Good day and thank you for standing by. Welcome to the Third Quarter 2021, Generac Holdings Incorporated Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions]. Be advised that today's conference is being recorded. [Operator Instructions]. With that, I would now like to hand the conference over to your speaker today, Michael Harris, VP Corporate Development and Investor Relations. Thank you and please go ahead.

Good morning and welcome to our third quarter 2021 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, our 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 or SEC filings. I will now turn the call over to Aaron.

Thanks, Mike. Good morning, everyone and thank you for joining us today. We experienced another quarter of exceptional demand as interest in our home standby generators, clean energy systems, and C&I products remained incredibly strong. Production levels were also the highest we have ever experienced in a quarter with shipments of home standby generators increasing at a substantial rate over the prior year, as we continue to ramp output at our new facility in Trenton, South Carolina. This led to record revenue growth of 34%, in spite of significant operational obstacles faced across the supply chain environment that deteriorated further during the third quarter. Even with the higher output levels, demand remained very strong and broad-based, leading to higher backlog levels, particularly for home standby generators, providing us with good visibility and a significant revenue growth for 2022. Additionally, we recently announced several strategic acquisitions that will accelerate our new Powering a Smarter World strategy, and provide additional avenues for growth as we continue our evolution into an energy technology solutions Company. Year-over-year, overall net sales increased 34% to $943 million, an all-time record, and also increased sequentially relative to the second quarter, which was the previous all-time record. The growth in the quarter was driven by strength in both residential and C&I products as compared to the prior year. Residential product growth was led by a 50% increase in shipments of home standby generators, as production levels continued to increase significantly relative to prior year levels, as well as tremendous year-over-year growth in shipments of PWRcell energy storage systems, which also grew double-digits on a sequential basis. Shipments of C&I products were also up dramatically in the quarter, with revenue of these products now growing materially above 2019 levels due to strength across a number of end markets and geographies.

Adjusted EBITDA margins of 22.2% were lower as compare to the prior year, as they were unfavorably impacted by higher logistics and commodity costs. In response to the escalating costs we are experiencing, we've undertaken a number of additional pricing actions and cost reduction initiatives to mitigate the longer-term impact to margins. Now, discussing our third quarter results in more detail, the megatrends driving consumer interest in backup power continued in the third quarter. Most notably, the Home as a Sanctuary trend, combined with more extreme weather, which again resulted in elevated power outage activity. Overall, baseline outage activity for the trailing 4 quarters grew on a year-over-year basis in the quarter, despite a very strong prior year comparison and remains well above the long-term baseline average. In fact, since we began tracking the impact of outage activity more than a decade ago, four of the top ten power outage severity quarters have occurred since the second half of last year. The convergence of the heightened power outage activity, broader electrification trends, and people spending more time at home has driven unprecedented demand for home standby generators. As a result, home consultations or sales leads increased again at a strong double-digit rate in the third quarter over the robust prior-year comparison and broad-based growth continues to be experienced as almost all U.S. regions grew on a year-over-year basis in the third quarter. It's also relevant to note that home consultations in the third quarter increased over three times the comparable 2019 levels. And on a year-to-date basis are more than 4 times 2019 levels. Activations of home standby generators, which are a proxy for installations, also grew at a double-digit rate compared to the prior year. We continue to experience a strong expansion of our distribution footprint as we ended…

Thanks, Aaron. Looking at third quarter 2021 results in more detail, net sales increased 34% to $942.7 million during the third quarter of 2021, an all-time record, as compared to $701.4 million in the prior-year third quarter. The combination of contributions from [Indiscernible] Enbala, Deep Sea, Chilicon and Off Grid acquisitions, and the favorable impact from foreign currency had an approximate 4% impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the third quarter by product class, residential product sales grew 6 -- grew to $608.8 million as compared to $458.9 million in the prior year, representing a 33% increase despite a strong prior-year comparable. As Aaron already discussed in detail, home standby generator sales continued to experience robust year-over-year growth, advancing by 50% during the third quarter as we made further progress, increasing production levels for these products, despite challenging supply chain headwinds. Shipments of PWRcell Energy storage systems grew at a significant rate as compared to the prior year. As storage attachment rates and market share gains continued to drive growth of Generac's clean energy solutions. This growth was partially offset by a decline in shipments of portable generators, which faced a strong prior year comparison from a record level of shipments to the hurricane in the prior year. Commercial and industrial product net sales for the third quarter of 2021 increased 47% to $258.3 million as compared to $176.2 million in the prior-year quarter. There was an approximate 15% benefit to net sales during the quarter from the impact of the Deep Sea and Off Grid acquisitions along with the favorable foreign currency. The very strong core revenue growth was in part aided by the soft prior-year comparison due to COVID-19 pandemic. However, C&I revenue also grew approximately 7% on a core…

Thank you. At this time, we would like to take any questions you might have for us today, [Operator Instructions]. Please note that analysts are allowed one question and one follow-up question only. Thank you. Please stand by while we compile the Q&A roster. This will only take a few moments. We have our first question, comes from the line of Tommy Moll from Stephens. Your line is open, please go ahead.

Good morning and thanks for taking my questions.

Hey, Tommy.

Aaron, I wanted to start on Ecobee, specifically on the go to market there, how do they go to market or how have they gone to market historically? How is that change when you took it as into your portfolio? And when you think about the edge that Generac will bring as the owner of this business going forward where there's some fairly stiff competition, how would you frame that for us?

Yeah, thanks for the question on that, Tommy. Ecobee is going to be -- I think we'll look back a couple of years from now and that's going to be a really critical turning point for us as we continue on this journey. as -- the evolution we talked about anyway, of becoming an energy technology Company. Specifically on your question on distribution, what we really like about them is that they refer to their go-to-market or their distribution strategy as omnichannel, which is exactly what -- how we would refer to our own. They sell through retailers, big-box retailers, they sell online those platforms, they sell through dealers. They have over 40,000 HVAC contractors that represent them in the marketplace so really a pretty wide net in terms of just the way they go to market. They sell to distributors, HVAC distributors, so it's really, truly omnichannel. We like that, it fits well. We think there's going to be a lot of interesting synergies there. our electrical channel can certainly install a thermostat, and conversely their trades can install some of our other products as well. So, we think there's a really good fit there. The thermostat market, if you just look at thermostats, the definition, you're right, it's a pretty big market. This is truly, I would say beyond that though. This is about the intelligent thermostat platform and the smart thermostat platform. And there are only a handful of true competitors to what Ecobee does. Ecobee created this category. Basically, Stuart Lombard, the person who runs that business up there, great entrepreneur, began that business in 2007, and by 2009 they'd introduced the market's first true smart thermostat. And others have joined. You're right. But I think what -- when we think about our differentiation going forward,…

Thank you, Aaron. That's very helpful. As a follow-up, I wanted to talk to your HSB business, where recently at the Investor Day, you gave some directional insight on really favorable cost per lead trends. So you're still supply constrained there, notwithstanding some major efforts to alleviate that bottleneck. But if you weren't supply-constrained in this environment, Aaron, how many more sales and marketing dollars could you deploy efficiently into that customer acquisition funnel? We talking 25% more dollars, 50%?

I think what's interesting Tommy, is we really haven't backed off on deploying the dollars even though we are supply constrained. And this is maybe why the lead times continue to grow, which is not what we want to see for our customers. But I think we've got our arms around some really good longer-term plans here to continue to expand capacity. All the things that were -- that we have been working on, that will come online next year and then -- we made some pretty big commitments here in the third quarter very recently. Around not only the expansion on the trend facility, which I think is an important commitment, but commitments towards additional automated manufacturing equipment to help us scale even further there. But your question is a good one, I would tell you that our marketing team watches the statistics very closely. And if they were to see the cost per lead starting to change right around where we're spending and where we're deploying dollars, they would throttle back the spending, and so far that really hasn't been the case. So I think what people sometimes don't realize is a home standby generator project was already a long term -- a longer, I would say project timeline for most people, because there's permitting involved, there's contractors involved, you have the work itself, you have inspectors. Clearly, it wasn't seven months before, but it generally was two or three months. And I think if people realize in today's environment that we are supply constrained in a lot of things, not just home standby generators, appliances, vehicles, you name it and it's tough to find things today. So I think there's -- call it an acceptance level, I don't know what it is, but I think people are somewhat accepting the fact that they have to wait. And I also think it also speaks to just how in tune people are with the importance of having backup power. The outages have been increasing, they've been lasting longer. I think people are spending a ton more time in their homes and they realize just how vulnerable they are and what that means to, you know, the ability to work from home, their kid's ability to learn from home. All the things that we need to do from home only happen with a continuous source of power. So I think a generator is just going to be -- it's going to be an appliance that we all have here going forward. We're going to need that as the grid continues to change and that's why we're committed to expanding our capacity. We've got a lot of confidence in where this is going longer-term. And I think that, as it relates to marketing dollars, we're going to continue to spend there too as long as it makes sense financially.

Thanks, Aaron. I appreciate the insight and I'll turn it back.

Our next question comes from the line of Ross Gilardi from Bank of America. Your line is open. Please go ahead.

Hey, good morning. Thanks, guys.

Hey, Ross.

I just had some questions on some of York's preliminary comments on the 2022 revenue growth. Just want to see if I'm thinking about it right. But it would seem that if you deliver the backlog alone, and I think in critical planning assumption that you had the Investor Day was to work that backlog down to essentially 0 by the end of 2022, $1 billion plus backlog. That alone is close to 30% revenue growth next year. Am I thinking about that correctly? And from the installer and distribution perspective, are you confident that you've got enough distributors and installers on the ground right now that could get those all installed, or do they just end up sitting in limbo for a period of time?

Yeah. Hey, Ross, this is Aaron. I'll take some of those questions and I'll kick it to York here too, if he wants to jump in. Maybe just on the backlog, I think directionally you're thinking about it, right? We've got -- clearly we're going to have a bigger backlog coming into '22 than we originally thought because demand has just been stronger. It's outstripping supply. We're hitting record output levels on HSP. We could go higher if not for some of the -- a lot of our constraints here are pure logistics related, just the nuttiness of getting components from Point A to Point B right now. Just the amount of dwell time that's going on with components in the ports and trying to find trucks, everything else you've heard about from every single Company in America. We're no different and that is -- that's kind of holding us back a bit, but we think that's temporary, that will resolve. We're confident that we'll get our feet under us as a country here around getting our supply chains repaired. But directionally, you're right, I think the real question is, we talked about this double-double in terms of our capacity, that's theoretical capacity. If the supply chain constraints persist into the first half of next year, that could obviously create some headwinds, right to what we originally thought of, in terms of ultimate theoretical capacity. So that's something we've got to watch. Longer-term, again we feel like we've got a good plan to go even higher, to go even further with home standby capacity, we've got the confidence to do that. I think you may have hit on something though it's really important here, is in the distribution network in terms of installation. We have 8100 dealers today. We're growing that number. We've grown to 1100 dealers over the last 12 months. The most in any last 12-month period we've ever grown and we're going to need to grow a lot more. The reality of it is we're going to have to pick up the pace of installations so that we can keep pace as we deliver more products going into next year. Now remember that dealers aren't the only people who do installations. Installations are also done generally by contractors. There's over 70,000 electrical contractors out there, and there's over a 100,000 HVAC contractors. And both of those trades do HSB installation. So it's beyond just our dealers. They do the lion's share, but it's also other trades that are involved who may not be dealers for us. So we have a pretty wide availability of contractors, but we really need to do a lot more training, We need to find more dealers and we've got, I would say an outside effort and outside focus on that for next year. I don't know, York, if there's any additional comments you want make?

[Indiscernible] what if the supply chain environment next year and will we catch backlog next year, I think it's all a function of what the supply chain look like and what the outage environment look like. So I think that would be my [Indiscernible]

It's setting up to be a monster year just based on the backlog we've got alone.

Okay. Great. Can I ask a follow-up question?

Yeah.

Yeah.

The original plan -- well, I did say original, at least last quarter, was to get EBITDA margin back to Q1 '21 levels in the fourth quarter, and obviously that's changed as it reflect in your guidance, but do you get back there in the first half of '22, and can you give us sense of where the run rate pricing contribution to revenue growth entering next year?

I think, as I mentioned, we've had multiple rounds of pricing across all categories, I mean, with home standby, there was roughly 4 that went in place earlier in the year, call it December, January, and another may call it May, June, another one September, another one we're contemplating recently. When you think about how all the -- those are going to pace into next year, the May increase, well, we'll start seeing that probably the beginning of 2022. The September increase we'll actually see because that was on shipments will start -- we'll see that here in Q4, that was a smaller one. The one coming up here that probably won't realize until let's say July given our lead times. I think -- and then you look at other products were also we've rolled out pricing as well. I think -- I would say by the end of the first half of 2022, we'll get full realization of all of our pricing, that should get us to gross margins that where -- at least look more similar to where they were in the beginning of the year, we're putting our budgets together as we speak, so not giving clear guidance as to what that looks like, but --

It's definitely going to improve.

-- it will definitely improve.

And will do that sequentially throughout next year. I would say, Ross, it's interesting, as we unpack this, the way that the costs rose so rapidly, in particular around logistics. I mean, that was -- and steel, certain commodity costs that are heavy in our products. Two things happened: 1. We got -- we had this -- we've just got long lead times on the products. So getting pricing to realize we were somewhat constrained there just because of the outside demands for HSB in particular. But then also I would say our cost lags if you will, have shortened because we're burning through material so much quicker, the pace of production is increasing at such a volatile pace where I think lags of increases in the past with commodities and other things might have taken us a while longer to get through and start to show and read through in the EBITDA margins or even the gross margins. They're reading through quicker right now. So temporary, we got a good plan to get ahead of it. I'm feeling really good about where we are going to be next year.

Our next question comes from the line of Philip Shen from ROTH Capital. Your line is open, please go ahead.

Hey, guys. Thanks for taking my questions. The 1st one --

Hey, Phil.

Hey. Thanks again. The first one's around capacity. You announced that expansion in Trenton yesterday. Just want to check to see if that was a part of the double by 2020 to Q2'22. And then you mentioned Aaron, that you've secured equipment for 2023. So I was wondering if you could expand on whether or not you've made the decision on capacity expansion beyond the Q2'22 double? Have you guys locked in supply chain agreements which I believe are critical And have you made any commitments there? And then finally, the Jefferson facility, I think you guys have converted that to being permanent. Is that key for reaching that Q2 '22 to double as well? Thanks, guys.

Got it. Thanks, Phil. Yeah. Capacity in HSB, let's just run through a couple of things in your question. The expansion at Trenton first. That expansion add 200,000 square feet to that facility, that is really about warehousing and distribution. I wouldn't say it would impact our double-double at all. What it is representative above is our confidence that we are going to be able to run at an elevated rate down there for an extended period of time. We would have had to do the adds warehousing and distribution, and to that with 3PLs, by bringing it in-house, we just -- we get a nice payback on that project pretty quickly; so that just made a lot of sense, and I think it's indicative of the longer-term feelings that we have about, not only Trenton. We like the facility, we like the labor pool, but also just the category, home standby in general. Now, on the additional capacity that we talked about on our prepared remarks with the long lead time automated manufacturing equipment, really what's going on there is we've talked, Phil, we have some internal components we manufacture, of which the tooling to make that equipment has just gotten crazy long. I mean, we're talking 60 to 70 weeks long in terms of ordering them the equipment and getting it delivered and starting to run it off. So what we're doing there is, we're basically saying, "Look, we have confidence in the category. We have confidence in the demand we're seeing. Let's get our tooling on order. " We don't even know where we're going to put the tooling, right? We're not exactly sure if it's going to go in maybe another expansion of Trenton, or maybe we squeezing into Whitewater, or maybe we put it in…

Great. Thank you for that. As it relates to Ecobee, based on our industry checks last night, we're guesstimating that the revenue run rate is call it $30 million to $50 million, and the Company's probably running up break even. Are we in the right ballpark here? And if so, what kind of [Indiscernible] growth could you see for Ecobee in 2022? And finally, how are they managing through the chip shortage? I'm guessing they're having some issues there as well. Perhaps that's a near-term challenge, but something that they worked through overtime. Thanks.

Yeah -- no -- that's a -- good questions, Phil, and again, we're really excited about this one. Now, Ecobee is quite a bit bigger than that. So they're about probably close to a 125 million in reps and that's supply chain constrained. Your point on chips, they could be going higher than that, but they do have, as you would imagine, some supply chain constraints, so they are working through those like we all are. And we're adding additional chip capacity across that product line. Stuart and his team are doing a nice job in navigating that. Their growth rate is going to be about 3x. The Generac growth rate as we laid it out in the LRP model for the Investor Day. So we've got a lot of aggressive growth on the table. That's not only devices, but it's also services. So pretty exciting. That's a lot of growth coming out of the services piece going forward. But no, it's actually -- I call it a startup that's getting to scale. They've been around 14 years and they've spent a lot of time getting to this point and they've really started to see an inflection here in the last couple of years. They are still in investment mode. They're generating operating losses today and we will continue to do so. We're going to continue that investment cycle over the next couple of years. It's probably going be a couple of years before they break even, so -- but that doesn't worry us. We think it's an important investment to continue to make, not only around their existing platforms, around the home energy monitoring, but also again around integration and synchronization of all of our assets that are part of our home energy ecosystem going forward.

Our next question comes from the line of Brian Drab from William Blair. Your line is open. Please go ahead.

Hey, good morning. First, can you just talk about the supply chain issues that you might be facing or could face as you try to ramp capacity additionally, setting up the new distribution warehouse, any of the equipment that you need. We're talking a lot about supply chain issues with as it relates to building generators, but just getting the equipment that you need into these facilities, how is that going?

Yeah, Brian. That's great question. We're still -- we're actually pacing pretty well with the existing equipment that's been on order. The new equipment that we've ordered here recently and committed to, part of the reason why that equipment is out longer on lead times is due to some component shortages. There's -- these are automated systems, so there's a lot of logic and a lot of chips and they're struggling with that. But the existing systems that we're bringing on here at Q1 and Q2 of next year are still holding in there in terms of the timeline. We feel good about that. No material delays there. The rest of the supply chain challenges, whether it be building out that -- the Trenton facility or some of the other things that we're trying to do here, I think we've effectively -- we've built that into our assumptions around the timing of when those things will become meaningful to us or when they'll become -- when they'll come online. It's really the near-term true component supply chain that's been -- that really deteriorate in the third quarter. When we sat there, even when we talk to everybody at our Investor Day. I mean, just what it did from the end of -- the middle to the end of September, to the end of October was disappointing, right? Just the bound of ships at anchor on the West Coast, just the trucking challenges, the rail challenges, the port challenges. the amount of additional time it's taking to get things here. Forget about the cost to get it here, which is mind-numbing as well. But the time, it's really the time factor to get it here. I'm really hopeful that that's going to start to turn around here over the next 60 days, I'm hoping are going to be better. We're hearing indications that perhaps, things have bottomed on that side in terms of just where they've been and hopefully that'll improve on a go-forward basis. But every day it seems to be something different than we're fighting a fire on.

Thanks. And then as a follow-up, the mind-numbing costs. Can you -- maybe this is for York, but can you quantify what you expect the excess transportation costs to be in 2021? And if we move into a world in 2022, where that starts to subside, I'm just trying to get a sense for how helpful that could be to your financial model for next year.

Just looking at the gross margin reduction here in Q3 -- gross margins reduced over 3%. That was predominantly all price cost as a headwind. And then just looking forward into Q4, that's another something similar, almost 4% price costs that are impacting us in Q4 of year-over-year. So, if that moderates, and coupled with pricing actions on top of it, that could have a pretty quick snap back in terms of profitability.

Okay. Thank you.

Our next question comes from the line of Joseph Osha from Guggenheim Partners. Your line is open, please go ahead.

Hi, guys. Thank you for taking the question. We haven't talked about Chilicon much today. I'm wondering if you think about that launch and all of the things we've been talking about here in terms of the availability of components in price, how that's working right now?

Yeah, it's great point, Joe and I'm glad you asked the question. Because we haven't talked a lot about Chilicon and it probably, out of all the acquisitions we've done and Ecobee represents a pretty nice sized TAM as well but the TAM available to us through Chilicon, through those micro inverters is big. And the team is making really good progress on the launch of those products in Q2 of next year. Still hanging in there with our commitment to do that. We're watching availability of components. We're working to scale the contract manufacturer that they -- that Chilicon was using and then we're adding other contract manufacturing resources. We're going to broaden that supply chain out, so that we believe we've got enough supply to get going on that next year. But as we start to take a look to our plan for next year, we're sitting there, stepping back, and saying, "Look, there's a lot of people that have interest in these products ", and we're setting up to have a pretty healthy position on supply. We got to put all that together when we put our 2022 guidance together formally, but I would say the initial receptivity continues to be strong. Our project remains online and on target and the internal excitement here around what we can do with that product line is -- if you talk to Ross Minick (ph) and his team, he's incredibly bullish on what we're going to be able to do with that longer-term.

Excellent. Thanks. And then a follow-up on the Ecobee as you point out, there's a lot of people who tried -- not been terribly successful in that market. One of the things people talk a lot about is fully integrated homeward management. Which you guys are coming to potential way from a different -- a different spot, especially as you ramp storage and then [Indiscernible] I'm wondering, when you have Chilicon and you have storage, and you can offer that as part of a complete package. Might you also go to customers and saying, "Hey, we can put in with this technology, our complete homework management [Indiscernible], is that going to be part of what you tried to do?

Absolutely. It is interesting. I think people are just -- you hear that Generac acquired Ecobee, and somebody says, "Why get into the thermostat business". I think that's a pretty, frankly myopic view of what we are getting into. What we're getting into is the home energy ecosystem and if that -- look, HVAC represents the largest energy load in the home today. That may change in the future with electrification of our transportation, but today, it's the largest electrical load and the largest energy load in the home. You combine that with our generation capabilities, whether it be PV Generation, or whether it's using a natural gas generator, with storage, with our load managements, with thermostatic control, water heater control. A water heater is another massive load in the home. You start looking across that spectrum, you could see very quickly, Joe, where it makes a ton of sense for us to include Ecobee thermostats or other grid edge devices with somebody who might be looking at a storage system or Solar Plus storage, because when you think about it in the context of the total amount of money they are going to spend on that system, frankly, the grid edge devices being thermostats, and water heater controllers, and load management controls, they are relatively small. But they add a tremendous amount of value and rounding out the value proposition, not only for the home owner, but also again for the grid operator. I think that's where it gets really interesting. Is what we can do with that through our Concerto platform. So anyway, we're taking a really long view at this, but it's an exciting view of the world, in the future grid 2.0 context, that I think you've got to step back and you've got to see where the puck is going here, and that's kind of what we're doing with this acquisition.

Got it. Thank you so much.

You bet.

Our next question comes from the line of Mark Strouse from J.P. Morgan. Your line is open. Please go ahead.

Yeah. Good morning. Thanks for taking our questions. Aaron, I wanted to go back to a comment you made at the Analyst Day where you thought that you'd be able to get backlog back to a quote unquote, "normalized level by the end of 2022". And even back then, you said there's a lot of factors that go into that. But just curious, over the past month since you made that statement, are you more optimistic, less optimistic on that ability?

Yeah. It's a great question Mark and one that we're talking about here as we put together our kind of formal guidance for 2022. I would say informally though, what our comment -- just answering your question directly about how I feel about it today versus maybe how I felt about it four or six weeks ago, when we put together the IR materials -- the IR day materials. I would say I'm less optimistic that we're going to be able to catch the full backlog next year as we exit the year. The demand has outstripped here over the last -- the most -- more recent period here as we ended Q3 and as we have come into Q4. It's just, it's odd to me. And we really had had -- October for the most part was a pretty quiet month on outages but the demand has been continuing just to be off the charts. There's really no two way to say it. Everything from our leading indicators like ICs to our logging indicators like activations and then, obviously, the incoming orders that are outstripping our record production levels here. It's just the setup there is -- and it's clear to us as we continue to peel back the onion of why that is, that the home is a sanctuary trend, the electrification of everything, the concern about just power security, power reliability, these things are real. These things are driving people to solutions like home standby generators and clean energy storage devices. And we're coming to a point of realization, I think that -- and it's why we made the comments about our commitments through the longer-term home standby capacity increases because we just feel like this is -- we're maybe at a tipping point here with this category, where we're just shy of, what, 6% penetration. I think, today, and it's -- the acceleration on that is phenomenal. We could be entering a period here where this is something that we think about as a -- that every home has to have. And there's a lot in between 6% and saying something that every home as to have, remember every 1% is $2.5 billion, so every 1% penetration is $2.5 billion of market. And we're over 75% share in the space. So it's good math, right? I mean, it's a great setup, but we've got to be prepared for it. Everything from the ability to produce these products, to the ability to install and service the products. There's going to be a tremendous amount of focus -- there has been a tremendous amount of focus so far. but there needs to be a lot more focus by us going forward on all those areas, so that we're ready for this, so that we can enable this. Because the secular things that we're seeing out here causing it, we don't see changing anytime soon. So we've just got to be ready for it.

Thanks, Aaron. And then just a follow-up question on Phil 's question. Just about Ecobee. I appreciate it's kind of the near-term outlook. What do you think the longer-term margin contribution is from that business [Indiscernible] is what do you think the -- like what are -- I guess what are the clean power margins, generally speaking today?

Yes, so I guess when you think about Ecobee and you look at as we ramp that up and they grow, their margin profile in the out years looks very similar to our clean energy business. We've talked about how that will probably be in the -- the mid to high teens EBITDA margins from a gross margin standpoint, closer to that mid-30% range. So you know that -- we would expect Ecobee, again, in the out-years to look similar to that overall Clean Energy business in the out years. Today, Clean Energy, just thinking, storage, that is a profitable business today. We haven't quoted exactly what margin profile it is, it's profitable today, but over time, over the next call it a few years, that will also grow into that high -- mid-to-high teens EBITDA margins as well, so we've got a roadmap and a path to get there.

Our next question comes from the line of Jed Dorsheimer from Canaccord Genuity. Your line is open. Please go ahead.

Hey. Thanks, guys and congrats with Ecobee. I've had the pleasure of working with Stuart and I think he will definitely be a great fit to the Generac family there.

And we're excited about it, Jed, thanks.

I just -- Aaron, I guess first question, grid services. You were a bit more vocal than I've heard you in terms of some of the value proposition or unlocking the value proposition, I guess, with the installed base. And so I was wondering if you might be able to unpack that a little bit more. And so, if I look out it installed capacity that's underutilized out in the field of generators, it looks like well over 20 gigawatts of generating capacity. So now that you're going to be adding in the intelligence with Ecobee, how do you -- how do you get me if I have a 24 kilowatt generator to sign up for being able to access my generator when I don't need that through the Concerto or for example? And where are you in that process with utilities? Does that have to go through [Indiscernible] case or how do you -- how does that evolve to unlocking that 20-plus gigawatts?

Yes. Thanks for the question, Jed. And grid services, you're right. We were a little bit more vocal on at this time because we continue to gain confidence based on honestly, just the sheer number of proposals in our pipeline. It changed dramatically in the 1 year that we've owned Enbala. The Concerto platform, they just did their latest release of the platform that adds additional functionality, that adds, again, the smart grid ready capability to our products. We've added here initially, the home standby generators, C&I gas generators, our PWRcell systems, even our Power Manager, the load management device, we're making all of those smart grid ready. And as we see more proposals coming in, it gets us more and more excited about the opportunity to connect those assets through Concerto, to those smart grids these grid operators to be able to participate in these programs. I will tell you that there is still this, I don't want to say it's a missing link, but there's the connection process of the marketing process, right? Of going out to a utilities rate payers and saying, "Okay, we can walk in today. We've got this, we demonstrated it here at the Investor Day. " You guys may have remembered back in our labs here we showed our map, if you will, of the U.S., and where we can zoom in on all of the assets we have on the ground. These distributed energy resources, be they generators, be they Storage Systems, or load management devices. And now going forward, be they Ecobee products, like thermostats and sensors, we're going to put all of that into the map. But we can go to a local utility, and we can have a conversation with them that's much more than just, hey, tell us…

That's great, and great explanation. Just as my follow-up, I want to shift gears a little bit. Aaron, just ask you about Europe. It's rare that you see a setup that seems this obvious. So if you look at the -- many of the misguided policies that Europe's pursuing, and how that sets up for an opportunity to capture the lack of resilience that's going into this winter. How are you thinking about positioning the business? I mean, I know your supply constrained right now and you're trying to do what you can in Trenton. But it seems like demand could just explode out to Europe, and I'm wondering how you're thinking about that in terms of being able to capture that value?

Scenario in the world that as you said, it's kind of an obvious one in terms of just the challenges and the challenging setup. You're going in the winter months for the Europeans in the way that they're -- in some cases there are dangerous energy situation there. And our products can help. I mean, the interest level in particular, at Home Standby, which picked up. We saw that very broadly as well with Home as a Sanctuary last year, we saw interest outside the U.S. pickup, far beyond anything we had seen previously for the category. And so -- but you're right, we are supply constrained. That's the unfortunate side of things. But we're still getting product over there. We're up dramatically and what we're delivering to Europe, it's still very small as a base. But it's growing very quickly. A storage is another area, we think that we have an opportunity there. That's probably a little bit further out as we deliver on some modifications to our existing PWRcell system, we'll have a new system coming out in 2023. And that system is probably going to be a little bit better fit for some of the European applications. But we are looking at how we might go after that market more aggressively here. Because it's going to take some time to get our distribution and our go-to-market approach under us there. So working on that, I will point out the Off Grid acquisition that we did is all about what's going on in Europe, with storage in general on the C&I side, we're seeing a lot of opportunities there, certainly in the rental markets to provide storage for the different applications there, whether it'd be entertainment applications or construction applications or things like that where clearly the high cost, the diesel fuel and even the availability in some cases of fuel in general is causing challenges. So we're seeing storage systems like the Off Grid systems become a lot more popular. [Indiscernible] is in the short period of time, we've owned it just the So, order book there is has been really fun to watch that grow as those products get introduced. We introduce them to our legacy channel partners there. But Europe represents a huge market opportunity. We're going to stay focused on it, but I'd love to say that we're going to be able to do something more there next year. But we got a tiger by the tail here in North America as well.

[Operator Instructions] And at this time, we will limit to one question only per analyst to address others questions. Our next question will be from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open. Please go ahead.

Good morning. This is David Tarantino on for Jeff.

Hi, David.

David.

Just attacking these supply chain headwinds from a different angle. Could you just provide some color on how the extended lead times to 30 weeks balances out between supply shortages and just the underlying demand strength?

Yeah, it's really more the -- I would say the underlying demand strength because we are just -- the order book has continued to be very, very strong. There's certainly some components, as I said, our ability to ramp to the theoretical capacity numbers we talked about for next year -- mid-year next year, maybe somewhat constrained by supply chain in the short-term. We still think that's probably maybe a first-half '22 story and then should abate. But I would say we are more constrained right now just based on the inability to just go beyond what -- as we get the up the learning curve here in Trenton and as we put a second-line on in Jefferson, and then as we go into next year with the new tooling that's going to get delivered there. That's just kind of pacing of getting to those levels that we've talked about. And certainly some supply chain constraints today causing that. But I would say it's more just demand outstripping. Even if we were able to produce at max capacity today, I fear that demand would be outstripping that, given where we're at. So I think it's more that than it is supply chain constraints.

Next question comes from the line of Pearce Hammond from Piper Sandler. Your line is open, please go ahead.

Good morning and thanks for taking my question. Specifically related to acquisitions, you've made a number of acquisitions here recently. Just curious if you're going to pause to try to digest some of these and integrate? And then, if you are looking for future acquisitions, what white space is still available within this energy technology solutions kind of mandate?

That's a great question, Pearce. We have done a lot of acquisitions this year. We've done six of them. The Ecobee acquisition was number six this year, that's a lot for us. And I don't think we started the year -- we didn't set out the year to do six. Acquisition timing -- what we've learned over the years of doing, that we've done something like 23 or 24 deals now. That -- the timing of those deals, we generally don't dictate that. They're generally dedicated by sellers or dictated by market processes, things like that. It just happened at this year, we got six that came to us, we have a really strong team here. And thankfully the acquisitions have actually been spread out nicely across our C&I business, across our residential business, across our clean energy businesses. So the teams have been able to absorb them. I think they have all been in one particular part of our business, which I think is good. In fact, some of them were international. Like the Off Grid acquisition.

Deep Sea.

--so the -- and Deep Sea, those acquisitions are being handled by the international teams. I don't think that we'll sit here and say, okay, let's stop and not do any more acquisitions because we need to absorb these. I think what we'll say is how do we go find the resources to do the integration needed so that we can continue to accelerate our strategy. That's what acquisition -- we use acquisitions to accelerate strategy. Some people have this narrative out there that we're -- that acquisitions are there, we're buying revenue, we're trying to obfuscate certain things. I have no idea what that's about. Look at our strategy, look at the acquisitions we've done this year, and it's a spot on fit for everything we're doing with strategy. Wherever we think we can accelerate strategy, we're going to use acquisitions. As far as white space is concerned, there are still some areas out there that when you look at the residential space, continue to look at heavy amperage loads in the home, I think there's some spaces there, where whether it's -- it could be in EV charging, it could be in other types of appliances that might have -- where control of those things might be important, although I will say we've taken a big step forward with Ecobee. But on the C&I side, we still have some other areas; the Off Grid acquisition while giving us a nice head-start on energy storage for C&I is still -- it's really more aimed at the mobile applications or rental applications. So I think there's some things there that we'd like to round out, but we've made some significant progress towards this effort of building the home energy ecosystem this year and also getting going on our C&I storage.

Our next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open, please go ahead.

Hi, this is [Indiscernible] on for Jerry Revich. In terms of the cost headwinds in the fourth quarter, can you describe how much is expected to be transient versus permanent?

I guess if you look at the impacts of commodities --

Is kind of dependent [Indiscernible] on commodity cost.

When we say logistics too, there's expediting costs because when there's supply chain constraints, you're expediting more so it's not just the cost of a container. You're doing some things, maybe artificially to get it here faster. I guess -- what is your view on steel, copper, and aluminum? I guess that's one answer to your question. Logistics, as long as things are busy and demand is strong. there's going to be supply chain constraints for a while, at least it's well-documented that way. But at some point, things will normalize here with the supply chain and logistics. Then things -- costs should normalize at that point. I guess all of this is transient if you have a little bit of a longer term view. But what I will say is the impact of the costs, higher input cost is going to be transient as we roll in our pricing actions and other cost reduction initiatives. So the impact of them will be transient. Okay, thank you.

Our next question comes from the line of Maheep Mandloi from Credit Suisse. Your line is open. Please go ahead.

Thanks, [Indiscernible] your questions. Just a quick one on the working capital as we look into the next two quarters. Should we expect similar working capital increase for Q4 and Q1 because of the inventory challenges here? Thanks.

I think there -- I highlighted 4 things that are causing elevated inventory just it's taking longer for things to get here so the transit times are extended. The supply chain constraints are -- cause -- when certain components don't arrive to the line and everything else does, you get a little bit of backup in inventory. We are ramping production so to the extent we're wrapping production, that should continue. And we're -- we're basically -- and once we get Trenton up and running too, that's going to be increasing as well as we go into Q1 next year. So, I'd probably say relative to the ramping part of the discussion, that will continue into Q1. But I think with regards to the longer in transit times, and just supply chain constraints, I think that probably has worked its way through and hopefully should level off in the next year.

There are no further questions at this time. Michael, please continue.

We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter 2021 earnings results with you in mid-February. Thank you again and goodbye.

This concludes our conference for today. Thank you all for participating. You may now disconnect. Have a great day.