as compared to prior guidance of $55 million to $60 million. We are also increasing our free cash flow conversion guidance for the full-year to be well above 100% as we anticipate an incremental benefit from working capital reduction in the second-half of the year. This compares to our prior guidance of approximately 100%. Our full-year weighted average diluted share count is now expected to decrease to approximately 60.5 to 61 million shares as compared to prior guidance of 61 million shares. This updated guidance reflects the share repurchases that were completed in the second quarter of this year. Our guidance for capital expenditures as a percentage of sales remains consistent at approximately 3% of sales. Depreciation expense and GAAP intangible amortization expense also remain consistent with last quarter's guidance. And finally, this 2024 Outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

Thank you. At this time, we will conduct a question-and-answer session. First question comes from Tommy Moll with Stephens, Inc. Go ahead. Your line is open.

Good morning and thank you for taking my questions.

Good morning, Tommy.

Aaron, I wanted to start on home standby. It sounds like the outlook for the year went from mid-teens to high-teens. It's a two-part question. First part is, can you characterize how much of that growth is just lapping over the destock versus incremental underlying demand? And then, second part on the demand, can you characterize activations versus shipments in Q2, and maybe even through July after the storm? Thanks.

Sure. I'll address the second part of your question first. Regarding the impact from the field inventory situation last year, we had previously mentioned a $300 million effect. The increase in guidance from the mid-teens to the higher figure is primarily related to storm impacts, which is an additional factor. The original guidance did account for the destocking that took place in the first quarter, which hasn't caused any issues in the second quarter and shouldn't be a problem for the rest of the year. As for the activation and shipment trends from the second quarter, activations were down slightly in the first half of the year due to fewer power outages compared to last year, and we started the year slowly. In the first quarter of 2024, outage hours were below average but have increased in the second quarter, and we expect activation rates to rise throughout the year. In fact, as mentioned in our prepared remarks, we've already seen a positive trend in July. Shipments in the second quarter were actually ahead of activations, which is typical for this seasonal period as we prepare for the season. We want our channel partners to have the necessary products ready. As noted earlier, we believe that field inventory levels are normal, indicating that we are currently following seasonal trends.

The next question comes from George Gianarikas with Canaccord Genuity. Go ahead. Your line is open.

Hi, good morning everyone, and thank you for taking my questions.

Hey, George.

I would like to discuss what occurred in July that prompted the guidance increase. While it's clear that the hurricane had an effect, could you specify the areas of heightened interest, in-home consultations, and activations? Were these primarily in the hurricane-affected regions, or did you also notice increased activity and interest across Texas outside of those areas? If possible, could you share any data regarding the highest penetration rates in different parts of Texas, and what do you think the long-term potential for further penetration is? Thank you.

Yes, thank you, George. In July, the impact of Hurricane Beryl was considerable. Houston had also felt the effects of a derecho event in May, which caused outages. Although Beryl was a Category 1 storm and not particularly strong, the saturated ground combined with high winds resulted in significant infrastructure damage, causing lengthy repairs. From our experience, the duration of outages greatly influences people's interest in seeking solutions. Our updated guidance reflects two key points. First, we sold a large number of portable generators in July. As a leader in the industry, we maintain substantial inventory for such events, which was quickly utilized in the market. The storm caught many off guard, as it shifted direction unexpectedly, leaving little time to prepare. However, we effectively deployed our inventory afterward. Additionally, we saw a remarkable increase in in-home consultations in July. Our tracking began around the post-Sandy period, roughly a decade ago, and we've noted that every hour of outages correlates with a higher intensity of consultations or sales leads. This was certainly true for this storm, particularly since the market had been affected earlier this year. With around 800 dealers across Texas, we feel prepared to respond to such events. While not all are in Houston, we have a significant presence there. There's often an echo effect in other markets following an event in Texas, typically driven by media coverage. Interestingly, the media attention on Hurricane Beryl seemed less pronounced than similar events on the East or West Coast. Nonetheless, the increase in consultations supports our revised guidance. Currently, Texas remains under-penetrated in our view, with a national average of about 6% penetration and under 5% in Texas. We see potential for growth in this large housing market, especially given the recent outages affecting many residents.

The next question comes from Michael Halloran with Baird. Go ahead. Your line is open.

Hey, morning everyone.

Hey, Mike.

Morning.

So, a question then on the clean energy side of things and the margin trajectory for the common in the prepared remarks, that ecobee's margins started to tranche better, maybe what's the driver behind that? And when you think more broadly about the current headwind associated with all the investments and then the timing of the new product launch and when you could really start getting revenue associated with that, has the timeline changed at all from your perspective as far as that profitability improvement curve might look like in those businesses?

Hey, Mike, York here. I'll address the gross margin discussion. The team at Ecobee has dedicated a significant amount of effort toward improving gross margins by focusing on the cost of materials for the thermostat and implementing substantial supply chain cost reductions. I would say that the execution of these initiatives is starting to show results now, leading to a considerable improvement in gross margin. They were already performing well, and now they've achieved even better results.

Yes. I believe part of this is due to the fact that when we acquired ecobee during the height of the pandemic, the cost curves were likely inflated, possibly artificially, because of surcharges, especially on our electronic components, which have since eased. That's a factor in this situation. We shouldn't diminish the efforts of the teams, which have been commendable, but market forces also play a role. Regarding the timing of our new product introductions, nothing has changed. We are still aiming for the end of this year for our next-generation storage device and the first half of next year for our microinverter products; those timelines are still on track. However, there has been a negative sentiment around solar plus storage this year, influenced by the higher interest rate environment and the effects of net metering 3.0 in California, but we believe this will not significantly impact us this year. Some potential offset might occur if the market continues to be weak. We discussed the Department of Energy grant we received, which we initially projected to have a $100 million impact over five years. Through negotiations, we've increased that expectation to $200 million, with most installations expected in 2025 and 2026. This project win is a new addition to our planning, and it helps to mitigate any market weaknesses that could carry into 2025. So, to summarize, we are not changing the timing. While the factors may differ from our original expectations, the timing remains the same.

One moment for our next question. The next question comes from Jeff Hammond with KeyBanc Capital Markets. Go ahead. Your line is open.

Hey. Good morning, guys.

Hey, Jeff.

Hey. I have two more questions. First, do you believe the benefits from lower input costs will persist into the second half? Also, we seem to be in an unusual phase with high levels of in-home consultations and increased interest surrounding grid instability. With the recent storm activity and our nurturing initiative, do you think we might see some increased engagement from these interested leads compared to usual?

Yes. On the input cost side, when comparing the first half to the second half, if there is a couple of percent improvement in gross margins, most of that will come from the higher mix of home standby. More than 50% of the gross margin increase will just be due to that mix improvement. We do expect some additional price cost improvements from the first half to the second half, but those will make up a smaller portion of the overall improvement.

Yes. Jeff, regarding the in-home consultations and those who are just exploring options, we've seen an increase in the number of people entering our sales funnel. Our outreach efforts to engage new demographics and broaden the appeal of our products have resulted in many more individuals shopping in this category. Additionally, there has been increased media attention on potential power outages due to structural issues with the grid, as well as trends in electrification and decarbonization. There are concerns about future power quality and rising power prices, which are also influencing consumer interest in self-sufficiency and efficiency regarding their power needs. Events like Beryl, which have led to increased outage activity, provide us with an opportunity to reconnect with individuals who may have previously received consultations but didn't proceed with a project. It's worth noting that our close rates have improved this year and are significantly higher compared to the end of last year. However, historically, we observe that after major events such as Beryl, close rates tend to temporarily decline in affected markets due to a sudden influx of leads. Nonetheless, we have the potential to convert these warm leads into closed sales, especially following such events. We anticipate a temporary retreat in close rates, but we are seeing a substantial increase in leads. This combination is a key factor in our decision to raise guidance today. Additionally, once leads are generated, we can nurture them in the future, even if they don't close immediately. Our nurturing techniques have improved significantly, which gives us optimism about leveraging this growing database of sales leads for future sales opportunities.

One moment for our next question. The next question comes from Brian Drab with William Blair. Go ahead. Your line is open.

Hi. Good morning. Thanks for taking my question.

Hey, Brian.

I'd just like to ask if you could clarify the revenue guidance update. If we're increasing revenue growth by 1%, that's approximately $40 million in additional revenue. You mentioned storm activity in May and Hurricane Beryl, which has led to some portable sales. You indicated that we're moving from mid-teens to high teens in home standby sales, equating to about $50 million, give or take $5 million. I'm curious if you could provide more detail on this, especially since the outage hours related to Hurricane Beryl were very close to the outage hours from the ice storm in '21, which was categorized among the top five all-time weather outage events.

Yes. Brian, this is York. I believe your numbers are close regarding how you quantify the impact we've included in the implied guidance. You mentioned the growth in home standby. There's been some improvement in portable products, along with minor offsets from clean energy based on our comments about that outlook. There have been slight declines in chore products that are also offsetting factors. When considering everything, we've consistently stated that the impact of a major power outage event would be around $50 million to $100 million in a given year. We've maintained that for several years. What we've accounted for in our guidance, particularly because it's early, leans towards the lower end of that $50 million to $100 million range concerning our impact from Hurricane Beryl. It's still early on the portable side. Aaron mentioned how the hurricane took an unexpected turn, which limited our ability to deploy portable units before the storm, resulting in possibly less uptake than other hurricanes where we could plan better in advance. This could contribute to some of the impact on portable products. However, regarding home standby, it's early days. We've received numerous requests for in-home consultations due to this situation, and we'll monitor how the close rates develop and provide updates over the next quarter.

Standby for the next question. Next question comes from Jerry Revich with Goldman Sachs. Go ahead. Your line is open.

Yes. Hi. Good morning, everyone.

Hi, Jerry.

I would like to discuss the performance of our gross margin. Last quarter, we noted improvements in material costs, which seem to be continuing into the first quarter as planned. As we look ahead to the guidance for the second half of the year, I'm curious if there is a chance that normalizing logistics costs for materials could positively impact our guidance, given the strong performance we've seen each quarter so far.

Yes, Jerry. No. I mean, gross margins were up almost 5% year-over-year. We've been seeing that for a number of quarters here as price costs, improvements have been reading through. And now we're starting to see as home standby field inventory becomes normalized and we're seeing that year-over-year growth in our home standby shipments, we're definitely getting the mixed improvement there. So, in the second quarter, I would say of that roughly 5% improvement in gross margins, I'd say maybe 3% of that 5% was mixed related. The other 2% was price cost. Again, we've been seeing that for a number of quarters. And as I mentioned, I think when Jeff Hammond asked the question, as we jump from first-half to second halves, we do expect sequential improvement in gross margins, again, mostly due to the just continued mixed improvements with a higher mix of home standby in the second-half of the year relative to the first-half. But we do expect some price cost improvements. And as a result, you would continue to see year-over-year price cost improvements as a result of all that. So, at least in the second-half of the year, so yes, no, well, again, gross margins are getting healthy as the mix of home standby normalizes and price cost normalizes and improves.

Standby for our next question. The next question comes from Kashy Harrison with Piper Sandler. Go ahead. Your line is open.

Good morning, and thanks for taking the questions. So, just a few for me, how much does Texas contribute annually to revenue demand in a normal year on the revenues side? And then, on the C&I side, I was just curious if you've had any updates from your telecom rental customers on how they're thinking about the duration of the downturn. And then, also, I was wondering if you could just speak to the sustainability of some of the strength you're seeing in the industrial distribution business in light of some of the weaker macro that we saw in 2Q. Thank you.

Thank you, Kashy. Texas is a significant market for us, and while we don’t provide state-by-state breakdowns, we have made progress since the Texas freeze in February 2021 when our penetration rates were under 3%. Currently, they are below 5%, which reflects about 200 basis points of growth in approximately three years. Events like the derecho in May and Hurricane Beryl will further fuel this market's growth. It's important to note that 95% of homes in Texas still lack our product, indicating substantial potential for generators. Regarding telecom, we believe we have reached the bottom of the cycle, especially compared to last year, and our current run rate suggests we could see an uptick, particularly in Q4. Although we are optimistic about 2025, we currently lack solid forecasts from our telecom partners to indicate that 2025 will outperform 2024. We hope to share insights as our partners finalize their plans for next year. In terms of industrial distributors, our leadership team, led by Eric Wilde, has made great strides in enhancing our relationships with U.S. distributors and investing in sales and service support. We've also made acquisitions in markets where we were previously underperforming, which have yielded positive results. This has helped improve our market share significantly in those areas. Overall, our efforts have led to strong performance in this channel, which serves as a reliable indicator as we navigate the challenges in telecom and rental in 2024, and we anticipate continued strength in this sector for the years ahead.

One moment for our next question. Next question comes from Stephen Gengaro with Stifel. Please go ahead. Your line is open.

Thanks. Good morning, everybody.

Good morning.

Just a quick one for me, you talked earlier about sort of the impact of storms kind of reverberating kind of across other markets. And I'm just curious, A, have you seen that at all in in-home consultations? And maybe even B, is there historical precedent where you've actually seen a meaningful uptick in adjacent markets or not? Or am I sort of reading a little too much into this?

Yes, Stephen. It's a great question. I can tell you that historically, whenever you get a widespread outage, it makes people think, right? So, as an example, in Texas, you get a hurricane hitting Texas early in the season, first cat five ever on record in the Atlantic that early. And people in Florida are watching. And so, Florida in-home consultations, there is a reverberation there that's positive, that gets people to action quicker. We advertise on a national basis so that advertising resonates better when in the background you have outages taking place. So, we have historical reference points for that. And we certainly have seen some of that here as well. Again, the only cautionary point I would put on that is that for whatever reason, the Hurricane Beryl Texas event was maybe less covered nationally. It was really quite a significant event relative to just the raw hours and the duration of the outages. And yet, nationally, the media just, I don't think covered it quite as well maybe as they might have if that had happened perhaps somewhere on the East Coast or somewhere on the West Coast. And that happens. But nonetheless, that's a reality of some of the way those cycles work. But we are seeing definitely, especially the Gulf Coast states, when you get into hurricane season and somebody sees, when people see a storm of that magnitude, something that gets to that magnitude that quickly this early in the season, and in particular where we've got a very strong season still predicted. So, I think that's another important element here is that that hasn't gone away, right? Nothing's changed there. Yes, it's gone quiet here for a little bit, but normally it would be in July and August or July in particular is usually a quiet month for events. But we'll see how it turns out the rest of the year.

One moment for our next question. The next question comes from Jordan Levy with Truist Securities. Please go ahead. Your line is open.

Appreciate you all squeezing me in here. I just wanted to get your thoughts quickly on the on standby. I don't think I heard you brought it up unless I missed it. I know it's kind of a quiet period for that, but just any thoughts on any traction in that segment?

We're still optimistic about that segment. It has decreased significantly, and as you mentioned, things have quieted down a bit. The high interest rate environment has made some projects more challenging to evaluate. Interestingly, this situation aligns with many other clean energy initiatives affected by high rates. Although these projects haven't disappeared, they haven't reached closure either. Currently, these projects are on hold, awaiting a more favorable rate environment. We anticipate that this segment, along with natural gas generators used in these applications, will continue to expand. Additionally, we're realizing that the category we had defined as beyond standby may need to be broadened to include certain microgrid projects. Many of these microgrid initiatives rely on natural gas generators as a key component, along with storage systems. The SunGrid acquisition we announced this quarter brings us closer to addressing the essential behind-the-meter storage aspect. We also noted that EV charging is becoming part of these projects. Our partnership with Wallbox enhances our role as a significant supplier for microgrid projects. We're continuing to develop our capabilities in both the assets and the ecosystem related to these projects, similar to what we have on the residential side. We believe an ecosystem is forming on the commercial and industrial side as well, which likely expands the definition of beyond standby to encompass activities around these microgrid projects. We remain positive about this area, but given the current challenging rate environment, things are softer than we expect them to be in the long run.

One moment for our next question. The next question comes from Donovan Schafer with Northland Capital Markets. Go ahead. Your line is open.

Thank you for taking my questions. I would like to get more details on what you mentioned in the prepared remarks regarding the C&I sector. I believe you noted that some of the weaknesses there were being balanced by strengths in India, which is always an interesting market to discuss. What has been happening on the ground recently? Have there been any impacts from election politics or similar factors? Any additional insights on the Indian market would be appreciated. Thank you.

Yes, thank you, Donovan. India is a growing market for us. Through our Pramac subsidiary in Europe, we acquired an Indian manufacturer several years ago and have expanded that relationship by fully owning it, including building a new factory there for that market. Our positioning in India differs from other genset manufacturers as we are focused on natural gas, while most traditional backup power solutions in the C&I markets globally rely on diesel. We do have a diesel product line, but our gas products are gaining more traction. These products are designed in the U.S., built in India with our engines, fuel systems, and ignition systems, and then deployed in the Indian market. We are optimistic about this because India is transitioning to natural gas, and there are many pipeline projects in development as part of the growing infrastructure build-out in the country. India is well-positioned to benefit from rising geopolitical tensions between the U.S. and China, as manufacturers are beginning to shift production away from China to India and other markets. While India has not grown as quickly as China historically, there is still plenty of opportunity as the country's infrastructure continues to mature, and recent political developments have become more favorable for business. Overall, we are optimistic about India in the long term; it is an important business for us with promising growth rates, and we stand out by emphasizing gas solutions while other manufacturers are still concentrated on diesel.

Standby for our next question. Next question comes from Keith Housum with Northcoast Research. Keith, go ahead. Your line is open.

Great, thanks. I appreciate the opportunity. Just focusing more back on taxes just real quick, in terms of historically, when major storms have gone through, how long has that tailwind been towards sales there? Has it been just a quarter or two, or has it been lasting longer?

Yes, thanks, Keith. It usually lasts two to four quarters. However, for larger events, you might experience an effect that lasts even longer. For instance, the Texas freeze of 2021 had an echo that has only recently diminished. This was partly worsened by the pandemic, which heightened concerns about outages. Similarly, Hurricane Sandy in 2012 definitely had effects that extended beyond two to four quarters. It's still uncertain whether the current event will have a similar impact. At this point, we are viewing it as relatively minor for a major event, but that perception may evolve as time passes. At a minimum, I would expect the effects to extend through this year and into the first half of next year.

Anniversary of

Especially when you hit the anniversary of the event, right, like that's when media picks up. Hey, remember a year ago at start of hurricane season, remember we had Hurricane Beryl in July kind of early in the season. So, those things get picked up. Again, the media drives a lot of that kind of echo effect.

To clarify, these events typically lead to an initial surge in demand that lasts for several quarters. After that, demand stabilizes at a higher baseline than before. This is why significant events and the awareness they generate can enhance distribution, which supports ongoing market activity to meet demand. We maintain this new baseline as we move forward.

Great, thanks. I will leave it there. One moment for our next question. The next question comes from Chip Moore with ROTH. Go ahead. Your line is open.

Hey, thanks for taking up the question. Wondering if you would expand a bit just on how you are thinking about back-half of the year swing factors for that 4% to 8% revenue range? Obviously, it sounds like Beryl activations will play a large role. But just other key puts and takes, what are you baking in on consumer, any softening there on the low-end? Thanks.

No, we aren't necessarily seeing that.

Not anything beyond what we already know.

Exactly. In terms of change from our prior guidance, for the most part, the guidance increase the impact of Beryl particularly in Texas. But maybe some around the edges broader awareness around the nation but we are not necessarily seeing a softening of the consumer that's offsetting that.

Beyond where we are at.

For instance, close rates are hanging in there. Now maybe with the large increase in in-home consultations from Texas maybe those won't all close at the same rate. So, maybe you will see a temporary moderation in close rates. But for the most part, close rates are hanging in there around the nation.

This concludes the question-and-answer session. And I would now like to turn it back to Kris Rosemann for closing remarks.

We want to thank everyone for joining us this morning. We look forward to discussing our third quarter 2024 earnings results with you in late October. Thank you again, and goodbye.

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