Hello, and welcome to Generac Holdings, Inc., First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I will now turn the conference over to Kris Rosemann. You may begin.

Good morning, and welcome to our first quarter 2025 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 first quarter results exceeded our expectations, primarily driven by strong shipments of home standby generators during the period. Residential energy technology sales also outperformed, as ecobee had another great quarter, and shipments of energy storage shipment systems also exceeded our prior forecast. Additionally, continued strong gross margins were the primary driver of adjusted EBITDA coming in well ahead of our prior expectations for the quarter. On a year-over-year basis, overall net sales increased 6% to $942 million for the quarter. Residential product sales were 15% higher than the prior year, driven by strong growth in shipments of home standby generators and energy technology solutions. C&I product sales declined 5% year-over-year, with increases in the domestic telecom and industrial distributor channels more than offset by softness in other C&I end markets. Favorable sales mix and lower input costs resulted in continued gross margin expansion of nearly 400 basis points from the prior year to 39.5%, which is our highest first quarter gross margin level since 2021, resulting in adjusted EBITDA margins increasing to nearly 16% for the quarter. While the first quarter marked a strong start to the year, the dynamic and uncertain nature of tariffs and other federal policy actions has introduced a wider range of potential outcomes for our end markets in 2025. As York will discuss in more detail, we are widening our guidance ranges for the year to reflect the potential impact of more restrictive trade policy on consumer spending. As disclosed in our press release, our updated outlook assumes that current tariff levels hold for the remainder of the year, with tariffs on Chinese imports at 145%, steel and aluminum tariffs at 25%, and all other reciprocal tariffs at 10%, including the assumption that these reciprocal tariffs continue beyond the current 90-day pause. While we anticipate a more cautious economic environment around the consumer, our updated guidance assumes the U.S. economy will avoid a full recession during 2025. At today's tariff levels and reflecting our current global supply chain, we expect our product costs will increase in the second half of 2025 by approximately $125 million prior to any mitigation efforts. In response to these anticipated higher costs, we have raised prices across a wide range of products, and we expect that our price actions will fully offset the cost of tariffs on dollar terms. Additionally, we are executing on a number of supply chain and other cost reduction initiatives that will help to further offset the impact of tariffs and other cost increases over the next several quarters. Now discussing our first quarter results in more detail, home standby shipments increased at a mid-teens rate from the prior year as we continued to execute on the strong demand from the elevated power outage environment that occurred in the second half of 2024. Power outage hours during the first quarter were above the long-term baseline average, primarily driven by the wildfires in Southern California, which is a growing but underdeveloped market for home standby generators. As a result, home consultations were lighter than expected relative to the overall outage hours in the quarter, as the IHC to outage hour ratio in California is below the ratio we have historically seen in other, more mature regions. Penetration rates for home standby generators in California are less than 2%, and our sales and marketing teams are focused on continuing to develop this important market through increased awareness for our products as well as further expanding our distribution in the state. As expected, close rates remained under pressure in the quarter as a result of the elevated demand experienced in the second half of last year relative to our sales and installation capacity. In addition to increased focus on optimizing our marketing investments during 2025 to further drive end customer demand for our products, we will continue to invest in lead optimization, dealer development and expansion, consumer engagement, and further penetration of home standby finance offerings to help support longer-term close rate improvements. We ended the first quarter with more than 9,200 residential dealers in our network, growing slightly from the prior quarter and representing an increase of more than 400 dealers over the prior year. The significant growth in dealer count over the last 12 months is an important element of our ability to support a new and higher baseline level of consumer awareness for the home standby category by adding more sales, installation, and service capacity to our distribution network. Similarly, the continued success of our Aligned Contractor Program, targeting electrical contractors that purchase our products through wholesale distribution, has provided an additional channel for us to further engage and align with a broader set of contractors that are selling and installing our products. Activations or installations of home standby generators increased during the first quarter as compared to the prior year, with particular strength in regions that have recently been impacted by elevated power outage activity, including the southeast, south-central, and west regions. Growth in activations continued early in the 2nd Quarter, with similar regional trends experienced here in the month of April. Importantly, our next generation home standby lineup is on track for the previously announced second half 2025 launch, representing the most comprehensive platform update for the product category in more than a decade. These new products will deliver numerous value-added benefits for homeowners and our channel partners relative to the current product line. For homeowners, this includes a lower total cost of ownership, with improved fuel efficiency, quieter operation, and lower overall installation and maintenance costs. The new product line also includes the industry's highest output air-cooled home standby generator at 28 kilowatts, improving affordability on a per-kilowatt basis as backup power needs grow in response to increased residential electrification trends. For our channel partners, the new home standby lineup offers more efficient installation and service processes, including faster commissioning times and improved remote diagnostics, ultimately enabling their businesses to provide greater uptime for customers while also saving time and money. Additionally, the transition to our next generation home standby generator platform has provided our operations and supply chain teams with an opportunity to implement more automation in our manufacturing processes and further increase the resiliency and diversity of our supply chain. Despite the projected impact of tariffs on the macroeconomic environment, we continue to anticipate growth in home standby generator sales for 2025, driven by an increase in activations during the first half of the year and higher pricing beginning in the second quarter. We also expect the category to hold the new and higher baseline of demand that was achieved following the multiple major power outage events in the second half of 2024. Additionally, we will continue to execute on our initiatives to support close rates, dealer effectiveness, and marketing optimization while also working on various manufacturing and sourcing initiatives related to the new product launch as well as the mitigation efforts around tariffs. Now moving to our residential energy technology solutions, which exceeded our expectations during the quarter as a result of continued strong momentum at ecobee and the further execution of the Department of Energy program in Puerto Rico for our energy storage solutions. The team at ecobee continues to perform very well, delivering robust sales growth during the quarter and exceptional gross margin improvement compared to the prior year with higher shipments across channels, most notably to our retail and pro-channel partners. We believe ecobee's recently introduced lower-cost smart thermostat offering will further drive market share gains by extending the product line into the faster-growing value segment of the market. ecobee's connected homes count also continues to grow rapidly, having increased approximately 17% from the prior year, along with improving service attach rates and related recurring revenue. Shipments of energy storage systems increased at a significant rate during the quarter as we continue to execute on the DOE program in Puerto Rico. We also began taking our first orders earlier this month for PWRcell 2, our next-generation energy storage system, and we remain on track for our first shipments of these new systems later in the second quarter. Our recent discussions with channel partners about the new platform have been very encouraging, and we have received positive feedback on our unique approach to creating a residential energy ecosystem, providing unrivaled capabilities for homeowners to generate, store, monitor, and manage their own power. We believe our expertise in building and developing distribution, our capabilities in direct-to-consumer marketing, the strength of our brand, and our financial stability combined with our differentiated ecosystem of solutions, including ecobee smart thermostats, PWRcell 2 energy storage devices, electric vehicle chargers, and home standby generators, creates an incredibly unique value proposition for both installers and end customers. Our prior expectation for residential energy technology sales in the range of 300 million to 400 million for the full year 2025 is unchanged, given our current assumptions that the Department of Energy program in Puerto Rico continues as planned, and the relevant portions of the Inflation Reduction Act, including the investment tax credit for homeowners, remain intact. We also continue to anticipate ecobee will achieve profitability during the full-year period. Additionally, we believe that our residential energy storage systems will be minimally impacted by tariffs during 2025, given our current inventory levels. We remain committed to investing in this strategically important area of our business, and believe that the megatrends around lower power quality and rising power prices will provide growing incentives for homeowners to seek out solutions that help to both protect and lower the cost of their electricity over a longer-term horizon. For our commercial and industrial products during the quarter, sales decreased by 5% on a year-over-year basis, as growth in shipments to our domestic telecom and industrial distributor customers was more than offset by softness in domestic rental, beyond standby, and certain international end markets. Shipments to our domestic and industrial distributors grew again during the quarter, as we continued to reduce our lead times for C&I products, and the channel also experienced improved quoting activity and project win rates on a year-over-year basis. Although we are encouraged by the resilience of this end market, given recent trends in these leading indicators, we continue to expect that full-year sales for industrial distributors will be softer compared to the prior year, as a result of entering 2025 with a lower backlog. Sales to national telecom customers increased at a significant rate on a year-over-year basis during the first quarter, and we continue to expect a return to growth in this channel for the full year. The telecom market represents an important long-term growth opportunity for Generac, given the secular trend around expanding global tower network hub installations and the increasingly critical nature of wireless communications that require much higher power reliability. As expected, shipments to our national and independent rental equipment customers in the first quarter declined from the prior year, driven by reduced capital spending from these accounts in our product categories. Although we continue to expect this channel to be softer throughout the year, we believe that this end market has further runway for growth longer term, as infrastructure-related projects continue to build out over time. Additionally, our effort to expand our product line into larger megawatt diesel generators remains on track, as we formally began taking orders for these products earlier this month and expect initial shipments to begin later in the year. We have experienced strong early indications of interest from prospective customers in the data center market that are seeking a reliable partner with more competitive lead times for emergency backup power gensets. We believe that we are well positioned to take share in this market over time, given our unique focus, which allows us to provide customized sales, engineering, and aftermarket experiences, while also providing data center customers with a nationwide service network to ensure greater uptime for these critical applications. Internationally, core total sales increased approximately 5% on a year-over-year basis during the first quarter, driven by strength in residential product shipments in Latin America and higher inter-segment sales to the U.S. market. Although international C&I product sales declined from the prior year, we experienced continued positive order momentum in the quarter, which we believe supports our expectation of improved top-line performance in our international segment over the remainder of the year. We are also executing on a growing pipeline of data center opportunities internationally, with initial shipments of our new large megawatt generators expected in the second half of this year. In closing this morning, our first quarter results reflect strong performance in our residential product categories, given the benefit from elevated outage activity in 2024 and increasing momentum in our energy technology solutions. As economic uncertainty grows, we will continue to rely on our core corporate value of agility as we react to the rapidly evolving trade policy situation. We have deep expertise across our engineering, supply chain, and operations teams, and they will be focused on the execution of impactful opportunities to optimize our cost structure and position our supply chain to mitigate the impact of higher tariffs. Importantly, the megatrends of lower power quality and higher power prices that support our longer-term growth expectations remain firmly intact, and we are confident that our Powering a Smarter World enterprise strategy is the correct approach for Generac to help homeowners, businesses, and institutions solve these challenges. And now I'll turn the call over to York to provide further details on our first quarter results and our updated outlook for 2025.

Thanks, Aaron. Looking at first quarter 2025 results in more detail, net sales during the quarter increased 6% to $942 million, as compared to $889 million in the prior year of first quarter. The net effect of acquisitions and foreign currency had a slight favorable impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the first quarter by product class, residential product sales increased 15% to $494 million, as compared to $429 million in the prior year. As discussed, growth in residential product sales was driven by a strong increase in shipments of home standby generators as we executed on the continued higher demand created by above-average power outage activity in the second half of 2024. In addition, growth in shipments of both PWRcell energy storage systems and ecobee products contributed to this strong year-over-year growth. Commercial and industrial product sales for the first quarter of 2025 declined 5% to $337 million, as compared to $354 million in the prior year. Modest contributions from acquisitions were offset by an unfavorable impact from foreign currency, resulting in a net neutral impact on sales growth during the quarter. The core sales decline was driven by softness in certain international end markets, as well as a decrease in sales to national rental accounts and other direct customers for beyond standby applications, partially offset by growth in shipments to domestic telecom and industrial distributor customers. Net sales to the other products and services category increased approximately 4% to $111 million, as compared to $106 million in the first quarter of 2024. Core sales increased approximately 1%, primarily due to growth in aftermarket service parts, connectivity, subscription sales, and international services revenue. Gross profit margin was strong at 39.5%, compared to 35.6% in the prior year first quarter, as a result of favorable sales mix, given the relative strength of home standby sales and the realization of lower input costs. Operating expenses increased 39 million, or 16%, as compared to the first quarter of 2024. This increase was primarily driven by increased employee costs to support future growth across the business, additional marketing spend to drive incremental product awareness, and ongoing operating expenses related to recent acquisitions. Adjusted EBITDA before deducting for noncontrolling interest, as defined in our earnings release, was $150 million, or 15.9% of net sales in the first quarter, as compared to $127 million, or 14.3% of net sales in the prior year. I will now briefly discuss financial results for our two reporting segments. Domestic segment total sales, including intersegment sales, increased 9% to $782 million in the quarter, as compared to $720 million in the prior year, including approximately 2% sales growth contribution from acquisitions. Adjusted EBITDA for the segment was $123 million, representing 15.7% of total sales, as compared to $99 million in the prior year, or 13.8%. International segment total sales, including intersegment sales, decreased slightly to $186 million in the quarter, as compared to $187 million in the prior quarter, including an approximate 5% sales growth headwind from foreign currency, resulting in approximately plus 5% core total sales growth. Adjusted EBITDA for the segment before deducting for noncontrolling interest was $27 million, or 14.6% of total sales, as compared to $28 million, or 15% in the prior year. Now switching back to our financial performance for the first quarter of 2025 on a consolidated basis, as disclosed in our earnings release, GAAP net income for the company in the quarter was $44 million, as compared to $26 million for the first quarter of 2024. Our interest expense declined from $23.6 million in the first quarter of 2024 to $17.1 million in the current year period, as a result of lower outstanding borrowings and lower interest rates relative to prior year. GAAP income taxes during the current year fourth quarter were $14.2 million, or an effective tax rate of 24.3%, as compared to $12 million, or an effective tax rate of 31.2% for the prior year. The decrease in effective tax rate was primarily driven by certain unfavorable discrete tax items in the prior year period that did not repeat in the current year. Diluted net income per share for the company on a GAAP basis was $0.73 in the first quarter of 2025, compared to $0.39 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $75 million in the current year quarter, or $1.26 per share. This compares to adjusted net income of $53 million in the prior year, or $0.88 per share. Cash flow from operations was $58 million, as compared to $112 million in the prior year first quarter, and free cash flow, as defined in our earnings release, was $27 million, as compared to $85 million in the same quarter last year. The change in free cash flow was primarily driven by an increase in working capital during the current year quarter, which included the replenishment of home standby and portable generator finished good inventories, partially offset by higher operating earnings. Total debt outstanding at the end of the quarter was $1.3 billion, resulting in a gross debt leverage ratio at the end of the first quarter of 1.6x on an as-reported basis, which is within our targeted gross debt leverage range of 1x to 2x adjusted EBITDA. Additionally, we opportunistically repurchased approximately 717,000 shares of our common stock during the quarter for $97 million. There is still $250 million remaining on our current share repurchase authorization as of the end of the first quarter. Moving forward, we will continue to operate within our disciplined and balanced capital allocation framework as we evaluate future shareholder value-enhancing opportunities over the long term. With that, I will now provide further comments on our updated outlook for 2025. As disclosed in our press release this morning, we are updating our outlook to reflect a broader range of potential outcomes for our business, resulting from higher tariff levels, uncertain government policy actions, and their related impact on the markets that we serve. While we are maintaining the high end of our guidance ranges for net sales growth and adjusted EBITDA margin, we are reducing the lower end of these ranges to consider the potential impact of a softer economic environment. This guidance includes the following important assumptions. We are assuming that current tariff levels that are in effect today stay in place for the remainder of the year. We are also assuming that government policy around clean energy remains materially intact during the year. This would include sustaining the investment tax credit as part of the Inflation Reduction Act, as well as continued federal support of our Department of Energy program in Puerto Rico. We are also assuming interest rates continue to remain at elevated levels, resulting in more cautious consumer spending trends through the year, but not falling into recessionary conditions during 2025. Our capital expenditures are still projected to be approximately 3% of our forecasted net sales for the year, in line with our historical levels as we continue to invest in incremental capacity and execute other projects to support future growth expectations. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

Thank you. Our first question comes from the line of Tommy Moll with Stephens.

Aaron, I wanted to ask about the new product launches in C&I for the data center market. You put out a press release earlier this month with a lot of product details, so my question is really in two parts. One, just if there's anything on the product design you want to make sure to highlight for us. And then, relatedly, you mentioned the ability to service this installed base one day with the Nationwide Service Network. I just want to make sure the go-to-market here is perhaps similar to your telco sales, so a direct sale, but then leveraging the service and aftermarket through your dealers. If that's an incorrect understanding, please let me know. Thank you.

Yes. Thanks, Tommy. So, yes, super excited about our data center product line, our large megawatt diesel lineup. Data centers, obviously, are our prime target, also though our existing customers, as we've talked before, kind of the existing end markets we serve from municipalities to manufacturing, distribution, healthcare, they all require larger blocks of backup power as well. So we feel like that's a part of the market that we haven't served historically, so we're going to be able to do that. As it relates to data centers, to take the second question first, Tommy, with data centers, the comment about the Nationwide Service Network, your assumption is exactly correct. We're going to ride on the back of what we've built for direct sales to our telecommunications customers primarily. That's a network we've built over the last 40 years. It's a combination of technicians with our industrial distributor customers, as well as our own IDCs, our own company stores. And so with that asset, we're going to be able to leverage that to serve on a coast-to-coast basis the direct sales of data center products. Now, outside of that, for other applications outside of data centers for those larger products, we'll service those products in a similar fashion to the way we take care of products that we sell through those other applications, which is primarily through our industrial distributor channel. They generally do that. We will occasionally jump in if we need to, it's not unusual for us to, we've got great resources here, even in Waukesha, Wisconsin, we can put somebody on a plane and they can be anywhere in the U.S. in less than four hours and be on the ground to get something up and running if there's a problem or to assist a customer or an end operator or a distributor with that. As far as the product itself is concerned, I think what I would call out, we made a little bit of a reference to it in our prepared remarks. But, one of the hallmarks that we have as a company here in our C&I product space is our ability to customize, that is something that we've brought to the market and really differentiates Generac. I think there's, in our business, there's a couple of different models that are deployed. We are a true genset manufacturer here. Others might just be assemblers and even others might be building a base product and then sending it out to distribution partners or third parties to do that customization. We prefer to do a lot of that customization in-house, both to control the quality and the cost and to control the lead times that are associated with that. And that's one of the things we think is an important differentiator here is that we're going to take that business model as we've deployed it on our broad C&I product line. We're going to extend that into these new products and offer these customers customizations that are done at the factory from an engineering perspective and from a manufacturing perspective, sourcing perspective. Obviously, there are still pieces of this that will have to be done by third parties. Sometimes that can be a specific type of canopy or enclosure that's on the unit. Those could be still done by third parties, but we're going to try and capture much more of that than the market currently serves today. And we think that'll help differentiate us, coupled with the lower lead times, the shorter lead times, as we've talked in the past.

Our next question comes from the line of George Gianarikas with Canaccord.

I can appreciate the widening of the range in guidance, given the macro uncertainty you have. I'm just curious if you can share any anecdotes, any data as to what you may be seeing on the ground day that may lead you to believe that we'll see a softening in business. Thank you.

Yes. Thanks, George. Great question. There's a lot of different ways that different companies are approaching guidance, right? I mean, I think you guys have all seen a wide range of outcomes here with people, some companies preferring not to give guidance, others maybe giving multiple scenarios. Look, multiple scenarios, we're not that smart, so we just decided, look, we have our guidance. We know what our business does when the economy slows down, and we know the impacts that can occur from, as an example, higher prices, right? There are some elasticity of demand that we are aware of in different categories based on history. So we tried to apply all of that, put our best foot forward with guidance. We didn't think that pulling guidance was the right approach either. So we felt like giving, just basically sharing everything we know. And so to your question, George, what we know is that higher prices tend to dampen demand. Overcoming that, though, we also know that outages matter more than anything in our business. So as we've said historically here, I think we hesitate to use terms like decouple or, we're counter-cyclical when it comes to the economy. But when the power goes out, people reprioritize their spending. And we tend to see generator sales be very resilient in the face of any economic condition, good or bad, frankly. And so our assumptions, I think the big assumption that we've made here and make every time we do guidance is that the outage environment is going to be in line with the long-term average. Should the outage environment be lighter than that, we could underperform. Should it be greater than that, we could outperform maybe that's at the low end of the range or the higher end of the range. I think we chose to take the low end of the range down because primarily where we do see pricing and have history with elasticity of demand impact is in the consumer market. So even though, even if we were to maintain outages or hit that outage number in the long-term average, there are going to be some buyers who may fall out of the funnel if prices go up. And we just know that. And we try to reflect that, I think, in our guidance to the best of our ability. But time will tell. I mean, there's a tremendous amount of uncertainty right now around the overall economic environment, the consumer in particular. But I think what we've seen on the ground and what you're hearing from others is the consumer is kind of hanging in there. I think Visa reported this morning, I think you're seeing consumer flows in terms of spending habits and things haven't really changed dramatically yet. But again, this is, there's a lot of uncertainty and we have to see what the next kind of 60 to 90 days brings. I think that will tell us a lot, both in kind of the statistics that we all watch. But also, kind of what happens with the current administration with some of the current trade policy efforts and the negotiations that are ongoing. So we're all waiting eagerly to hear what's going to happen next. I think the good news is we're used to having to pivot. We called out our core, one of our core values here at the company, which is agility. We're very proud of that agility. I think it underpins what we do here, being able to react to external stimuli that happen in demand, as well as, that things can happen on the supply side. And that's what we're reacting to today.

Our next question comes from the line of Mike Halloran with Baird.

So just kind of a follow-up on that, Aaron. I certainly understand the logic behind the broadening of the range. Just want to understand the moving pieces. At the lower end of the range, it sounds like that is driven almost exclusively by demand degradation, and you still feel relatively comfortable having, on an EBITDA dollar basis, neutral from all the tariff impacts. Is that true or false? Am I interpreting that correctly? And then secondarily, can you just give some sort of framework for how much of your COGS are exposed in any kind of regional sourcing dynamics you might have? Thank you, guys.

Thank you, Mike. Regarding the low end of our guidance range, we want to account for potential impacts on consumers. The midpoint of our guidance represents a decrease of 150 basis points from our previous outlook, reflecting a softer consumer environment. While there is demand destruction, we expect it to be offset by higher pricing, which should balance out the impact of tariffs dollar-for-dollar. Specifically, we anticipate a potential impact of around 125 million in the second half if no mitigation efforts are made and tariffs remain unchanged. From a supply chain perspective, approximately 70% to 80% of our cost of goods sold consists of materials, with 50% sourced from the U.S. or North America and the other half from outside. Our supply chain is extensively global, with significant sourcing from Europe and Asia. Notably, our exposure to China for material purchases is less than 10% annually, a figure that has decreased by half over the past five years due to our efforts to diversify after COVID and the initial tariffs. With our new home standby product line, we're taking further steps towards diversifying our supply chain, moving away from higher tariff countries, and we believe this could reduce our China exposure significantly over the next 12 to 18 months. While tariff costs of 145% pose a major challenge, we are prepared to pass on these costs in pricing. If economic conditions change in the next 30 to 60 days, we can still adjust as we launch our new product line and reset pricing later this year. Currently, we have accumulated some additional inventory on our balance sheet to facilitate this transition, which, fortunately, is not subject to the current tariff levels. Additionally, in our clean energy storage business, we also have leftover inventory that is insulated from tariff impacts through 2025. Our main concern remains around consumer and commercial sectors, and we are actively working to address these challenges.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

So your Q1 to Q2 cadence is a little bit different than normal. I'm just wondering, what, if any, you saw of kind of pull forward, selling versus sell through, kind of getting ahead of price increases with your channel partners. And then just in general, how are IHCs afterglow trending in the markets where you saw storms kind of relative to history? Thanks.

Hey, would you like to take the pacing, York, and then I will?

Yes. No, in terms of the pull forward question, yes, we did have a good quarter lost in all of this. Q1 was a very good quarter. I would say there was only a small amount probably that was pulled forward to get ahead of the price increases that were launching on home standby, maybe $20 million roughly. So it's a relatively small number on the pull forward side.

Yes, I would like to comment on the recent performance of the IHC. It's interesting to note that in this business, you can observe outages, and you'll find positive trends in many metrics. Conversely, in areas where there haven't been outages for a while, the metrics won't reflect that strength. If we take a closer look at our first-quarter IHC numbers, we can see that IHCs are performing robustly, particularly in the southeast, benefiting from a strong second half of last year with the outage environment. In contrast, the western regions, especially California with the wildfires, present a different picture. Although we mentioned this in our prepared remarks, it's important to note that California remains an immature market for us compared to others, characterized by numerous outage hours but fewer IHCs. While the growth was significant, it fell short of expectations for a mature market during such outage conditions. This situation is primarily because the market is still developing; currently, our penetration in California is less than 2%. We are seeing growth, with numbers now double what they were five years ago, indicating a substantial opportunity ahead. However, the intensity of IHCs per outage hour remains lower there. Meanwhile, in the Northeast and Canada, we experienced fewer winter outage events this year, particularly in the fourth quarter and first quarter, resulting in lower IHCs. Therefore, we are witnessing positive momentum in markets that faced outage challenges last year, while in other areas, the IHCs year-over-year are consistent with our expectations, which is a decline.

Our next question comes from the line of Brian Drab with William Blair.

I was wondering if we could talk about the impact, more specifically, of the assumption that the China tariff remains at 145%. Can you give us any granularity on, what percentage of COGS is currently materials, so we can kind of, I know you said material sales, materials input from China is under 10%, but it still seems like that could be a really big number. I'm trying to figure out what happens to your guidance if we reverse this situation with China or mitigate it significantly.

Yes, sure. I would say this, the 125 million about two-thirds of that is really China-related. So, I mean, you can do the math on that, whatever, I don't have a calculator in front of me, but whatever that is. If it goes to 50, you can do the math.

If it's 80, 80-some million, whatever that is, if it goes to 50%, then you can compute the impact that that would have, not only in the second half of the year, but obviously, whatever 2026 models you might be looking at as well, Brian. But, yes, I mean, look, it's, again, China continues to be a smaller part of our supply chain overall and has, that's been a trend we've been on for, for some time now and continue to work at. I think the decoupling of these two economies is clearly underway, has been probably underway for some time. It's just being accelerated today with these current, with the current set of trade policy things in force, and if those change, if there's some kind of grand bargain that's struck here between the two countries. We'll watch that closely, because obviously, what we don't want to do, and I think what other companies probably are trying to avoid as well, is you don't want to, we're trying to avoid passing along the full impact of that to the market if we don't need to, right, if there's going to be some change. Or certainly, trying to reflect the future changes that are going to continue to happen in the supply chain, we want to reflect that in how we think about, we want to be thoughtful in how we think about pricing to the market, right? We don't want to just, because, again, increasing the prices is going to put pressure on demand. Even though outages, ultimately are the biggest thing that matter, you're still going to see people fall out of the funnel around the edges with higher price. That's just part of what the math is when you look at U.S. to see a demand around this category.

Our next question comes from the line of Jerry Revich with Goldman Sachs.

Aaron, we've seen just continued really good category interest into April, and I'm wondering if you could just talk about what kind of conversion rates you're seeing between IHCs into orders. I'm thinking of the chart you shared at the Analyst Day. Are we closing back to where we were in the last cycle on that category given the high level of interest in IHCs through April?

Thanks, Jerry. We observed some pressure on close rates in the fourth quarter of last year, which is something that tends to happen historically. When we experience significant demand events like we did in the second half of the year, it can outpace our sales and installation capacity. We then follow up with new distribution and increased market awareness, particularly in less developed areas like California. Over time, close rates tend to recover as part of this cycle. It's important to consider the maturity of the close rate over an extended period rather than just a snapshot at a specific moment, which may only reflect trends from the last 90 days. Some customers take longer to make decisions and may require additional promotions or engagement with our teams to encourage them to move forward with a purchase. We noticed continued pressure on close rates in Q1, although it has improved compared to the declines we saw in the latter part of last year. We anticipate a recovery for the remainder of the year, consistent with historical patterns, but close rates were under pressure during the second half of last year and continue to be in Q1, as expected. Overall, there were no surprises beyond what we anticipated.

Our next question comes from the line of Mark Strouse with JPMorgan.

I apologize. I'm going to ask you to go down another rabbit hole here with kind of scenario analyses. But just thinking about the indirect impact of tariffs and specific to steel prices, which are up, 35, 40 percent-ish. I'm assuming your 2025 guide is buffered somewhat by your hedges. But assuming tariffs stay in place and steel prices remain elevated once those hedges expire, can you just kind of talk about how we should think about that in terms of either margin impact or the pricing reaction that might be needed in order to offset it? Thank you.

Certainly. We purchase significant amounts of steel, aluminum, and copper, which are our primary inputs. Recently, we've experienced some pressure related to these metals. Even when tariffs haven't directly impacted certain metals, they have indirectly allowed steel producers and fabricators to increase their prices, which the market has also embraced. We have taken this into account in our current guidance. If prices rise further, it could pose a challenge for us. We do have some hedges for these metals, but they're relatively minor. Historically, our response has typically been to adjust our pricing. Additionally, we have a profitability enhancement program, known as PEP, in place to help mitigate inflationary pressures. While tariff-related issues aren't typical, some metal price fluctuations could be viewed as somewhat unusual. However, current metal prices are not as high as the peaks seen during the COVID period, though they remain elevated. We'll keep a close watch on these trends. It's also worth noting that shipping rates have decreased significantly, with container rates from Asia to the U.S. dropping by half in the past month. Reports indicate a 25% to 35% reduction in sailings recently, which may present opportunities for us to lower our logistics costs. We acknowledge the various factors affecting our input costs and have factored everything we are aware of into our current guidance. Should input costs rise further, we will respond with additional cost reductions and adjust our pricing strategies accordingly.

Our next question comes from the line of Keith Housum with Northcoast Research.

Hey, just trying to understand a little bit better, the impact of tariffs across the product line. Obviously, you guys got a pretty diverse lineup, focused clearly on HSBs but others as well. Can you just give us an idea which of your products are probably most impacted by the tariffs as well as the increased costs?

We won't provide details on a product-by-product basis due to the large number of products we offer. Even among similar product families, some items are more affected by tariffs based on their sourcing location. Therefore, we won't share that level of detail. Instead, we want to emphasize the $125 million figure we've mentioned. We’re actively working to reduce that amount and believe there are good opportunities to do so. This $125 million is fully unmitigated, meaning it assumes tariffs remain at high levels and we don’t have additional mitigation options. If tariffs decrease or our mitigation strategies improve, that figure will decrease as well. However, all our products have some level of sensitivity to tariffs. The complexities of our supply chain can be overlooked; many industries are not based in the U.S., so we can't source everything domestically. While it's possible that domestic sourcing could develop over time, it won't happen quickly. A more thoughtful approach to this would benefit companies and markets in absorbing changes. Some progress has already been made in this area over the years and will likely accelerate, but we also face challenges like labor availability in the U.S. Additionally, automating processes may be costly due to reliance on high-tariff countries for equipment parts. Structural challenges exist in reshoring and nearshoring efforts, and it will take time to address them. While we're committed to this goal, some level of tariffs will remain unavoidable. It's worth noting that tariffs were already part of our run rate, with the $125 million representing additional tariffs from recent changes.

Our next question comes from the line of Jon Windham with UBS.

Hi, perfect. Thanks. Just a quick housekeeping question. Just looking at your global manufacturing footprint, can you remind us the activities for Mexico, India, and China at the manufacturing facilities?

Sure. I mean, we have facilities in all three of those countries, and a lot of it is around a, in-country, for-country manufacturing strategy because generators are big, heavy products, and they're also localized for codes, codes and standards electrically and for a lot of tailpipe emissions that differ from one country to the next. We do manufacture some products. As an example, in Mexico, we called out the intersegment sales internationally to the U.S. There's a little bit there that we do manufacture, but a lot of what we do in Mexico is for Mexico and Central America, some for South America. What we do in India is almost exclusively for India. And what we do in China is for a mix of China and Europe primarily. So I think those footprints are well-established. I do think that it's interesting. I mean, we have some unique flexibility, I think, because of that as we examine, again, looking at mitigation strategies around tariffs, how can we utilize, best utilize our footprint, our international footprint to help us mitigate the impact of tariffs? Are there ways that we can shift more production to areas that where we benefit from the USMCA agreement as an example? Today, we don't do a lot of that down in Mexico, but we could maybe do more. I do think we have a lot of plants right here in the U.S. as well. We just opened a new plant in Wisconsin, in Beaver Dam, Wisconsin, one of our biggest plants in the U.S., just went online April 1st. And that serves mostly our C&I products here in the U.S. and Canada for products. And so pretty proud of that. We've got seven facilities, seven big manufacturing plants here in the U.S. Been a big supporter of manufacturing here in the Upper Midwest for a long time. It's our heritage. It's our history. And frankly, the U.S. market still represents a great opportunity for us, and that's why we're committed to this market. But we're going to utilize our footprint in the best manner possible to help us mitigate the impact of tariffs.

Our next question comes from the line of Jordan Levy with Truist Securities.

I didn't hear much about ET in the comments or during the Q&A, but there may be some focus on the residential solar market. It continues to face pressure in the short term, which is expected. I understand you have a solid inventory of PWRcells headed to Puerto Rico this year to support that segment. I'm curious about your approach to the new product rollouts there and the financial implications of those considering the tariffs and the domestic challenges in that market.

Thank you for the question, Jordan. You're correct that we haven't focused much on energy technology, but we had an excellent quarter in this area. A significant part of that success comes from ecobee, which has been performing exceptionally well in terms of market share. They launched a new affordable entry-level smart thermostat in the fourth quarter, which has been very well-received as they target the value segment of the market. We also had a strong quarter in clean energy, which, as you mentioned, is another aspect of our energy technology efforts. This is based on a small foundation, primarily supported by our work with the Department of Energy program in Puerto Rico. We have the necessary inventory and installations are ramping up, which is helping us improve our installation rates and overall performance, with solid economics in play. Additionally, we are focused on future developments, particularly our next-generation product lines for storage. We recently opened orders for PWRcell 2, the next iteration of our storage system, and have received positive feedback from installers seeking alternative options. There has been some consolidation in the storage market due to the current state of the solar market, with some suppliers exiting, including Panasonic's recent announcement to leave the U.S. market. This consolidation could create opportunities for us, even if it's from a small base. We are optimistic about the potential for storage, as increasing power costs support its viability long-term, even without incentives. While the possibility of losing support may have been unexpected, state programs may help fill that gap. It's essential to understand that the payback period for solar plus storage systems remains strong in areas with high electricity rates, and the demand for resiliency continues to grow as power quality declines. While this may impact our total addressable market in the near term, our new products are designed to be lower cost and higher performing, competing on equal footing with current market offerings. We have more exciting product launches planned, which we will discuss at the Renewable Energy Show in Las Vegas this September, and we encourage you to attend. We are pleased with the progress of our smart thermostats and ecobee business, as well as the recovery we're experiencing in energy technology.

Our next question comes from the line of Sean Milligan with Janney.

Thank you for fitting in. Thank you for all the detail today. I guess on the $125 million impact from tariffs, can you kind of talk about how much you expect to get back from price increases versus cost out supply chain initiatives? And then also, I don't know if you addressed it, but last quarter you talked about price increases for the new product and residential home standby. Curious if you could update us on kind of how much total price increases you expect for Resi-HSB this year now with tariffs.

Yes, I think in terms of the pricing impact to offset the tariffs, at least the $125 in the second half, the philosophy we took is we wanted to have enough mitigations to offset the impact of those.

Dollar for dollar.

Well, at the EBITDA margin level. So basically, so the price we're putting in the market, as well as the supply chain initiatives that we're working on, at least in the short term, should do that. Now, having said that, next, there's a lot more work going on behind the scenes from a supply chain standpoint to continue to mitigate and diversify our supply chain. So we'll work on that and continue to update our progress on that. But the pricing that we're going out with is to basically hold that EBITDA margin percent at the EBITDA line.

Right, and that was the announced pricing, the 7% to 8% price increases that went into effect March 30th. So that's what's contemplated in the guide. That's what York is referring to in terms of the offset to maintain EBITDA margins, basically in that category if we're just talking about home standby. Now, because we have a new product line coming in the second half of the year, we are going to go with another price adjustment there. But that's really reflective of the additional value that we're extending to customers and channel partners with that product, because there's a lot of additional features and things that are in that product that obviously there's a little bit more cost related to those, even take away the tariffs and everything else. In fact, I would argue the new product line actually reduces our tariff exposure because the supply chain is actually effectively more diverse. So there's a combination of that. So there's a lot of moving pieces underneath that. But at the end of the day, when you look, there might be a little bit more price associated with tariffs alongside of that increase that goes out for the new product line, but it won't be much. And 7 to 8 is really kind of the center point of that today. And then we'll have, yes, we'll kind of see where the tariffs land. Again, we're trying not to get ahead of ourselves with putting too much price in the market. We will if we need to. And we've kind of assumed that if we had to do that, we would. But I think we're watching closely to see where these negotiations go on a country-to-country basis with the current administration.

Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Kris for closing remarks.

We want to thank everyone for joining us this morning. We look forward to discussing our second quarter 2025 earnings results with you in late July. Thank you again, and goodbye.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect.