Generac Holdings Inc. (GNRC) Q4 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Fourth Quarter and Full Year 2021 Generac Holdings Inc. Earnings Call. [Operator Instructions] I would now like to hand the conference over to you host today, Michael Harris, VP Corporate Development and Investor Relations. You may begin.

Good morning, and welcome to our fourth quarter and full year 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 results to differ materially from these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. The fourth quarter was a great finish to an outstanding 2021 for Generac, with all-time record performance for both the quarter and the full year for net sales, adjusted EBITDA and adjusted EPS as we achieved record quarterly production levels and continued to experience exceptional demand for our products and our solutions. Additionally, we completed the strategic acquisition of Ecobee during the quarter, which represents a major step forward in our efforts to provide a broader residential energy ecosystem that includes intelligent monitoring and management solutions as well as an increasingly sophisticated user interface platform. Fourth quarter revenue was well ahead of our expectations, driven by higher shipments of home standby generators as build rates for the quarter exceeded our plan due to strong operational execution. Shipments of C&I products also outperformed expectations during the quarter, with broad-based strength continuing across all channels and regions. Despite the substantial increase in production levels, our backlog continued to grow in the fourth quarter across the business, highlighted by home standby generators, providing us with substantial visibility into 2022 being another year of exceptional revenue growth. Year-over-year, overall net sales for the fourth quarter increased 40% to $1.07 billion, an all-time record, and also increased sequentially over the third quarter, which was the previous all-time record. Notably, fourth quarter core sales growth of 35% accelerated relative to the third quarter's core growth rate of 30%, highlighting our strong execution and the progress we continue to make in ramping capacity despite ongoing supply chain challenges. Growth in the quarter was broad-based with both residential and C&I products growing at a low 40% rate compared to the year ago period. Residential sales growth was once again driven by a substantial increase in home standby generator shipments and continued momentum in power cell energy storage shipments as well as the impact from recent acquisitions. The C&I sales increase was led by our telecom and mobile channels domestically, growth across all major regions internationally and the contribution from recent acquisitions. Adjusted EBITDA margins of 20.7% were lower year-over-year as it reflected the impact of higher input costs, driven by ongoing supply chain challenges and the overall inflationary environment as well as the impact of additional operating expense from acquisitions. Partially offsetting these cost headwinds were the initial impact of multiple pricing actions implemented over the past year. And we expect even greater realization of these price increases, along with cost-reduction initiatives and other favorable margin impacts as 2022 progresses. Before discussing our fourth quarter results in more detail, I want to provide some full year 2021 financial highlights as well as share some key accomplishments that we achieved during the year. First and foremost, I want to thank our team of over 9,500 employees globally for their hard work and perseverance throughout an incredibly challenging operating environment in 2021. Our teams have helped us successfully navigate the pandemic while still providing an incredible level of service to our customers and our partners around the world. The hyperscale growth that we are experiencing is a reflection of their commitment to the execution of our strategy and their dedication to our success. As a result of our team's collective efforts, Generac achieved another year of record revenue, adjusted EBITDA and adjusted EPS in 2021, far exceeding the previous record levels seen last year. In fact, revenue increased by approximately $1.3 billion, representing 50% growth year-over-year and marking the highest annual growth rate in our history as a public company. This performance came on top of very strong revenue growth over the 3 previous years that averaged in the mid-teens and was highlighted by tremendous growth in home standby generator shipments and approximate doubling of clean energy revenue and strong and broad-based growth in our global C&I products. Adjusted EBITDA for the full year was $861 million, with a very strong adjusted EBITDA margin of 23.1% that was similar to the prior year despite a variety of supply chain challenges, considerable inflationary headwinds and significant investments for future growth. In the third quarter of 2021, we achieved an important milestone by starting production of home standby generators at our newest facility in Trenton, South Carolina. And we continue to make excellent progress in ramping production levels at this new facility as well as at our existing facilities in Wisconsin. Additionally, the further build-out of our clean energy market opportunity was a key highlight during the year as we significantly grew shipments of our power cell energy storage systems through the expansion of our supply chain, increased targeted marketing efforts, growth in our distribution network and the introduction of several exciting new products. We also broadened our Energy Technology Solutions portfolio with several strategic acquisitions, highlighted by Deep Sea Electronics, Chilicon Power, Apricity Code, Off Grid Energy, Tank Utility and ecobee. 2021 was also a heavy year of new products as we introduced our market-leading 26-kilowatt home standby generator, our Generac branded microinverter that we call PWRmicro, the industry's first dedicated engine-driven battery charging system we call PWRgenerator and our innovative PWRmanager load control device. We also introduced a host of new C&I products this year, including a hybrid mobile power solution pairing a mobile energy storage system with a traditional mobile generator, a mobile battery-powered light tower and our first C&I battery storage system for the North American market through the Off Grid acquisition. We also announced smart grid ready capabilities for all our home standby generators, power cell energy storage systems and our natural gas C&I generators. Smart grid ready technology is important to advancing our turnkey approach to grid services and enabling these products to be utilized in programs that provide grid resiliency and an incremental ROI for the asset owner. Finally, during our 2021 Investor Day last September, we debuted our new enterprise strategy we call Powering a Smarter World, which focuses on improving energy resilience and independence, optimizing energy efficiency and consumption, and protecting and building critical infrastructure. We also published our inaugural environmental, social and governance report, highlighting the alignment of our new strategy to key ESG-related external frameworks and standards. These accomplishments provide us considerable momentum as we head into 2022. The guidance we are initiating today is for another year of significant revenue growth between 32% and 36%, which is expected to be driven by further increases in home standby production throughout the year, strong growth in clean energy markets, continued broad-based global demand for C&I products and contributions from recent acquisitions. Notably, this full year 2022 guidance projects an approximate doubling of Generac's revenue as compared to 2020 levels, with organic growth accounting for the vast majority of the increase. In addition to the significant top line growth, we expect to maintain attractive margins while continuing to make aggressive investments in next-generation energy technology solutions. We credit these accomplishments to the agility and dedication of the Generac team as we overcome short-term operational challenges and remain focused on our long-term purpose of leading the evolution to more resilient, efficient and sustainable energy solutions. Now discussing our fourth quarter results in more detail. Demand for home standby generators in the fourth quarter continued to benefit from important megatrends, which further expanded consumer awareness of the category. The Home as a Sanctuary trend remains a key driver of demand, along with the impacts of more extreme weather resulting in elevated power outage activity over the past several quarters, including 3 major outages over the past 18 months. The combination of these factors, along with broader electrification trends, continues to drive incredibly strong demand for home standby generators. As a result, home consultations or sales leads increased again in the fourth quarter over the robust prior year comparison and for the year grew at a strong double-digit rate, and we're nearly 4x the full year 2019 levels. Activations of home standby generators, which are a proxy for installations, also grew at a significant rate compared to the prior year. And our distribution footprint ended the fourth quarter with 8,100 residential dealers, an increase of approximately 800 dealers over the last 12 months. As we have discussed, we continue to make encouraging progress increasing production levels for home standby generators, most notably at our new facility in Trenton, South Carolina, as daily build rates at all our facilities were dramatically higher when compared to prior year levels. Build rates also grew sequentially as we added a new production line at both the Trenton and Jefferson, Wisconsin facilities during the quarter. As a result of the higher output levels, lead times have declined by approximately 4 to 5 weeks from 32 weeks at the end of the third quarter. However, home standby order rates have remained very strong, leading to a further increase in our backlog, which currently is still well over $1 billion and provides excellent visibility into 2022 revenue growth. Output levels are projected to increase further throughout the year as additional capacity comes online. However, demand has remained strong. And although we expect to exit the year with improved lead times, we anticipate that we will still end 2022 with a significant backlog for home standby generators. Many of the same factors underpinning tremendous demand for home standby generators, along with the increasing penetration of solar installations, are also helping drive rapid growth for our clean energy products. As previously mentioned, shipments of our PWRcell energy storage systems grew significantly in the quarter as compared to the prior year and also grew at a strong double-digit rate sequentially. Despite industry-wide supply chain and logistics challenges impacting our clean energy solutions, full year 2021 clean energy-related revenue approximately doubled as end-user demand remains robust for our PWRcell energy storage systems. In addition to strong revenue growth, key performance indicators for clean energy products continued to show favorable trends in the fourth quarter. Home consultation and system activations both increased at a strong rate over the prior year and also increased sequentially. In addition, we further built out our clean energy installer network as we ended the fourth quarter with nearly 2,500 trained and certified dealers with approximately 1,000 dealers registered on our PowerPlay sales platform. The solar plus storage market continues to expand rapidly, and we expect to see significant year-over-year growth again during 2022. Shipments of PWRcell energy storage systems are anticipated to increase substantially during the year. And we expect clean energy revenues to grow aggressively as compared to the 2021 levels. We're also very excited about beginning shipments of the previously mentioned new product introductions for clean energy, which are expected to contribute incrementally in 2022. This includes our new PV microinverter product offering called PWRmicro, with shipments expected to begin toward the end of the second quarter and ramping further during the second half of the year. A key component of future growth for our clean energy offerings is establishing and developing our distribution network, including partnering with large national solar providers. We recently announced an expansion of our partnership with Sunnova that adds even more of Generac's industry-leading technology to its current suite of offerings. In addition to energy storage systems, Sunnova customers will now have access to the industry's only fully integrated lineup of home standby generators, microinverters and load control devices delivered from a single equipment provider. The scope of the new agreement includes integrating both companies' software platforms, enabling the joint participation in grid services programs across the U.S. Additionally, Sunnova's consumer-friendly financing solution will now be made available to Generac's certified dealers for all their customers' financing needs, including home standby generators. We're very excited about our expanded partnership as it grows distribution capacity for our residential products, increases financing opportunities for potential home standby customers and facilitate additional growth in grid services. I'd now like to provide an update on the ecobee acquisition, which closed in December and which helps to accelerate Generac's evolution into an energy technology company. We believe we can leverage ecobee's existing technology and capabilities to develop a home energy management platform, which will be core to our growing residential energy ecosystem of the future that benefits both homeowners and grid operators. This platform will enable homeowners to make smarter energy production, storage and consumption decisions while also integrating with our Concerto software platform to provide grid operators more efficient access to a home's distributed energy resources. Importantly, while still very early, we are already starting to see near-term commercial synergies from the acquisition as the initial integration with our existing commercial sales channels has been encouraging, including expansion into Generac's residential and clean energy dealer networks as well as key retail relationships. In addition, ecobee has a sizable dedicated sales team directly engaging utilities and grid operators with their ecobee energy program, which is aimed at developing demand response and load control opportunities. Our Generac Grid Services team has begun working closely with this group to coordinate and expand these efforts to develop our sales pipeline together by leveraging ecobee's more than 2 million connected homes as a valuable installed base of potential distributed energy resources. I'd also like to provide a further update on Generac Grid Services, a group recently formed within the company that builds upon our October 2020 acquisition of Enbala Power Generac Grid Services has been making excellent progress in expanding its sales pipeline, including meaningful opportunities beyond traditional software-as-a-service contracts. The fourth quarter saw significant progress in new deals closed and in the final stages of negotiation, increasing our top line visibility for 2022. The Grid Services team continues to integrate Generac's products and solutions into the Concerto software platform, with the resulting hardware cross-selling opportunities expanding the sales funnel even further. We believe this creates a unique advantage for Generac in the market for grid services, given our increasingly unmatched set of energy technology assets and industry-leading derms platform, helping us to maintain momentum with utilities, grid operators and energy retailers while raising our profile with key decision makers in the utility industry. We also recently announced a key win for Generac Grid Services to build virtual power plants, or VPPs, by recruiting and enrolling Generac solar PV and battery storage system owners for Southern California Edison's PowerFlex program. This initiative gives SoCal Edison's residential customers the opportunity to earn incentives by allowing some of their carbon-free electricity stored in their PWRcell energy storage systems to be dispatched for grid stability purposes. Public sector support for grid services opportunities has been increasing, highlighted by the numerous programs within the recently passed Infrastructure Investment and Jobs Act that target grid flexibility and resilience and encourage utilities and grid operators to develop and manage virtual power plants using distributed energy resources. Now let me make some comments on our C&I business, which grew rapidly in the fourth quarter as key end markets and geographies continued to recover off the softer prior year impacted by the pandemic. Global C&I product sales increased 43% on an as-reported basis compared to the prior year and 30% on a core basis, which was well above 2019 levels during the quarter. Our domestic C&I products saw growth across all channels in the fourth quarter, led by national telecom and rental equipment customers. We also have a record backlog for C&I products, which increased further during the fourth quarter and has continued to build here in the first quarter, providing good visibility for another year of meaningful growth in 2022. Shipments of C&I stationary generators through our North American distributor channel grew again at a solid rate. And the channel continued to experience strong quoting and order activity along with improving close rates and market share gains in the quarter. We're also experiencing strong growth with our Energy Systems industrial distributor business in Northern California that we acquired in 2020 as our investments and overall increased focus in this important backup power market are producing excellent results. In working to build on this success, in the fourth quarter, we acquired the Power Generation Group of Papé Material Handling, our industrial distributor based in Southern California, further expanding our presence in the large and growing West Coast market. Shipments to telecom national account customers increased dramatically again during the fourth quarter as compared to the prior year, benefiting from elevated levels of capital spending by several of our larger telecom customers. The catalyst for the investment in backup power in this important vertical continues to be driven by an elevated power outage environment, the power security mandate in California requiring a minimum of 72 hours of backup power and the build-out of 5G networks. The long-term demand outlook for backup power in the telecom sector remains very compelling, driven by the increasingly critical nature of wireless communications. We also experienced very strong growth with our national rental equipment customers as shipments of mobile products continued to recover at a significant rate off the pandemic-driven lows of 2020. These customers are investing heavily in fleet equipment, and we remain optimistic about the long-term demand outlook for mobile products given the mega trend around the critical need for infrastructure improvements. We expect that the Infrastructure Investment and Jobs Act passed in late 2021 will support a higher level of capital spending by rental equipment companies over the next several years. Additionally, we're experiencing ongoing strength in project quoting and improved close rates for our natural gas generators used in applications beyond traditional emergency standby power generation, such as their use in Energy as a Service, microgrid solutions and other distributed generation projects. Order rates for generators used in these applications increased dramatically during the full year 2021. We believe the increased interest in these products is being driven by the need for enhanced resiliency and grid stability that these large blocks of power offer for grid operators while simultaneously providing a tangible and meaningful return on investment for the asset owners. Internationally, we continue to see strong momentum as well with shipments increasing 47% year-over-year on an as-reported basis during the fourth quarter, with 26% core net sales growth when excluding the benefit of the Deep Sea and Off Grid Energy acquisitions and the impact of foreign currency. The core sales growth was driven by strength across all major regions and has recovered well above the levels from 2019. Overall, quoting and order activity continued to accelerate at a strong pace in key international markets in the fourth quarter, driving growth in the international backlog and higher visibility for 2022. We have also seen a growing interest in home standby generators in certain international markets, highlighting the potential for the product category's addressable market to grow significantly beyond the still underpenetrated U.S. market. Cleaner burning natural gas C&I generators are also experiencing positive momentum internationally as we work to educate the global market on the benefits of natural gas fuel generators over their traditional diesel solutions. The International segment's fourth quarter EBITDA margin expanded to 13.9% from 6.8% in the year-ago period due to the accretive margin profiles of the Deep Sea and Off Grid Energy acquisitions, improved overhead absorption on higher volumes and realization from pricing actions, which were implemented throughout 2021. The integrations of the Deep Sea and Off Grid Energy acquisitions are progressing well as we continue expanding the reach of their energy technology solutions through our global distribution channels. Off Grid has seen very strong market interest for its mobile energy storage systems in new regions and with legacy Generac customers. And we are very excited to bring this innovative battery storage solution to the North American equipment rental market in 2022. The Deep Sea acquisition has substantially expanded our global controls and electronics engineering teams and provides important capabilities that are core to the growth of our portfolio of grid-connected Energy as a Service and microgrid solutions. In closing today, 2021 was a year of tremendous progress for Generac as we significantly expanded our capacity and further accelerated our evolution to an energy technology company with a number of key strategic investments across product categories and regions. We believe this growth has resulted in market share gains in every part of our business during 2021. And I'm extremely proud of the hard work of our teams to achieve such strong results despite the incredibly challenging operating environment. As we look forward, we believe we are just getting started on our newly introduced Powering a Smarter World enterprise strategy. Through the combination of aggressive organic investment and strategic acquisitions, we have built a portfolio of power generation and storage systems, monitoring and management devices, and platform and controls capabilities that provide for resiliency as well as participation in grid services programs, thereby creating enormous value for an increasingly broad range of stakeholders. With these solutions, in tandem with our services, our distribution, our brand and importantly, our expertise, Generac is uniquely positioned to be a leader in the ongoing modernization and evolution of our electrical grid to be more flexible, cleaner and smarter. I now want to turn the call over to York to provide some additional details on our fourth quarter and full year 2021 results and our new outlook for 2022. York?

Thanks, Aaron. Looking at fourth quarter and full year 2021 results in more detail. Net sales increased 40% to $1.07 billion during the fourth quarter of 2021, an all-time record as compared to $761 million in the prior year fourth quarter. The combination of contributions from the Deep Sea, Chilicon, Off Grid, Tank Utility and ecobee acquisitions and the unfavorable impact from foreign currency had an approximate 5% impact on revenue growth during the quarter. Net sales for the full year 2021 increased 50% to approximately $3.74 billion, also an all-time record for the company. Briefly looking at consolidated net sales for the fourth quarter by product class. Residential product sales grew to $706 million as compared to $499 million in the prior year, representing a 42% increase despite a strong prior year comparable. Contributions from the ecobee and Chilicon acquisitions and the impact of foreign currency contributed approximately 2% of revenue growth for the quarter. Home standby generator sales made up of the majority of the residential product growth, increasing by approximately 50% over the prior year as we continue to make significant progress in expanding production capacity for these products despite the challenging supply chain environment. Shipments of PWRcell energy storage systems also grew at a significant rate as compared to the prior year as overall solar market growth, rising storage attachment rates and our expanding distribution continue to drive growth for our clean energy solutions. An increase in shipments of portable generators and shore products also contributed to growth in the quarter. Commercial and industrial product net sales for the fourth quarter of 2021 increased 43% to $284 million as compared to $199 million in the prior year quarter. Contributions from the Deep Sea and Off Grid acquisitions and the unfavorable impact of foreign currency had a combined impact of approximately 13% on net sales growth during the quarter. The very strong core revenue growth was driven by an impressive growth across all domestic C&I channels in all major regions internationally. While this growth rate was aided by the softer prior comparison impacted by the COVID-19 pandemic, our C&I revenue was up approximately 19% on a core basis as compared to 2019 levels, which highlights the strong demand that we are seeing across most C&I markets. Domestically, the C&I growth was driven by a significant increase in shipments to telecom national account customers resulting from the much higher capital spending as these customers continue to harden their wireless networks. We also experienced strong growth in mobile product shipments to our rental channel customers as they continue to invest in their fleets, given strength in their end markets. Also contributing to the increase was solid growth with our industrial distributors as well as higher shipments of natural gas generators used in Beyond standby applications. Internationally, the increase in C&I products was broad-based from a geographic standpoint, with growth in all major regions as global C&I markets continue to experience a sharp increase in demand of the softer prior comparison impacted by COVID and had recovered well above 2019 levels. Net sales for other products and services increased 21% to $77 million as compared to $64 million in the fourth of 2020, recall this service category is primarily made up of aftermarket service parts, product accessories, extended warranty revenue, remote monitoring and grid services subscription revenue and other service offerings. Contributions from the ecobee and Tank Utility acquisitions and the impact of foreign currency contributed approximately 4% of revenue growth during the quarter. Strength in aftermarket service parts continues to be a core driver of sales growth in the category as heightened power outage activity and a larger installed base is driving increased demand. We're also experiencing higher levels of extended warranty revenue on a larger and growing base of extended warranty contracts. Also contributing to the increase were higher levels of remote monitoring and grid services subscription revenue as well as increases in other services. Gross profit margin was 34% compared to 39.4% in the prior year fourth quarter as the challenging supply chain and overall inflationary environment drove input costs significantly higher during the quarter. Specifically, the lagging impact of rising steel prices, inbound logistics costs and labor rates, along with the Trenton plant start-up, all pressured margins in the current year quarter. The early realization of initial pricing actions partially offset these margin pressures. Importantly, our backlog as of the end of the year contains multiple rounds of additional price actions that will be increasingly realized in the coming quarters. Operating expenses increased $58 million or 44.8% as compared to the fourth quarter of 2020, but declined approximately 100 basis points as a percentage of revenue, excluding intangible amortization and transaction-related costs. The overall increase in OpEx dollars was primarily driven by the impact of acquisitions, and related transaction costs, higher employee and marketing spend, additional variable expenses from the significant increase in sales volumes and increased amortization expense. Adjusted EBITDA before deducting for noncontrolling interest, as defined in our earnings release, was an all-time record of $220 million or 20.7% of net sales in the fourth quarter as compared to $196 million or 25.7% of net sales in the prior year. For the full year 2021, adjusted EBITDA before deducting for noncontrolling interests came in at an all-time record of $861 million, resulting in a strong 23.1% margin that was similar to the 23.5% margin in the prior year despite the challenging operating environment and acquisitions that impacted margins during 2021. I will now briefly discuss financial results for our 2 reporting segments. Domestic segment sales increased 39% to $896 million in the quarter as compared to $645 million in the prior year, with the impact of acquisitions contributing approximately 2% of the revenue growth for the quarter. Adjusted EBITDA for the segment was $197 million, representing a 21.9% margin as compared to $188 million in the prior year or 29.1% of net sales. The lower domestic EBITDA margin in the quarter was primarily due to the significantly higher input costs and the impact of acquisitions, partially offset by the early realization of pricing actions implemented throughout the year. For the full year 2021, Domestic segment sales increased 52% over the prior year to $3.16 billion. Adjusted EBITDA margins for the segment were 25.1% compared to 27.0% in the prior year. International segment sales increased 47% to $171 million in the quarter as compared to $116 million in the prior year quarter. Core sales, which excludes the impact of acquisitions and currency, increased approximately 26% compared to the prior year. Adjusted EBITDA for the segment before deducting for noncontrolling interest was $23.7 million or 13.9% of net sales as compared to $7.8 million or 6.8% of net sales in the prior year. The significant expansion in international EBITDA margins was primarily due to strong margin contributions from the Deep Sea and Off Grid Energy acquisitions, improved overhead absorption and operating leverage as well as the impact of pricing actions. For the full year 2021, International segment sales increased 45% over the prior year to $573 million. Adjusted EBITDA margins for the segment before deducting for noncontrolling interests were 11.5% of net sales during 2021, a 640 basis point increase compared to the 5.1% margin in the prior year. Now switching back to our financial performance for the fourth quarter of 2021 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $143 million as compared to $125 million for the fourth quarter of 2020. GAAP income taxes during the current year fourth quarter were $20.6 million or an effective tax rate of 12.4% as compared to $39 million or an effective tax rate of 23.8% in the prior year. The decline in effective tax rate was primarily due to certain discrete items related to acquisitions and a higher stock compensation deduction during the current year. Diluted net income per share for the company on a GAAP basis was $2.04 in the fourth quarter of 2021 compared to $1.97 in the prior year. Adjusted net income for the company as defined in our earnings release was an all-time record $162 million in the current year quarter or $2.51 per share. This compares to adjusted net income of $136 million in the prior year or $2.12 per share. Cash income taxes for the fourth quarter of 2021 were $29.7 million as compared to $34.9 million in the prior year quarter. The current year now reflects a cash income tax rate of approximately 19.7% for the full year 2021 compared to our previous expectation of approximately 20.0% to 20.5%. The decrease is primarily driven by a higher level of stock compensation deduction than previously expected. This full year cash tax rate for 2021 compares to the prior year rate of 17.9%. The increase in the current year cash tax rate versus the prior year is primarily due to a significant increase in domestic pretax income, which is taxed at a higher statutory rate, along with an increase in nondeductible goodwill from acquisitions. Cash flow from operations was $62 million as compared to $218 million in the prior year fourth quarter. And free cash flow as defined in our earnings release was $42 million as compared to $191 million in the same quarter last year. The decline in free cash flow was primarily due to a much higher working capital investment in the current year quarter, partially offset by an increase in operating earnings and lower capital expenditures relative to the prior year. The higher working capital investment was primarily driven by further elevated inventory levels at the end of the year, resulting from extended logistics in transit times, ongoing supply chain constraints, increasing production rates and continued investments in the ramping of our new Trenton facility. We repurchased 350,000 shares of common stock during the fourth quarter for $126 million under our current share repurchase program. And we have approximately $124 million remaining under this authorization as of December 31, 2021. At year-end, we had approximately $550 million of liquidity comprised of approximately $150 million of cash on hand and $400 million of availability on our ABL revolving credit facility, which matures in May of 2026. Also, total debt outstanding for the -- at the end of the year was $980 million, net of unamortized original issue discount and deferred financing costs. Our gross debt leverage ratio at the end of the fourth quarter was only 1.2x on an as-reported basis. In addition, our term loan doesn't mature until December 2026, and we do not have any required principal payments on this facility until the maturity date. And it has a low cost of debt of LIBOR plus 175 basis points. We also have interest rate swap arrangements that fix our interest rate exposure on approximately $500 million of this debt through the maturity date of December 2026. Further enhancing our overall liquidity is our strong cash flow profile. And for the full year 2021, free cash flow was $306 million. Uses of cash during 2021 included $744 million for acquisitions, including earn-out and non-controlling interest buyouts, $126 million for share repurchases and $110 million for capital expenditures. Our strong balance sheet and free cash flow generation give us the flexibility to grow our business, execute on our strategy and invest in future shareholder value-enhancing opportunities. With that, I will now provide further comments on our new outlook for 2022. As Aaron previously highlighted, key demand metrics for most of our product categories continue to trend strongly during the fourth quarter, leading to a further increase in backlog as we exit 2021. Looking into 2022, we expect significant growth in home standby generator shipments as we ramp capacity in our Trenton, South Carolina plant. We also expect strong growth from our clean energy products as the solar plus storage market continues to grow rapidly and as we launch several important new products, including PWRmicro throughout the first half of the year. We expect C&I products to continue to benefit from strong and broad-based global demand, highlighted by domestic telecom, mobile and energy management customers and several key international markets. In addition, our 2021 energy technology acquisitions are expected to contribute meaningfully to our overall growth in particular, the ecobee, Deep Sea Electronics and Off Grid Energy acquisitions. In summary, we have tremendous momentum and significant visibility into our demand profile as we enter 2022. As a result of this positive top line outlook, we're initiating guidance for 2022 that anticipate significant revenue growth as compared to the prior year. Net sales are expected to increase between 32% to 36% as compared to the prior year on an as-reported basis, which includes an approximate 5% to 7% net impact from acquisitions and foreign currency. This revenue outlook assumes shipments of residential products increased at a low 40% rate during 2022 and revenue for C&I products is expected to grow at a high-teens rate compared to the prior year. Importantly, this guidance assumes a level of power outage activity during the year in line with the longer-term baseline average. As a result, consistent with our historical approach, this outlook does not assume the benefit of a major power outage event during the year, such as a Category 3 or higher landed hurricane. Given we are expected to be producing at capacity for home standby generators throughout the year, the upside of a major power outage event would be more limited to incremental portable generator shipments during 2022. Meaning, any extra lift for home standby generators from a major power outage event would most likely result in incremental revenue in 2023. As Aaron previously explained, we expect to significantly reduce our backlog and lead times for home standby generators during 2022. But given the strong demand for these products, we still expect to carry a notable amount of home standby backlog into 2023. As we ramp capacity for home standby and clean energy products, we're expecting a certain level of quarterly seasonality during 2022, with net sales in the first half being approximately 47% weighted and sales in the second half being approximately 53% weighted. Specifically related to the first quarter, we expect first quarter 2022 shipments to be similar to fourth quarter 2021 levels with increasing residential shipments being offset by seasonal impacts for C&I products. Looking at our gross margin profile as we enter 2022, we anticipate cost pressures from ongoing supply chain challenges, component shortages, higher logistics costs and an overall inflationary environment to further impact gross margins in the first quarter, resulting in a sequential decline in gross margins from fourth quarter 2021 to first quarter 2022. We expect many of these inflationary pressures to progressively ease as we move through 2022 for a variety of reasons. Steel prices have come off their recent peaks, and we expect freight costs will recede during the year as supply chain bottlenecks improve. Also, the realization of multiple pricing actions that we took in 2021 will have a meaningfully positive impact on gross margins, particularly in the second half, supported by our significant backlogs that contain higher pricing levels. In addition, the impact of plant start-up costs will continue to lessen as production at the new Trenton, South Carolina facility further ramps. Also, we expect to realize certain cost-reduction initiatives that began in 2021 to combat the significant increase in input costs, including important projects to improve the cost structure for certain high-volume product lines. These tailwinds should be increasingly realized on a quarterly basis as we progress through 2022. For the full year 2022, we expect pricing, easing input cost pressures during the second half and cost-reduction initiatives to more than offset the continuation of inflationary cost pressures during the first half. As a result, we expect gross margins for full year 2022 to increase modestly compared to 2021 with sequential improvements throughout the year. Specifically, from a seasonality perspective, we expect price cost headwinds to hit peak levels in the first quarter of 2022, leading to trough gross margins that are expected to be approximately 100 basis points below fourth quarter 2021 levels. We expect quarterly improvements throughout the year ultimately leading to fourth quarter 2022 gross margins recovering back to first quarter 2021 levels. In addition, we continue to make significant operating expense investments to scale the business, support innovation and drive future revenue growth in new and existing markets. These energy technology investments and the impact of acquisitions completed in 2021 are expected to result in moderately higher operating expense as a percentage of revenue for the full year 2022 when compared to full year 2021. As a result of these factors and our gross margin expectations, adjusted EBITDA margins before deducting for noncontrolling interests are expected to be approximately 22.0% to 23.0% compared to 23.1% reported for the full year 2021. This includes the combined impact from recent acquisitions that is expected to dilute adjusted EBITDA margins by approximately 150 basis points during 2022. From a seasonality perspective, we expect adjusted EBITDA margins to improve significantly as we move through the year, primarily driven by improving gross margins throughout the year as previously discussed in detail and, to a lesser extent, improved leverage of operating expenses on the expected higher sales volumes. Specifically, regarding the first quarter, adjusted EBITDA margins are expected to bottom in the first quarter at approximately 250 to 300 basis points below fourth quarter 2021 levels and then improve sequentially throughout the year, returning to the mid-20% range in the fourth quarter of 2022 even when including the impact of recent acquisitions. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for 2022. As a reminder, our approximate $30 million per year tax shield that originated from the LBO transaction in 2006 fully expired at the end of 2021. As a result, 2021 was the last year that adjusted earnings will benefit from a notably lower cash income tax rate relative to the GAAP tax rate. Given that our cash tax rate is now expected to be more in line with the GAAP tax rate, we are now only going to guide to the GAAP tax rate going forward. For 2022, our GAAP effective tax rate is expected to be between 24% to 25% as compared to the 19.7% full year cash tax rate for 2021. This increase is driven primarily by the expiration of the previously mentioned tax shield as well as lower expected share-based compensation deductions in 2022 when compared to the prior year. In 2022, we expect interest expense to be approximately $41 million to $43 million, assuming no additional term loan principal payments during the year and assuming increasing LIBOR rates throughout 2022. Our capital expenditures are projected to be approximately 2.5% to 3% of our forecasted net sales for the year. And depreciation expense is forecast to be approximately $56 million to $58 million in 2022 given our assumed CapEx guidance. GAAP intangible amortization expense in 2022 is expected to be approximately $95 million to $100 million during the year. This is an increase compared to $50 million of amortization expense in 2021 due to the impact of acquisitions completed during 2021 that resulted in a significant increase in finite live intangible assets such as trade names, customer lists, patents and technology. Stock compensation expense is expected to be between $31 million to $34 million for the year. For full year 2022, operating and free cash flow generation is once again expected to follow historical seasonality of being disproportionately weighted toward the second half of the year. Given the very strong organic sales growth expected during 2022, we expect the conversion of adjusted net income to free cash flow to be approximately 70% to 80% for the year as a portion of cash flows will be invested in working capitals to support this growth. Our full year weighted average diluted share count is expected to increase and be approximately 65.3 million to 65.5 million shares as compared to 64.3 million shares in 2021. Finally, this 2022 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

[Operator Instructions] And our first question comes from Tommy Moll from Stephens.

York, you gave some helpful insight on the growth and EBITDA margins and their progression through the year. I wanted to drill down on the home standby business. It sounds like their price cost should be a tailwind as you get into the second half of the year. I would think that once Trenton has scaled production there, that also ought to be margin accretive. So if you run it all through and things go according to plan, could you exit '22 with a higher margin on that business than you had put up in the past?

I mean I think, overall, what we guided -- what we're talking to and what we're -- our guidance anticipates is that our gross margins overall for the company get back to, I guess, what we're calling pre-inflationary environment. If you look at Q1 2021 gross margins of roughly 40%, our guide basically gets us back there in Q4. I guess I'd have to -- we haven't necessarily parsed that out by product category in our guidance and in our prepared comments. But I would think it would get back to at least similar margin where the pre-inflationary environment was earlier in the year.

Fair enough. Had to ask. Aaron, to follow up on Grid Services, you made some news last month with the virtual power plant deal you announced in about that deal specifically. And then you mentioned the funnel for Grid Services is pretty full for 2022. How many more of these do you think you could sign this year?

Yes. The Grid Services piece, Tommy, as we've indicated a couple of times, I think, publicly is -- the pipeline there is growing at a rapid pace. We're actually -- we've been expanding our sales force there. We've more than doubled the headcount in that business. We're closing in on 100 people that are focused on it every day. And that's without -- there's a dedicated team, a pretty large dedicated team at ecobee as well that, as I mentioned in my prepared remarks, that's going to be helpful in some of the sales efforts there. The challenge, of course, for Grid Service and we noted this during Investor Day, is just a long sales cycle. You're dealing with utilities and grid operators and folks that have -- they have a process for these types of programs, the process is and one-off approval through a regulatory agency or regulatory body in general. A lot of these programs, in some cases, to certain utilities and grid operators are completely new. So there's a pretty good sized learning curve here as well. But I would say that we're incredibly encouraged. We talked specifically about the Southern California Edison PowerFlex program as kind of a proof point of some of the deals that are in the pipeline that are actually getting done. That one is not a huge program, admittedly. But it's a nice program for us because it helps us demonstrate not only to Southern California Edison, but we can use that program and the elements of that program, we can share that with other utilities. I think a lot of utility companies are just struggling with what is the right equation for them. What's the right -- is it a demand management program? Is it some kind of grid support program? Or is it some other kind of -- some grid operators need help with frequency or voltage on the grid? And we can do that with a lot -- in particular, with our storage systems. Those things can be incredibly helpful to helping stabilize the grid, whether you're talking about voltage or frequency or you're talking about augmenting power generation or curtailing demand. We have basically a huge amount of flexibility in what we can design for programs. So the kind of lack of formality around what type of program is needed by each grid operators, you have to work with them on informing that. And then the long sales cycle that goes into that, it's going to be a while before we see real, meaningful kind of impact from that in our results. Now we've contemplated that in the guidance we're offering today. And in fact, it's tracking very well, if not above, what we shared with you on the Investor Day back in September. But really encouraging stuff, but just a long sales cycle.

And our next question comes from Ross Gilardi from Bank of America.

Can you guys quantify any more specifically what you're assuming for home standby backlog exiting '22? And just like what is a normalized level of orders for home standby in today's world? I mean really what I'm trying to get at is, I mean, do you have enough home standby backlog for your -- in your planning assumptions right now exiting 2022 to avoid a down year in 2023 without significantly above trend or year -- in '23. Hopefully, you followed all that, but I think you know what I'm asking.

Yes. I mean you're asking for 2023 guidance, right? No, I think I understand what you're saying. And so just a couple of comments, I think. We do think, as we said in the prepared remarks, we're going to end the year, this year, we're going to end the year with a pretty substantial backlog yet of HSB. Because we anticipate the order rate, which we've seen already so far this year and as we exited 2021, has been really strong. In fact, so strong that even though we've taken our production capacity up, we've continued to outstrip that and grow the backlog. And we are going to grow our output throughout this year. We've got some pretty heavy growth, as we've talked about, our double-double, the theoretical capacity. We talked about how we're unsure how supply chain is going to be able to feed that, although we're getting more comfortable with that as the year progresses here. Again, based on our prepared remarks, we've got some pretty nice growth built into our forecast for the year. But that all said, we're still going to end with a pretty good backlog. The question of how much backlog is going to depend largely on the type of outage environment we see over the next 6 to 9 months as the year progresses. So if we get a heavy kind of -- or normal, I'll say, even outage environment over the summer months and into the fall, we may outstrip that even further and the backlog may be even bigger. So it's really difficult at this stage for sure, to kind of answer the question you're asking. I do think, though, that what's changed is when we -- last prepared remarks, we weren't -- we thought we'd be out of backlog by the end of '22. And that has changed at this point based on the current demand environment and based on even though that we are adding more capacity. So really, it's encouraging on the one hand, and we do think we're going to bring lead times down, but we're not going to get back down to that normal kind of 1- to 2-week lead time as we end the year.

All right. And then I just wanted to ask you about International. You made some interesting comments about growth and interest in international HSB. Where are you seeing that? And then your International EBITDA contribution has basically tripled from the first quarter to the fourth quarter. I think a lot of that M&A, but you finished the year with a 14% EBITDA margin in the second half of the year. If we carry that over into 2022, that seems like a pretty big a tailwind that I hadn't really thought about before. So can you talk more about like [Indiscernible] margins in the business.

Yes, yes. So on the HSB side specifically, the markets we're seeing interest, there's a number of markets. But very specifically, down in South America, we're seeing it in Argentina. We're seeing it in Brazil. When you go kind of elsewhere, you expand your aperture to a global basis, we're seeing, obviously, Australia has been a market we've targeted for some time for HSB. We're starting to see growth there, which is very nice. Interest in Japan, which is interesting. We're seeing interest in Russia and Ukraine, which arguably might be related to some of the security concerns short term here. But typically, this product category benefits from a concern over your power quality. And whether that concern is driven by weather or whether it's driven by geopolitical concerns or something else, we have seen a really interesting increase in the interest level. In fact, I would tell you that the teams over in Europe that are responsible for the rest of the world sales and marketing efforts, they want more product from us. And because of our production constraints here, they're telling us they could sell even more product if we get it in their hands. So we're very encouraged by that. Because I think largely, as we've all talked, this is the category has been primarily a U.S. -- North American focused element. And so to get outside of that, I think, is exciting. Now on EBITDA margins, that's really exciting because we've been pushing on this for a while. We took -- we were heading the right direction up until the pandemic hit. And then our international EBITDA margin kind of stepped backwards as we lost top line volume. As volume returns, and this is -- strip out for a second the acquisitions, take out Deep Sea and Off Grid, which have -- they're accretive from a margin profile, no doubt. But actually, the core ROW business as we refer to are our international segment, without those acquisitions, actually was up as well. So we're really encouraged by what we're seeing in terms of progress on our march towards improved EBITDA margins in that business. Then you add in the acquisitions, and like you said, we ended the year into the almost 14% in the fourth quarter. And we believe that is going to be a nice -- if you call it a tailwind, I call it kind of getting on finally on with where we want to be with this business longer term with EBITDA margins. But we're encouraged by it. And again, home standby generators, because of the margin profile of those products, certainly helps our natural gas C&I generators. They become -- are becoming popular there, also help. They're accretive to margin and then the acquisition. So we put all of those together, plus just improvements in the general core business that is the ROW business, we're very pleased with where we're going with EBITDA margins there.

And our next question comes from Philip Shen from ROTH Capital.

Just following up on one of the last questions around demand. You just mentioned, Aaron, that where you thought backlog would be by end of '22 is meaningfully higher now versus the last time you hosted a call. And so given the demand signals that you're seeing and given the supply constraints and outlook for freight improving and so forth, where do you stand now with capacity expansion? Are you closer to making a decision? Do you think we could get something beyond the Q2 '22 double-double sometime soon? And if so, what's the timing and the magnitude of what that expansion could be?

Yes. Thanks, Phil. And obviously, we continue to watch that very closely and continue to make the necessary moves we think are important to make timing-wise. As we mentioned on the last call, we made a commitment to invest in additional tooling for production of our alternators, which is one of the constrained areas in ramping production further or ramping output further. We made that commitment because of the long lead times of those machines. At this point, that automation equipment is out 50, 60 weeks in lead times. So we've got that on order. We don't necessarily have an address on what we're going to deliver it yet. But it would -- based on the timing of that, it would be sometime in 2023. Early 2023, we'd have to find a home for that. We're considering whether we can add that to our existing footprint and maybe take some of the raw material or even finished goods storage that we do in the facilities we use today, maybe move that to off-site. So we're looking deeply at the home standby capacity footprint to figure out how we're going to effect that next leg up. But we have put in motion kind of the longer lead time items that make that possible. So I feel good about that. And we continue to invest in additional automation in our existing operations and additional capacity. We mentioned -- and we've talked about this at some time, we really are producing home standbys in 3 facilities now. The intent, of course, being once we ramped our Trenton facility, we would go down to 2 facilities. We kind of absorb what we're doing today on a bit of a temporary basis in Jefferson, Wisconsin. We'd absorb that into Trenton more fully. We are looking at should we keep that third facility running and should we expand it even further. In fact, in our prepared remarks today, we added another line in Jefferson in the fourth quarter. We also turned on another line in Trenton during the fourth quarter. So the Trenton one was contemplated. The Jefferson one was planned as well, but we've got those up and running now. And my point is with this is that, the Trenton one could become more permanent as a way to expand capacity beyond the double-double. So yes, and that plus the additional tooling investments that we're committed to, we think we're going to be in really good shape, at least, to have taken care of some of the longer lead time items that make that possible as we get to early '23.

Great. And then as it relates to Chilicon and the PWRmicro, it sounds like you're ramping in Q2. Can you talk about how the channel is receiving that yet? Does the channel yet have the samples to be able to test and get the inverters on the approved vendor list for different companies and financing partners? And just curious on what kind of demand in terms of megawatts or revenue we could see from Chilicon in Q3 and Q4?

Yes. Thanks, Phil. We're super excited about the PWRmicros. We think this is an opportunity for Generac to begin to really fully participate in the clean energy markets beyond just the storage markets, which have been really good so far and really encouraging so far as storage attachment rates continue to climb. But we know there's still a substantial number of PV-only type of systems going in that today we don't participate in. So the PWRmicros are our way to do that. The Chilicon acquisition was our pathway. We're making really good progress on the redesign of the initial Chilicon, the original Chilicon microinverter design. They had a really great design. The guys at Chilicon, super bright guys, had developed what we think is, frankly, we think it's industry-leading technology. And in fact, the approach, the 2:1 microinverter, 2 panels to 1 microinverter, we think is an important part of kind of the value prop of the product going forward. We're on target for a Q2 launch. And so we feel good about that. And as we said in the prepared remarks that the -- where you'll start to see the benefit of that or will experience the benefit of that is really in the second half of this year. We haven't given specific guidance on that yet. We have a lot of supply chain work ahead of us here to ramp. And as you know, a lot of the components that go into those types of products, on the electronic side, semiconductors, processors, microprocessors, there are supply chain constraints that have formed for everybody in the industry and we’re no different. We're working through that, and we're talking to our supply chain partners today about how to be ready for the second half and to scale. We do expect to get in early in the second quarter, get the samples into beta test sites for our channel partners. Receptivity by channel partners, by the way, continues to be incredibly strong. They are very excited to see us enter the market. And I think it really rounds out our product offering. It's that product supermarket approach that we've talked about so much that I think from a single provider to be able to offer everything from generators to storage systems to PV inverters to load control devices and integrate that on a single pane of glass, like we're planning on doing here and then expose all of that through our Grid Services teams, there's nobody in the industry that can do what we can do, by the time we get to the second half of this year with the product launches we've got that being a key one, of course.

And our next question comes from Brian Drab from William Blair.

I'll just ask one question here. Aaron, I'm wondering if you can talk a little bit about the dynamic, I guess the dynamics that are impacting the dealer count and how it's flattened out. I think, obviously, that's -- and I think you've talked about this related to new dealers not being able to get product right away that they won't give them the lead times. So how do you view that playing out? And I'm wondering if this, in the end, sort of spring loads growth into '23 in the home standby category? Because as the lead times come down, certainly there's an inverse relationship there with the dealers. And then all of a sudden, you get a little bit of extra growth because you're growing that dealer base again.

Yes. It's a great question, Brian. Thanks for bringing it up. The pipeline for new dealers remains very strong. Our challenge, of course, has been fulfilling those orders for new dealers because of the backlog. So as the backlog was extended as it is, we're doing everything we can to get product to those folks, but it did flatten out at the end of the year here. We still added 800 in the full year, which is more than we've ever added in a single year. But I think you bring up a good point. I mean there's no question that continued expansion of that channel is critical to our growth. I mean we need that installation bandwidth. We need that sales bandwidth. We need that service and support bandwidth as the install base grows. So we are laser-focused on continuing to grow that channel. And it is arguable that maybe it does spring load that a bit for 2023 -- or 2022 here. We didn't necessarily kind of speak to it that way. But it's -- I think it's probably the right way to think about it. And that's an incredibly important area for us and is getting a lot of attention. And I think we're going to find our way through to continue to grow that throughout the year here even, hopefully, as we increase our production capacity, that certainly helps us satisfy those new dealers with product. Because the last thing we want to do is sign a dealer up and then we can't deliver to them. I mean that's a demoralizing experience for the dealer. So we've got to focus on that as we get into 2022 here.

Is there some sort of lead time threshold that you think you need to get to where that starts to -- where dealer count starts to grow again?

I think you're going to see growth. I mean just naturally, I mean, you may have seen a little bit of a flattening out here in the back half of the year simply because of the lead times being extended. But as I mentioned, lead times are actually starting to come down. In fact, they're down 4 to 5 weeks from where they were at the end of Q3. So that, as it comes in, I don't think it's going to remain flat. I think it's going to accelerate here as we get out of -- as we exit 2021 and get into 2022, you will see dealer counts begin to pick up again.

And our next question comes from Jeff Hammond from KeyBanc.

Just maybe talk about, I think you gave kind of residential commercial, but maybe just how you're thinking about growth rates in storage this year, clean energy all in? And then just give us your view on kind of the California net metering proposal and how you think it impacts battery storage short term and long term?

Jeff, I'll start there. As I highlighted, embedded in the 32% to 36% overall growth guidance, I mentioned residential products will increase in the low 40% range. Embedded in that is clean energy. We do have aggressive growth plans. We doubled that business here. And from 2020 to 2021, we've got aggressive growth plans here in 2022, well north of 50% growth. So we're excited about that. So that will be accretive to our overall residential product growth overall.

And then, Jeff, just on the California, net metering situation is playing out there, really interesting for me personally. I mean I've gotten a front row seat to this. For the first time, we're involved. I'm on the -- there's a war room for the CEOs in the industry on this NEM discussion. It's being sponsored by California Solar and Storage Association, CALSSA. And so this is kind of our first kind of foray into the debate around policy changes that impact the industry. And clearly, the concern there is a valid one in terms of the draft resolution that's been put forth by California Regulatory Commission there, the CPC. And so I personally, as a provider of storage, we think that this net metering fight is going to play out everywhere. I mean this is like the early innings on what's going to happen when solar hits a tipping point. You do run up against the fact that you need to kind of take a hard look at the incentive structure that net metering provides to assure a fair and equitable incentive structure going forward, yet you don't want to dampen obviously enthusiasm for renewable energy. So there's got to be balance in that. And I think the industry recognizes that. And I think what -- the proposed draft that was put out on California NEM 3.0 clearly doesn't achieve balance. And I think that's the concern. That being said, I do think that as the battle for NEM plays out and as you find balance, it's going to drive storage rates higher, which is good for us. In the short term, we actually are underexposed in California. So it probably doesn't hurt or help us in California much initially here. But over time, this net metering fight is, if you want to call it that, or this debate, is going to play out. It has highlighted for us something though important, and that is that I think we need to have a stronger voice in the debate around policy as a company. I think we've probably taken a bit of a lower profile there than we should. And so we're starting to lock shoulders, lock arms here with the industry and go shoulder to shoulder with others to kind of, one, really become deeply knowledgeable on the policy-related things that are going on in the industry; and then try to figure out how we impact it, how we impact it positively for the broader industry as well as for Generac and our customers, so -- and our dealer partners. So I think we are going to be investing in policy and investing in the regulatory forefront more so than we ever have. But it's been really interesting to see this kind of first hand.

Okay. Great. And then in your Analyst Day, I think you put out 2024 EBITDA margin targets of 24 to 25 And clearly, we've had this unprecedented supply chain price cost, which seems like it's going to get better in the second -- into the second half. Some acquisitions coming in, most notably ecobee. Just how should we think about same or differ around that target as you look at it today?

Yes. Jeff, this is York. As I mentioned on the EBITDA pacing, we're looking at Q4 EBITDA margins in our guidance to be somewhere in that mid-20% range, which is for a fourth quarter, that's a seasonally strong quarter. But looking out, I don't see any -- now that we'll level set and reset the margin profile with the pricing actions we've implemented and maybe with some moderation in some of the inflationary pressures here, we should get back to sort of the cadence that we've been thinking about all along in our Investor Day, that 24% to 25% EBITDA margin longer term.

[Operator Instructions] And our next question comes from Mark Strouse, JPMorgan.

You've been raising pricing 3 or 4x now over the past year. Your backlog continues to build. Just curious at a high level once we eventually get to the other side of the raw material pricing and the shipping pricing coming down, what is your strategy on pricing to your customers? Do you bring down cost equivalently? Or do you kind of leave pricing where it is and try and juice up your margins a bit?

Yes. Mark, I think there's a -- within that question, there's a lot of moving pieces, obviously, on where do costs go. Is the inflationary environment transitory? The PPI, yesterday, it was a 9.7% read on an annualized -- for the last 12 months, and so 10%. And costs are up dramatically if you look at our business. And I don't think all of it's read through yet personally. I think this is the problem with the Fed. And the problem with these statistics is they're backward looking and they're lagging. You're looking at data that's dated. Every new contract that comes up, I don't care if it's for snow plowing, grass cutting, delivering materials to the facilities, trucking, if it's -- everything that we do is higher. All the insurance renewals. Everything else is coming in, every time we get a new renewal, software cost, they're higher. So inflation is going to continue to kind of read through I think 6 to 12 months, again, in spite of what economists and other talking heads say. I mean they should really go work for a company because it's really just easy. You just look at all the costs. I said this a year ago. There's no way this is transitory. Wages are going up. Wages don't go back down. It doesn't happen, sorry. And we look at some of the costs and some of the inputs, they're not going back down. They're structural. So it's not that hard. And I think a lot of these folks just get tied up in the data. So my point on all this is the pricing we put in was to help us neutralize these cost increases. That being said, we didn't put as much pricing in as costs have gone up because we are going to work very hard this year to offset that with some notable cost-out projects. We've got some big projects that we've been working on. We actually initiated them last summer when we saw costs really starting to climb that are going to help us kind of not have to fully bake in the pricing to offset dollar-for-dollar the cost increases. So where do things go from here? Let's hope that they come down at some point, and we're able to bring our pricing down. We want products to be affordable. We think that's an important tenet of growing the category going forward.

And our next question comes from Joseph Osha from Guggenheim Partners.

I wanted to ask a little bit about some of the trends you're seeing in consultation activity around the country. I've heard in the past that you were seeing some interesting growth in consultations in parts of the country that hadn't necessarily been big markets for you in the past, and that might signal some higher growth in places like California, for example. So I'm wondering what kind of trends you're seeing now, what that might signal in terms of how in the U.S. your sales shape up this year?

Yes. No, thanks, Joe. It's a great question. And obviously, we call them IHCs, in-home consultations. We are seeing a move towards more virtual nature there. But on a year-to-date basis, as we said, I mean, we saw 46 states that had growth in IHC counts. And I mean it's amazing how widespread the growth was, how broad-based it was. In the fourth quarter, there were a couple of regions that we did see a little bit of cooling off and a couple of regions that were just, again, really strong. Regions like the Midwest, regions like South Central and the Western regions continue to be very strong with consultations. Some of that could be that some of those areas have -- individually, there are some states underneath some of those areas that maybe have lower install bases or lower penetration rates, so they're kind of catching up to the averages. Whereas maybe some of the other regions like the Northeast and Southeast might have a little bit above kind of national average penetration rate, so maybe they're slowing down a little bit. I mean a lot of that is based on what's been experienced in that region directly. That's our history with IHCs. But still phenomenally, I mean, for the whole quarter, up double digits again for the quarter across the country. So just a really strong read on IHCs. And I think it portends really well. And it gives us confidence in the guide that we're issuing this morning around 2022, given that kind of front-end interest that we're seeing in the product category.

And our next question comes from Jed Dorsheimer from Canaccord Genuity.

Congrats on a great quarter and outlook. Aaron, I guess, my one question is just around Grid Services and the BPP -- and the deal you mentioned with SoCal Edison, the -- which is obviously on renewable. And my question is, Europe is proposing to reconstitute both nuclear and nat gas as clean energy. And Europe has kind of been a leading indicator for some of the trends here. So I'm wondering your capacity that's out there in the field seems to be over 20 gigawatt hours of capacity. Most of that's nat gas. I'm wondering how your discussions are going around moving that over from a BPP perspective or whether or not that's still a roadblock because it's nat gas powered.

Yes. Joe, it's a great question. We're really encouraged by seeing that move in Europe to kind of redesignate, if you will, nat gas and nuclear as "clean or renewable." And I mean it's -- look, and you follow the energy markets and a lot of folks on this call do as well. I think we all understand the importance of continuous sources of baseload power. We want to clean it up as much as we can. We want to move to lower intense forms of energy, lower carbon-intense forms of energy. Natural gas provides for us an awesome opportunity to do that and move away from things like coal and move to natural gas and nuclear and other forms that dramatically change the profile of baseload power in the context of how clean it is versus today. And especially as we go to electrify everything, right? I mean our dependence on electrical power, just electricity in general, you think of a typical home today, and we depend on not only electricity, but we -- oftentimes most homes depend on natural gas for heating or for cooking. And certainly, with transportation, we depend on gasoline. I think having those 3 fuels provides for some flexibility. If we go to relying on a single source going forward, the challenge with reliability becomes -- I think it's going to be incredibly risky to do that. Back to your point though, your point in terms of the conversations we're having here in the U.S., I think most of the utility operator and grid operators, they understand it. Maybe they're not able to publicly say it that nat gas is something that needs to be around. And you've got these movements afoot kind of local community to local community where they're trying to ban new natural gas connections, which is ridiculous. It's completely shortsighted. And it actually serves -- it serves us negatively as a populist to do this. And so I think it's well intentioned, but I think the outcomes are really -- are going to be very undesirable. So the conversations are happening. That fleet of product that we have is really desirable. And I'm excited that we're going to be able to connect those products, as we said, through our smart grid ready technology, we're going to make them available and exposed to use in BPP programs like what you're seeing in SoCal Edison and in a lot of other places.

And our next question comes from Christopher Glynn from Oppenheimer.

Just a quick one, a lot's been asked. I'm curious if the guidance assumes that Trenton's running full throughput at the targeted capacity for the second half or if you have some more gated assumptions there just based on all the factors required to make Trenton hum at that -- to accomplish that double-double.

Yes. Thanks, Chris. So the simple answer is that you've got 2 types of capacity, a theoretical capacity and then you kind of have your real world or realized capacity, right, like what you can actually do. And so theoretical capacity is a bigger number than what we planned for here. And again, because we've got -- again, we've got a pretty good line of sight on everything we need. But you've got labor -- potential labor constraints. You've got potential supply chain constraints, logistics constraints. We've baked in, if you will, a hedge. I don't know if that's the right word to use. People can call it whatever you want to call it. But we are planned below the theoretical capacity of the facility for the balance of the year. Now if we get some breakthroughs on that, could it be higher? Potentially. And we're obviously shooting for higher numbers. And we want to get to that theoretical capacity. I think it's always difficult to run a facility at a theoretical capacity number. You very rarely ever run a facility at 100%. You're always generally running it at something less than 100% because of the real-world implications of doing that. You need downtime for equipment repair and maintenance. You need -- you have people come and go in terms of whether it's illness or whether it's something else, you have the human limitations there. And you try and put all that into the modeling, if you will, and that's what we come up with as kind of our real-world capacity, which is below the theoretical capacity of the facility.

And our next question comes from J.B. Lowe from Citi.

Why don't we talk about -- I mean, obviously, there's good -- there's some pretty decent visibility on the resi storage. But was wondering what you guys are thinking -- how you guys are thinking about the opportunity on the commercial storage side and then also just international expansion for the battery product.

Yes. It's -- J.B., it's great. The Off Grid Energy acquisition has been -- that was our first foray into commercial storage. It's generally the product they have, the form factor of the product is really ideal for the rental market. So it's modern on a trailer. It can be paired with a mobile generator so you can charge it right there in the field. And then you can run off of batteries, particularly useful in construction sites, especially when you get into metro areas where it's difficult to run kind of generators at night or you have noise restrictions, things like that. These products are -- have become very popular. And we're just now introducing them here in the U.S. So we've got a couple of our national rental account partners that are really excited to add them to their fleets. So we're going to be putting that equipment here in the U.S. But we're also introducing Off Grid to all of our rental customers through our Pramac group, which is our ROW Group in Italy. They have the European rental market is quite well developed. You get into the U.K., you get into any of the European Mainland countries, and we have a lot of great relationships there because we provide backup generators or construction generators as well as lighting towers, water pumps, things like that. So we've got a really great history with those customers, both, again, here in the U.S. as well as in Europe. And the Off Grid products are being incredibly well received. So our first foray into storage is kind of geared towards the rental market. We are taking those products that we're developing a road map for stationary storage. That puts us kind of into, I would say, it's more akin to what we do in the C&I generator market globally. And that's not necessarily what the Off Grid product is geared towards today. But in the future, the road map would give us a product that would look like kind of storage for those stationary C&I applications. So more to come on that as we develop that, but really good kind of early innings here with storage for C&I.

And our next question comes from Kashy Harrison from Piper Sandler.

So back at your Investor Day, you provided the multiyear outlook on the revenue CAGR through 2024. Obviously, it's only been a few months since that color was provided. But I was just wondering if you could maybe walk us through some notable developments in that multiyear view since that Investor Day that you think might be worth pointing out? Have there been any big developments we should be paying attention to? And if there are, what's -- what are there?

Yes. No, this is York. I'm thinking out loud. We've been talking about how our backlog coming into 2022, and therefore, ending the year in 2023 is going to be probably higher than we were anticipating back in the LRP period that we launched in September of last year. So that obviously will be a tailwind there as you progress through the model. ecobee was not in the LRP model. So you'd layer that on top. That's probably the biggest development that wasn't in the LRP model. It's just our strategy around ecobee and developing a home energy ecosystem and all the synergies that will come with that. That's probably the biggest thing that's not in LRP.

Yes, I would agree with that. And I think the fact that -- I think maybe not fully appreciated in the LRP, in my prepared remarks today, I said based on our read of the markets that we participate in, we gain share everywhere across the board. And that might not have been fully contemplated in the LRP as well. Just those share gains -- share gains tend to be pretty sticky. So when you are picking up share, you kind of -- that has a compounding effect in out years. So that could be a positive tailwind. Although I think York is right. Probably the bigger tailwinds there would be the higher anticipated backlog for HSB exiting '22 and the ecobee acquisition, which clearly really wasn't baked into the LRP model last September. But good question.

And our next question comes from Donovan Schafer from Colliers Security.

I want to focus on international markets here. So acquisitions from, say, 2010 to 2018, were really focused on building an international footprint to benefit from megatrends like the shift from diesel to natural gas generation. And now it looks like this is really starting to play out for you. But I want to hone in on what specifically have you seen in the last year, leaving aside COVID because I know that had an impact. But within, say, the last year, what's really been driving this and what could we see or what would you expect it to drive over the next, say, medium term, 3 to 5 years? And I just want to kind of trout some candidates of kind of factors. The LNG market has been growing very aggressively. Brazil and Argentina, I think those are LPG markets. So could that be part of what drives things there. Japan has been talking about developing offshore methane hydrate for years now. India launched a pilot program for residential natural gas distribution. So from that whole grab bag, what do you think are the most important things?

Yes. Donovan, I really appreciate that. And you're spot on. I mean over the last 10 years, the last decade is about giving -- is about building the footprint, right, and building the team, building the capabilities to deliver products, manufacture and deliver products into the markets whatever those products may be. Our long-term view was always around HSB products, potentially C&I natural gas products and of course, more recently, clean energy products, whether they’d be storage and we're demonstrating this, right? Just in my comments -- just on -- with the previous question around Off Grid Energy, the ability to take those storage systems and put them in the hands of our teams where we already have business, where we already have customers, where we already have distribution in those countries, the comments I made in the prepared remarks about HSB expanding and then that we talked about here on the Q&A about markets like Argentina and Brazil. And you're right, it's where you see markets where natural gas is expanding. India is another market opportunity for us longer term. I didn't talk about that, but there's a lot of new pipeline capacity being put online, and it's definitely on the drawing board right now in India. Now it's got to get through the regulatory processes and things in India. But nonetheless, natural gas is an enabler. LPG markets are an enabler for many of these products. And it fits right in with what we're doing. We said -- we always said that the -- our effort in investing globally was always about the long term. And when we said long term, we meant decades. We didn't mean years. It's starting to play out, which we're really happy to see some of these things in the near term. But longer term, I'm not going to speak specifically to like 3- to 5-year type of growth rates, but we're incredibly encouraged by the interest level in these products. And we haven't even gotten to our entire portfolio of clean energy assets yet and getting those in the hands, residential storage, PV microinverters in these other markets where we certainly know, especially in markets like Europe, and in Australia, where they're a lot more developed. We think we have opportunities there, and we are going to execute on those opportunities in the years ahead.

And I'm showing no further questions. I would now like to turn the call back over to Michael Harris for closing remarks.

We want to thank everyone for joining us this morning. We look forward to discussing our first quarter 2022 earnings results with you in late April. Thank you again, and goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect.