Good day, and thank you for standing by. Welcome to the First Quarter 2022 Generac Holdings Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Now it is my pleasure to hand the conference over to your first speaker today, Mike Harris, Vice President, Corporate Development and Investor Relations. Thank you. Please go ahead.

Good morning, and welcome to our first quarter 2022 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 and other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. We experienced another all-time record in shipments during the first quarter as net sales, adjusted EBITDA and adjusted EPS were all ahead of our previous expectations. The revenue outperformance was primarily driven by continued progress on our capacity expansion plans and effective management of a challenging supply chain environment. This led to higher-than-expected shipments of home standby generators, PWRcell energy storage systems and C&I products globally. The higher revenues drove adjusted EBITDA dollars, which were also ahead of our prior expectations, despite elevated input costs resulting in lower-than-expected margins in the quarter. Demand for our products also exceeded our expectations for the quarter, resulting in an increase in overall backlog from the end of 2021, with the home standby backlog remaining significant and providing us with considerable visibility in the quarters ahead. Year-over-year, overall net sales increased 41% to $1.14 billion and also grew sequentially from the fourth quarter of 2021, which was the previous all-time record. We continue to experience robust and broad-based growth across the business with each of our residential and C&I product classes and Domestic and International reporting segments, all growing at incredibly strong double-digit rates as compared to the prior year on an as-reported basis. Strong momentum in core sales, which excludes the impact of acquisitions and foreign currency, continued in the quarter with 33% growth over the prior year, led by our residential product category. Overall, residential sales growth was again driven by a substantial increase in shipments of both home standby generators and PWRcell energy storage systems as well as the impact from recent acquisitions. The C&I sales increase was led by our mobile and telecom channels domestically, growth across all regions internationally and the contribution from recent acquisitions. Adjusted EBITDA…

Thanks, Aaron. Looking at first quarter 2022 results in more detail. Net sales increased 41% to $1.14 billion during the first quarter of 2022, another all-time record as compared to $807 million in the prior year first quarter. The combination of contributions from acquisitions and the unfavorable impact from foreign currency had an approximate plus 7% impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the first quarter by product class. Residential product sales grew to $777 million as compared to $542 million in the prior year, representing a 43% increase despite a strong prior year comparable. Contributions from the ecobee and Chilicon acquisitions and the impact of foreign currency contributed approximately 5% of revenue growth for the quarter. Home standby generator sales made up the majority of the residential product core sales growth, increasing by approximately 50% over the prior year as we continue to expand production capacity for these products. Shipments of PWRcell energy storage systems also grew at a significant rate as compared to the prior year as the U.S. residential solar plus storage market continues to grow and as we expand our distribution network for our clean energy solutions. Partially offsetting this strength, portable generators faced a tough prior year comparison due to the significant outages caused from the severe winter storm impacting several states in the first quarter of 2021, including the high-profile Texas winter storm event. Commercial and industrial product net sales for the first quarter of 2022 increased 38% to $279 million as compared to $202 million in the prior year quarter. Contributions from the Deep Sea and Off Grid acquisitions and the unfavorable impact of foreign currency had a net positive impact of approximately 13% on net sales growth during the quarter. The very strong core revenue…

We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Mike Halloran with Baird. Please go ahead.

Hey, good morning everyone.

Good morning, Mike.

Good morning.

So can we just dig into the home standby side a little bit? Obviously, you seem pretty comfortable with the in-home consultation to the consultations in general being in line with your expectations. But backlog came down. How much of that is a comment on demand coming in a little bit versus your capacity ramping to cover some of that incremental backlog? And maybe just what you're seeing in the channel in general from a customer demand perspective at this point, book-to-bill or anything like that?

Yes. Mike, I think I'd point to a couple of things that we talked about on the prepared remarks, and I'll give you a little bit more color around it beyond that. So the HSB backlog did come down as projected. Our demand was in line with our expectations. So IHCs, I think in our prepared remarks, we said they were 3x the 2020 Q1 levels. So they're significantly elevated when you look past the Texas event last year, which is just -- was a very unique set of circumstances. And none of our guidance contemplated that reoccurring nor does any of our guidance contemplate any major events happening this year. So if something does happen, we're going to obviously end the year with even greater demand than we project at this point. On the execution side of things, we did execute better than we thought we would in Q1. So our output levels for home standby were better. We were able to navigate a couple of supply chain challenges that we're facing and continue to face. Our Wisconsin factories as a matter of fact just continue to outpace our projections here. We're getting a lot of output out of the factories here. And then obviously, in Trenton, South Carolina, we've been aggressively ramping that factory. And that output grows every week that goes by, so continue to lift that up. So the combination of increased output and then the demand being in line still puts us with an incredible backlog for HSB well above kind of where we would have thought we would be at this point. Especially if you go back to our Investor Day remarks in September, we really weren't planning on kind of being where we're at today. So pretty exciting times for the HSB category.

So a question on pricing then as a follow-up. Maybe a sense for the cumulative amount of pricing you guys have put in over the last arbitrarily 12 months or so. But did I hear you right, Aaron, in the prepared remarks that you suggested that the backlog was repriced for the current marketplace?

It will be on June 1st. Correct.

Okay. And cumulative pricing?

Cumulative pricing, I think high teens is kind of what we would call over the last close now to like 15 months, 18 months maybe even.

Including this latest round that we monitor here in April.

Including this latest round here in April, which is the repricing of the backlog on June 1 effective date.

Got it. Thanks guys. Appreciate your time.

Thanks Mike.

Your next question is from the line of Tommy Moll with Stephens. Please go ahead.

Good morning. And thanks for taking my questions.

Hey Tommy.

Aaron, I wanted to stick with the theme of pricing here. What insight do you have on how elastic demand is for home standby? And any insight into what portion of the underlying unit volumes are financed versus purchased outright by the homeowner?

Yes. No, those are great questions, Tommy. I'll probably let York maybe tackle the finance piece. I don't know if we've given that.

I mean it's still a relatively small piece.

Yes. But it's growing. I mean it's been growing pretty rapidly, the finance piece.

Historically, it wasn't a financed purchase. But it's growing dramatically.

Well, I think as the category expands...

Yes. Maybe if it's 10% of the volume, but it's growing.

It's been growing quite a bit. In terms of elasticity around pricing, Tommy, I think what we would tell you is we have a ton of data and metrics that we watch very closely. So everything from inbound consultation request to, obviously, the proposal costs that go out on average. Recall that the high-teens number that I just quoted for pricing impact on the HSB is just the product itself. And the product itself is maybe half of the total cost of the project. So you have other inputs there around labor and other materials that have also increased, of course. But when we look at those project costs, we're able to then look at the close rates that we're seeing, and that helps us kind of gauge the impact of each round of pricing. To-date, we're not seeing any significant impact on pricing. It's an expensive product to begin with, right? So we used to say it was all in kind of a $9,000, $10,000 project for a home standby generator. Today, it's maybe an $11,000 project to $11,500 when you look at the average proposal costs. That extra $1,500, $1,000 to $1,500 doesn't seem to be dampening the enthusiasm for demand for the category. And I think that really speaks to the underlying megatrends that are driving the need for resiliency and backlog. And I would point to, again, in our prepared remarks, we talked about IHCs being up 3x over this point last -- in 2020. So just up dramatically over that environment. And the pricing would be that kind of mid-teens, and maybe 20% overall increase in product category price. So we feel pretty good that -- and I would say this, just my last comment on this. Having been around this business as long as…

Yes. And I appreciate the context. Aaron, sticking on the home standby theme. As we think about some of the factors into next year, you mentioned that you've achieved and held a higher level of underlying demand versus the pre-pandemic baseline. And so once we get through most or all of your backlog and assuming away any kind of major outage event next year, what are some of the things that you can do to drive that awareness higher or to drive that underlying demand higher? I mean I'm thinking largely around customer acquisition spend. But there's a lot of focus on units next year once it's a "normal environment." We'll see if we ever get there. What is within your control to drive that demand?

Yes. No, it's a great question and something that we're constantly focused on. I would tell you, we test a lot of things. We have hesitated to kind of roll out bigger things right now, because obviously, demand has been strong. The backlog is as big as it is. So adding to that, we're kind of up against do we frustrate customers with the lead times versus adding incremental demand. So I would tell you this, what we've been -- here's an example of a program we're testing. We have accumulated hundreds and hundreds and hundreds of thousands of unclosed leads over the last several years. Just as the category awareness has grown, all of those leads came in based on prior spend. We know that when we reengage unclosed leads, in particular after maybe a localized outage or maybe on the back of a promotion regionally or nationally, or just the phone call just to reengage them and maybe discuss ahead of the hurricane season, the upcoming hurricane season if they're located in those regions or ahead of the upcoming winter season if they're in those regions, we found that we can move the needle on close rate. So we've stood up internally a group, a team that is outbound calling to those unclosed leads. That is something that as we watch the return on that, and we're very pleased so far with the early returns on that pilot program, that's one area that could be scaled, could be scaled quickly. It could be scaled with outsourced resources or we could internalize it. We have a lot of capability when it comes to call centers and the ability to do those types of outbound campaigns. So that's one area. Another area is pulling on promotional levers, which we, again,…

Your next question is from Ross Gilardi with Bank of America. Please go ahead.

Good morning, guys.

Hey, Ross.

Hey, Ross.

Maybe we could just expand on your last comment there, Aaron. So if you take your new guide, you're at $5.1 billion to $5.2 billion in revenue in 2022. And your three year target from your Investor Day, I think, it's $5.5 billion or $5.6 billion. So how are you thinking about that now? I mean is it realistic to think you'll raise the $5.5 billion sometime soon. And within the $5.5 billion, is the home standby business the larger or smaller business, larger or smaller business than where it will finish in '22? And if we see the HSB come off, it's high in the next one to three years, you have enough other growth levers to comfortably get to the $5.5 billion.

Yes. I think when we laid out the guidance in the Investor Day, Ross, we never said we were going to grow in a straight line. The company continues to -- we grow. We're a grower and a dynamic grower at that. But we know that there are things that happen in the category sometimes that are outside of our control, things like what happened in Texas. And you don't know if you're going to get a strong hurricane season. Recall that none of our -- I think in our Investor Day, we really only had one major event assumed in the three year period. So to that effect, we've got a number of things that weren't in the guidance back in the Investor Day, things like ecobee. We don't have additional M&A in the guide. We're seeing some tremendous potential out of our Grid Services teams. We've got the entire clean energy story that is -- we're just tapping into a whole new market opportunity. It's pretty interesting. I mean we go through -- so we do strategic planning like every company, I'm sure. And we go through a pretty rigorous exercise around kind of our kind of TAM and SAM evaluations in each of the categories and channels that we participate in. The total addressable market that we have available to us today is so much greater than what it was even a couple of years ago. That based on not only where we've acquired companies and gotten into new spaces, but where we've continued to grow organically, where some of the spaces we were in before are growing organically. It's just -- it's actually pretty stunning. Yes, and think I it's -- to me, when I think about why is the company growing the way it's growing. It grew 50% last year. Our guide here this morning is to grow between 36% and 40% again this year. There aren't a lot of companies doing that. So why is that? I would tell you, I think it's just we are taking advantage of the opportunities in front of us. We're taking advantage of what we've built and we're leveraging it. We're leveraging it for better effects. We're leveraging it into these bigger addressable markets. And I think that, that is a big reason why we're experiencing the growth we're experiencing. Will that continue in the future at these rates? I mean I don't know. We're not here to update guidance this morning from a long-term basis. But I do know that all the signs that we have and all the success that we've experienced point to much bigger market opportunities based, in particular, on the megatrends that were tapped into strategically here. I think we're just in the right place at the right time with the right products. And I think we're going to continue to build on that not only the remainder of this year, but in the years going forward.

And just HSB dealer inventories, are they normalized yet? And then just when you talk about production, you seem to be saying more so that you're getting -- you're squeezing more out of Wisconsin. Is trend actually hitting the production targets that you had laid out at the Investor Day? Or is Wisconsin having to overcompensate for that, maybe ramping slower than you thought?

Yes. It's a great question. Trenton is actually on pace with where we thought they would be. Really, the outperformance in Q1 came out of the additional output out of the Wisconsin facilities. We continue to dial in. We've added a lot of automation to all of those facilities with the kinds of production rates we're talking about here with HSB. To be honest, I mean, being around the category as long as they've been around, they're mind-blowing in terms of the daily rates that we're producing. It's -- but to see our Wisconsin facility continuing...

[Indiscernible] through supply.

And the supply chain challenges getting around some of that stuff.

We baked some of that in.

We had. We had maybe hedged a little bit in Q1 for that. So that's the answer to that question. On the dealer inventories, we're seeing days of inventory be a little at the high end of where they've been historically. That happens kind of seasonally about now. It's coming out of the winter season. It's been -- and the spring weather has been, I don't know about many of the people on the call here, but if you live anywhere in the upper Midwest, it's a wonderful winter we're having this spring. I think I actually saw snowflakes again yesterday, so May 3. So it's been difficult to get out and install product at the kind of pacing we want to see. And we're also starting to see some of the limitations of the expansion of the category in terms of permitting in some areas, especially some newer areas like California, just really struggling with getting permits issued there. So that's been a hurdle. We called it out a couple of times. It just continues to befuddle me how difficult that is permitting in that particular region. But we need to increase the install pace because output is increasing. So that is a massive area of focus for us. And we're working hard with our existing dealers, but also with new dealers in terms of increasing their ability to install products more quickly. And they're struggling also, by the way, with labor. That's another struggle point for the channel out there. So it is something we're watching closely. But we are seeing install rates move up. We just need to see it move up even faster.

And we believe there's buyers for those units that are in the field. So I think that...

Well, absolutely. Yes. The IHC.

Based on the IHC volume.

Based on the IHC volume, we think the demand is there to support what we're seeing in the field in terms of inventory.

Going to increase the install bandwidth.

Right.

Your next question is from Philip Shen with Roth Capital Partners. Please go ahead.

Hey guys, thanks for taking my questions. First one is on a follow-up on the price increase. My sense is it was around 6% that's effective June 1. Can you talk through if that's right? And then also, what is the chance that we could see more price increases in Q3 and Q4? Is that a much -- is that a meaningfully low probability? Or is that actually on the radar because of the inflation you see ahead?

Yes. It's a great question, Phil. I would tell you that you're pretty close on the price increase. It depends on which SKU and which model, but kind of mid-single digits, 5%, 6%, somewhere in that range with the last round of pricing. And that was across a number of products in the home standby category for sure. And then even a little more aggressive in some of the clean energy products. You may have your channel checks. In terms of where we'll go with pricing, Q3, Q4, I mean, I would tell you right now the guidance contemplates that additional pricing because we're taking the somewhat extraordinary step of repricing the backlog as of June 1, that's going to read through a lot quicker than previous price increases. So today, we feel like our guidance -- if you just look at kind of the margin progression here, Q1 is going to be the bottom. Q4, we're going to return kind of somewhere like back to where we were kind of in the beginning of 2021. And so that's a pretty big step, right, to get from today to there. And a lot of that, because of that 5% to 6% kind of reading through the back -- through the balance of the year here, alongside some additional cost reductions, plus previous pricing actions that we've done also reading through to get the full impact of all the pricing. So we feel pretty good. That said, obviously, sitting here like on the last call, it was prior to the Russian-Ukrainian conflict. We were actually starting to see some pullback in some of the basic commodities. We're big users of steel, copper and aluminum. We're actually seeing some moderation in those commodity costs. And then that conflict happened. And we saw kind of a reengagement of those inflationary trends on those basic commodities as well as just continued and persisting high logistics costs, which have been really somewhat amazing to watch. We were very optimistic around the last call that those costs, commodities and logistics would start to moderate through the balance of the year. I'm not as optimistic as I sit here today that they will. And that's reflective of this kind of most recent round of pricing and why we did that.

We're -- in our latest guide, we've got steel prices at their higher levels here. And copper, now copper has actually moderated since then, but...

It has actually pulled back.

Yes. And we are starting to see the beginnings of some of the logistics costs moderate, so that will be helpful. But yes, if costs continue to rise from like, let's say, today's levels, then it's something we would have to evaluate. But I think the team was able to react very quickly to these higher inflationary pressures that we're seeing today.

And given the elasticity comments I made prior, it doesn't worry us if we have to do that. the thing that we probably could have done to help ourselves earlier is to reprice the backlog more fully earlier on. That's an extraordinary step. We try to avoid doing that because we know that our distribution partners, oftentimes, they've already bid out a job. They already have a contracted arrangement with end customers. So repricing the backlog is effectively just reducing their economics on a project or they have to go back to their end customer and also increase price, which different channel partners approach that differently. But that's a pretty painful step. And we understand that. But that's something that we -- it doesn't worry us. If we have to do that, we will do that again.

Okay. In terms of capacity, Aaron, you just talked through hitting your Q2 '22 double, double. And you talked through the strong demand, the new baseline level. What else do you need to see before you become -- well, what else do you need to see for the next capacity expansion to become official? Like where are you in that process? We've talked through over the past few quarters here. And you've been waiting for something. What is that something? And how close are we? And if we are looking at another leg of expansion, where is it? And to what degree can you sketch it out?

Yes. Yes. Thanks, Phil. And we've been in the process for evaluating either an expansion in our existing facility in Trenton or perhaps another facility for home standby production in particular. We haven't announced a location yet or what our plans are there. We did take the extraordinary step of ordering some of the additional tooling we'll need to take another leg up in capacity -- to increase capacity further there because we know the lead times are long. That tooling right now would hit sometime in the first quarter of next year in 2023. Where we deliver that tooling to and where we take that production capacity to is the question. In terms of what do we need to see, I think we've already seen it. We've seen a new and higher baseline for the category. We know that we want to have, for ourselves, we need to build in some upside here in terms of the expansion capacity, if you will. We need some excess capacity there to handle where demand surges happen. We call it surge capacity. Today, we think we have -- we've been in pretty good shape not knowing what's going to happen in the back half of the year for the demand curve. Again, all of our guidance here does not assume, even though contrary to what the latest hurricane forecasts are, does not assume that we get a major event. So if we do see an active hurricane season, obviously, we'll want to move faster not slower on those capacity expansion plans. But in the meantime, we're going to have to figure out where we deliver this tooling. And we're going to have to figure out what that kind of longer-term capacity for HSB looks like. We do have some similar challenges on…

Your next question is from Jeff Hammond with KeyBanc. Please go ahead.

Hi, guys. Good morning.

Hey, Jeff.

So I know you covered some on kind of price cost. But I just want to kind of level set on your confidence in the second half kind of margin ramp. And just as it relates to kind of the start-up freight and component surcharges, if you need some reprieve there to kind of hit that margin ramp. Thanks.

Yes, Jeff, this is York. I mean looking at our commentary, gross margins are expected to go up, let's say, roughly 8% from Q1 to Q4. I would say about half of that will just be the realization of the pricing that we've just been talking about at length here over the call. The other half is the cost inputs that you just mentioned. If you think about like where steel was at its peak, it is actually off from its peak. So relative to what we're experiencing in Q1, which was the peak, and as that progresses through the year, steel should come off a bit. We are starting to the beginnings of lower inbound freight costs. We don't believe we'll need to expedite as much as we do feel like we brought in a good amount of safety stock here over the last couple of quarters. So we just believe that inbound logistics cost should moderate a bit. As we ramp, we'll start absorbing in particularly our Trenton plant better. And then we do have line of sight on focused bill of material cost reductions on home standby telecom product, et cetera. So we feel like we have got good line of sight on some of the easing input cost to execute on that gross margin improvement. As I mentioned before, the guidance does assume steel costs at these higher levels that ramped up after the Russian-Ukraine invasion there. And so we feel like from a future commodity standpoint, we think we've embedded the current environment into the guide. So good line of sight to all the pieces to give that 8% increase in gross margin.

Okay. Great. And then I don't know if I missed it, can you give us the updated lead time on home standby? And then just any updates on kind of just the net metering noise and kind of this trade circumvention kind of having any impact on your clean energy businesses?

Yes. No, it's a great question there, Jeff. About 20 weeks on HSB today on inbound orders, so still pretty extended, pretty long. Backlog is still well north of $1 billion on HSB. But it's -- we're continuing to make progress there as we ramp production. In terms of -- on the clean energy business, the impacts to the net metering discussions that have been going on kind of coast to coast, right, from California to Florida, we've seen the Florida thing play out. The governor there vetoed, vetoed the potential rule changes around net metering, the curtailment of net metering. California is reevaluating the proposed draft rule making there by the PUC. We don't see -- actually, when you think about it, let's just take California as an example. We don't have a dramatic penetration in the State of California. So really probably kind of a nonevent for us. In fact, I would say probably that kind of a situation, net metering kind of being curtailed, and by the way, that's kind of the inevitable situation around net metering. As you get more homes that have solar and are producing their own power on-site, selling that back to utilities at retail rates is untenable economically. I mean it doesn't work longer-term. So -- but there needs to be a gradual kind of glide path. We've talked about this. We've engaged regulators on this. You can't have this abrupt kind of pulling the punch bowl away kind of situation. I think that's detrimental to the industry. But in what's being proposed in California, that would -- if they did pull the punch bowl away and net metering was curtailed dramatically there as being as proposed, storage is the answer. So we've actually seen marked increase in interest in storage systems as a result. And I think inevitably, that is what is going to drive storage attachment rates even higher. We're kind of in that 20% to 25% range right now on storage attachment rates. And then the trade circumvention discussion, really that -- we're talking to our channel partners. They're not concerned about it in terms of impacting resi solar, maybe more on the utility scale solar projects, those bigger projects. Some of the suppliers of panels to those types of projects are maybe going to be the ones that are caught up first in this evaluation or this investigation. On the residential side, frankly, there are other panel providers that might push panel prices up a bit. But again, looking at the total cost of these projects, not dramatically so in terms of the impact to the projects. They just don't think there'll be any real demand disruption on the back of that at the residential level. So no major concerns there, at least today, based on our discussions with channel partners.

Your next question is from Brian Drab with William Blair. Please go ahead.

All right, good morning. This is Blake Keating on for Brian.

Hey, Blake.

You have taken my question, I'll just ask a quick one here since it's after the hour. Have the two lockdowns in China affected any of your suppliers there or your supply chain network overall? And do you see that as a potential risk moving forward that they continue to be under lockdown?

Yes, it's a great question, Blake. It's not helpful. Just broadly, we have supply chain there in that part of the world. And the lockdowns have created just another, yet another kind of struggle or challenge for our operational teams. So we're working around it. I do think that York may have made this comment before relative to our current working capital situation. We're feeling like -- we've got a lot of inventory sitting here that we're preparing for season. So you can kind of think of it as like a little extra safety stock right now, which is helping us buffer the impact of that. But we do have some instances where we're having to expedite logistics. Again we're having to fly some products over-the-top of things to get here faster because of the lockdowns where we can't load a ship or we can't get something here on a timely basis. So if those lockdowns extend, could that impact us? I think, like anything, probably would have some kind of an impact. I do think that we've done a really nice job over the last couple of years broadening our supply chain, meaning we have fewer single sources of supply now than we've ever had for some of our critical categories like home standby. So we do have other options. We're not as concentrated on supply. So that I think just derisks the category a bit and makes any one disruption that much less impactful. So I feel like we're in a better shape to weather that.

Got it, thank you. I will pass along.

Thanks, Blake.

Your next question is from Mark Strouse with JPMorgan. Please go ahead. Mark, your line open.

Sorry about that. Can you hear me now?

Yes, now we can hear you.

Sorry, guys. I was on mute. Thanks for taking my questions. Good morning. Most of them have been answered. I did want to talk about the new Chilicon product, though. I'm sorry if I missed that. But are the new micros, are they still on track for introduction later this quarter?

They are. Yes, we're going to be shipping our first beta sites here late in Q2. And we expect to ramp full production and full shipment volumes here in the second half. I mean we still had a pretty modest part of our clean energy guide for the year that was associated with PWRmicro, that hasn't changed at all. We know that, that's going to be a slower ramp than probably what our storage ramp was originally. But I'll say this, every time we engage with a channel partner in the kind of the renewable space, the solar space, they're very excited to have us there as a potential supplier. We know that we've got -- we got to prove ourselves there. But we like where the opportunities could take us. That could be one of the more meaningful things, one of the more meaningful product launches here not only for clean energy, but maybe for this company in the years ahead. If we look forward, we feel really bullish about where that category is going.

Great, okay. That's it from me. Thank you.

Thanks, Mark.

Your next question is from Jerry Revich with Goldman Sachs. Please go ahead.

Yes, hi. Good morning everyone.

Hi, Jerry.

Aaron, I'm wondering if you can just talk about, given the initiatives that you spoke about earlier on the call in terms of growing database and just improvement in conversion rates today versus five years ago, 10 years ago, how do you feel about the peak-to-trough move in residential standby demand in this cycle compared to what feels like a 30% magic number we've seen post Katrina and Rita and Sandy, et cetera? How are you thinking about that within the context of the way you're positioned today? Thanks.

Yes, Jerry, that's a really interesting question and one that we continue to ponder here as well. I would tell you that when you think about Sandy and even Rita and some of the back -- kind of go back, it's more than a decade ago, right? I mean that's the category was in a very different place in terms of awareness, in terms of distribution, in terms of our brand recognition, maybe even in terms of kind of consumers' view on the need for backup power, right? Just given everything that's transpired in the last decade, outages are more frequent. Outages are lasting longer. People are spending more time in their homes. The grid is in a different spot. I think we're that much more dependent on a continuous source of power in our homes and everything that we do. So I don't know if I'm ready to make a comment that it'll be in terms of, numerically, how it will differ. But I think the category, there's no question, that a category is in a completely different place. Awareness levels around the products are much, much higher today than they've ever been. So I feel like that it's not -- back 10 years ago, this was a category that was dependent on the episodic nature of things outside of our control. I do not feel that, that's the case today. I feel like we have a lot more -- we have a lot more levers to pull. We have a lot more buttons to push. And we have a lot more ways to stimulate demand. And there's a lot more need in the marketplace for that.

Well, just think about Grid Services and just having an ROI to the generator where in the past it didn't.

It's a whole another angle to -- we're starting to see interest in home standby generators as part of these Grid Services bids. And that would be something we wouldn't have had back then, for sure. I mean it's a great example, York.

And I'm wondering, can you just expand on that last point? How close are we to seeing these contracts moving forward as part of Grid Services you had in California in alignment with PWRcell and utilities? I'm wondering if we're close to anything similar for the home standby category and utilities. Thanks.

Yes, that's an area we're watching very closely as well. Grid Services, in our prepared remarks, we said we've gotten -- we've won a number of deals. I mean in Q1, our Grid Services team, I think it was eight or nine really kind of important deals for us that some small, some large. But we don't press release every one of them. I know others in our market do because I think they have nothing else to talk about. So you talk about that which is the only thing you can talk about. But for us, it's just one more thing. We're marching forward here, building that out. It's given us a lot of confidence about the future opportunities there, not only just kind of how we think about the balance of this year, but how we exit this year, and going forward with Grid Services. And it's a mix of products. It's not just home standby. It's everything from PWRcells to thermostats. We talked about ecobee in some of the prepared remarks, but lot of interest in thermostats. And there's a reason for that because utilities understand that the cost of a home standby, the cost of a PWRcell, those are pretty expensive products. They're impactful, of course, on the grid. But thermostats are more affordable. And when you talk about low and moderate-income households in particular, utilities have to solve for all of their rate payers. They have to solve this problem across their entire rate paying base. And so not every one of those rate payers is going to be able to put in a battery, a storage system or a home standby generator. So in order to really address all of the ratepayers, thermostats are a great way to do that. And so I've been actually pleasantly surprised by the number of high-quality conversations. I was down in Houston last week talking to a couple of larger utility partners down there. And just the enthusiasm they have for the full suite of products that we offer, but also around thermostats in particular, I think it's just been -- I think it's one of the many areas of traction that we're seeing. But one that I think longer term, this makes a lot of sense because you can deliver a lot of value across the entire rate paying base for not a lot of investment. And I think that really is exciting for many of those grid operators and utility companies.

Your next question is from Maheep Mandloi with Credit Suisse. Please go ahead.

Hey, good morning and thanks for taking the questions as well. Most of my questions have been answered. Maybe just like on the HSB backlog, if you could help us understand, how much is coming from California and Texas. And just maybe thinking about the growth in those markets beyond 2022, should we expect like a similar run rate you see in your core backup generator markets? Or how -- what are you seeing in the last year in that market? Thanks.

Yes. No, great questions, Maheep. Thanks. Yes, we don't break out backlog traditionally by region or by state. But obviously, demand curve, we did call out last year and the last quarters last year that we were seeing obviously tremendous interest from those two markets, specifically that you mentioned California and Texas. We have seen a lot of distribution growth in those markets, which would lead to additional growth opportunities in the future. I would just point to one thing that I did mention, I think I answered it kind of indirectly in another question about kind of the field inventories. But California, in particular, the permitting process there has continued to kind of be challenging. It slowed the growth of that market, in my opinion, in terms of what we can install, the rate at which we can install. Interest level in the category remains very high, though. When we look at IHCs, our in-home consultations kind of -- and we look at them historically vis-a-vis kind of the 2020 level, that's something that we still see elevated levels in Texas and California, for sure, in terms of interest in the category. And again, I just mentioned on the last question, Q&A question, I took that we were down in Houston last week. We talked to a number of the participants down there in the market, and they continue to see very strong demand around the product. I think there are a lot of homeowners who maybe were disenfranchised when they tried to get a quote a year ago in the height of the demand surge coming off of the Texas winter event. They were a little bit disenfranchised by either the lead times or just even the time to get an in-home consultation done. And so they're coming back around this year, and they're starting to think about, okay, I want to be ready for next winter, meaning the winter of 2022. And so they're actually starting to see and talk to customers who were not in the funnel. They just kind of self-selected out because it was just too long to wait. And so they're coming back in and revisiting it. So I feel like those markets are going to be -- continue to be growth markets in the future and an important part of the overall story for home standby growth as we see the penetration rate deepen.

Thanks.

Your final question is from Kash Harrison with Piper Sandler. Please go ahead.

Good morning everybody. Thank you for taking my questions and all the details. So circling back to the commentary around home consultations being 3x above 2020 levels. This might be perhaps a simplistic way to think about things, but I mean, should we effectively just think about the "normalized" baseline level excess backlog is more or less being 3x your U.S. residential revenues from back in Q1 2020 since presumably PWRcell and ecobee weren't really contributing that much to revenues back then?

That's an interesting thought. I mean it's an interesting question. I would tell you that you'd have to take into consideration where our close rate is at. That's a part of that equation. And recall that IHCs are not our full, that's not everything we do, right? So it's -- we think it's representative or proxy for the HSB market, but that just is a portion of what we do. So there are other channel partners there. We've also seen growth outside the U.S. markets where we're more established with IHCs. We didn't talk dramatically about that this time. But we continue to see interest in the product category growing outside of North America. But it's a -- I would have to run the numbers. I have to unpack kind of the HSB growth as we've seen it in kind of the backlog there and where we're at if we took that away. I'm not sure that I could say with 100% certainty that the go-forward rate, baseline rate is 3x. I'd have to think more about that. It's an interesting question, though.

You got to forecast future close rates and then what is the storm season this year. And like there's a lot of...

But if you're thinking about baseline, which I think is his question, I think it's an interesting question. But there's a lot that goes into that. But it's certainly going to be higher. That's what we always talk about this new and higher baseline level that gets created after these kinds of events or cycles. And we've seen them historically over the last nearly 30 years. We kind of grow. We infill with new distribution. We infill with new levels of awareness and then the brand recognition and everything that goes into that. And invariably, it holds those higher baseline levels. It's really quite something to see.

And then you've got our clean energy business growing. Then you've got our global C&I business that is doing very well on top of all that.

Right, so those would be accretive to that.

Put all the pieces together, yes.

Accretive, yes.

That's helpful. Thank you. And then just as my follow-up. I'm trying -- I was wondering if you could just maybe circle back to the relationship between the HSB lead times and backlog. You mentioned lead times are now around 20 weeks from 27 to 30 at year-end. But you still have over $1 billion in backlog and you expect to carry some of that into 2023. And so I was wondering if you could just maybe remind us what you consider "normal" lead times to be? And then are there like seasonal market dynamics that would stop the reduction in lead times from being linear, meaning that at the time of the next call, you wouldn't just shave up another seven to 10 weeks and then another seven to 10 weeks after that. I'm just trying to better understand how to think about the relationship of how the lead times might evolve over the next few quarters and then how the backlog might evolve with those lead times? Thank you.

Yes, that's a great question, Kash, and maybe a good place to end the call today. Obviously, the HSB backlog, I think the thing that, for us, we're going to have a meaningful backlog in HSB when we exit this year. That has become clear to us given the demand has remained robust, in line with our expectations in Q1, but was elevated off from Q4 where we thought it was going to be coming into this year. That pushed kind of the original assumption when we sat at our Investor Day was that we would be back down to our historical lead times, which are zero to two weeks. That was part of your question, what are historical lead times, zero to two weeks. It's almost like, we inventory for the product. We want to have product available so that when there are demand surges, we can handle it. We don't foresee ourselves getting back to that level by the end of this year. In fact, we'll be quite a bit -- lead times will remain fairly elevated. They won't be at 20 weeks, but they won't be back at zero to two weeks. And remember that because we're also we're ramping production here each week of backlog, we're talking about is a bigger number, right, because we're producing a lot more per week. So we're accelerating. And so that week -- each week of backlog is actually a bigger number. So the quantum is growing as we grow our output here. So -- and that's without. By the way, our assumption does not include a major event. So it includes no major events. So a muted hurricane season, that's not what's projected. So we are, I guess, maybe being a bit conservative there. I don't know. We've always guided without storms. Whether that's right or wrong, we could debate that for another hour on this call. But it's -- that's the way we guide. And so there's like a free option embedded in the stock that way. If you want to think of it that way, is that if you do get a storm season that's in line with what experts are saying, we're going to see more demand. I don't know that we'll be able to satisfy much more of that demand this year because it will be a 2023 story more so than anything. We do have portable gens and other things. We're in pretty good shape there. From an inventory standpoint, we'll be able to capitalize on that, if there were outages that were major outages this year. But we're going to have a sizable backlog going in next year. And that's the big -- I think that's where we'd probably leave it at here for this call. So -- but great question.

And that concludes the question-and-answer session. Now I'll hand the conference back to Mr. Harris for final comments.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect. Have a great day.