Good day and thank you for standing by. Welcome to the Q1 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. To ask a question during this session, you will need to press star one on your telephone. In addition, if you require any assistance, please press star zero. 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 Q1 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 as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call.
Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.
Thanks, Mike. Good morning, everyone, and thank you for joining us today. We experienced another all-time record in shipments during the Q 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 Q4 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 margins of 17.3% were lower year-over-year, primarily due to the impact of higher input costs driven by ongoing supply chain challenges and the overall inflationary environment. Partially offsetting those cost headwinds were the increasing impact of multiple pricing actions implemented over the past year, favorable sales mix, and the early impact of product cost reduction initiatives.
Importantly, we expect growing realization of the previously announced price increases as 2022 progresses as well as incremental favorable margin impacts from additional pricing actions which were enacted during the Q2 , further execution on cost reduction projects, and easing input cost headwinds resulting in sequentially improving margins throughout the year. Now discussing our Q1 results in more detail. Shipments of home standby generators in the Q1 grew at an exceptionally strong rate over the prior year and continues to benefit from the convergence of multiple mega trends that have significantly increased consumer awareness for the category. Power outage activity as measured on a rolling four-quarter basis at the end of the Q1 was approximately in line with the long-term baseline average, and early forecasts for the upcoming hurricane season are pointing to another year of above-average activity.
As discussed previously, home consultations faced a challenging comparison with the prior year due to the high-profile Texas winter storm event and several significant outages in other states in the Q1 of last year. We're in line with our expectations for the quarter. For some perspective, home consultations during the Q1 were nearly 3x higher than the level seen in the Q1 of 2020, reinforcing our view that demand for the home standby category has once again achieved and held a new and higher baseline level. Activations, which are a proxy for installs, continue to grow at a solid rate compared to the prior year, led by the South Central and Midwest regions. We ended the quarter with over 8,100 residential dealers, an increase of more than 400 dealers over the past 12 months.
We made better- than- expected progress in increasing production levels for home standby generators as daily build rates at our Wisconsin facilities further increased over prior year levels, and build rates continued to aggressively ramp sequentially at our new Trenton, South Carolina facility. Higher output levels are driving an improvement in lead times, which have been declining to approximately 20 weeks from approximately 27 weeks at the end of 2021. Despite the ongoing improvements in build rates and lead times, home standby backlog remains well above $1 billion. While build rates are projected to further increase throughout the year, we still expect to carry a meaningful portion of this backlog into 2023, even without the benefit of a major outage event in our forecast.
In response to higher inflationary pressures, we're also taking additional pricing actions in the home standby category in the Q2 , and we expect to realize the benefit of these additional increases primarily during the second half of 2022. New orders now reflect this higher pricing, and orders in backlog will also see a price increase effective June 1. In addition to the several pricing actions we've taken, significant cost reduction initiatives and moderating input costs are expected to further benefit margins for the product category moving forward. Our clean energy products contributed meaningfully to overall growth in the Q1 as shipments of our PWRcell energy storage systems grew significantly from the prior year period as our team successfully navigated industry-wide supply chain and logistics challenges.
Supporting this rapid growth is the continued build-out of our installer network as we ended the Q1 with more than 2,600 trained and certified dealers with approximately 1,100 registered on our PowerPlay sales platform. In response to rising input and expedited logistics costs, we have also recently implemented additional price increases for our clean energy products. In spite of policy-related uncertainty in the near term, we believe the megatrends and secular growth drivers underpinning consumer demand for residential clean energy solutions is as compelling as ever. We remain very optimistic about the new and innovative product offerings we're bringing to market in 2022, including our new PV microinverter product offering called the PWRmicro, which has continued to receive significant pre-launch interest from our channel partners.
In addition, our recently launched PWRmanager load control device has garnered positive feedback in the market, and we expect this industry-leading innovative product to further strengthen our position within the residential energy storage market. We are still expecting clean energy revenue growth well above 50% for the full year, with continued strength in PWRcell energy storage systems, along with contributions from the initial rollout of new products. I'd now like to provide a quick update on ecobee. We're seeing good progress in developing cross-selling opportunities for ecobee's hardware solutions with Generac's retail and wholesale partners. Longer term, we're pursuing opportunities with residential and clean energy dealers, as well as working to leverage ecobee's existing HVAC dealer base to sell Generac products. In the smart thermostat product category, the ecobee brand resonates well with consumers, and we have exciting new product introductions coming here in the Q2 .
Additionally, ecobee's dedicated energy services team has seen a number of wins with several utilities and grid operators, including a recently announced demand response program with a local utility provider in Colorado. This is a simple but important example of a program that can be replicated across the country, which allows for the adjustment of ecobee smart thermostats during periods of high demand, resulting in energy conservation, financial benefits for homeowners, and improved grid stability. We're also seeing promising commercial developments between ecobee and Generac Grid Services, with utilities having an increasing interest in ecobee's product offerings. The Generac Grid Services and ecobee sales teams are jointly bidding on projects, and this collaboration offers significant growth potential in a large and rapidly expanding market by leveraging ecobee's growing installed base of more than 2 million connected homes.
Our ability to increase our share of the value stack of a grid services program is also improving the economics and payback for homeowners, which has the potential to improve demand for ecobee hardware, as well as participation in grid services programs. Expanding a bit more on Generac Grid Services, the team is executing on its strategic vision and has an increasingly impressive and diverse sales pipeline that includes expanding the cross-selling of Generac equipment, along with other opportunities beyond software-as-a-service contracts driven by our unique hardware plus software plus services value proposition. Generac Grid Services also experienced strong growth during the quarter in key metrics, such as connected assets under management, and we signed and closed a number of important software-as-a-service, turnkey, and performance contracts.
In addition, a growing proportion of hardware orders, including home standby generators and PWRcell energy storage systems, along with other contracts in the final stages of negotiation, have improved our line of sight for a significant ramp in this business during 2022. Importantly, the Generac Grid Services team is making great progress integrating Generac's products onto the Concerto software platfo rm to create complete solutions for utilities and grid operators. We are excited about the economic and societal value of these opportunities as we work to facilitate the decentralization, the digitization, and the decarbonization of the power grid. Now let me make some comments on our C&I products, which also grew rapidly in the Q1 , with strength across multiple end markets and geographies. Specifically, global C&I net sales increased 38% on an as-reported basis and 24% on a core basis as compared to the prior year.
Strong growth in net sales for domestic C&I products in the Q1 was led by national telecom and rental equipment customers, as well as growing demand for our natural gas generators used in applications beyond traditional emergency standby projects. We also have a substantial backlog for C&I products which increased further during the Q1 , supporting our expectations for solid growth to continue in the category. Shipments of C&I stationary generators through our North American distributor channel grew again in the Q1 , and improving close rates helped drive growth in orders and backlog in this channel. Shipments to national telecom customers increased significantly during the Q1 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 the elevated power outage environment over the last several years, the power security mandate in California, and the growing number of connected wireless devices alongside the build-out of high-powered and increasingly critical 5G communications infrastructure. We also experienced very strong growth with our national and independent rental customers this quarter. These customers are investing heavily in fleet equipment, and we remain optimistic about the long-term demand outlook for mobile products, given the megatrend of the critical need for infrastructure improvements and recently passed legislation supporting infrastructure spending.
We're also very excited about the opportunity to bring our mobile energy storage solutions, which we recently added through the Off Grid Energy acquisition in the UK, to the North American market in 2022, and we have already seen meaningful order activity from key domestic channel partners for these products. Additionally, we are experiencing significant momentum in project wins for our natural gas generators used in applications beyond traditional standby power generation, such as their use in energy as a service, microgrid solutions, and other distributed generation projects. A diverse range of customers, from national and regional commercial accounts to municipalities and beyond, are showing substantial interest in these solutions. We believe this demand is being driven by the need for enhanced resiliency and grid stability that these larger blocks of power offer for grid operators, while simultaneously providing a tangible and meaningfully improved return on investment for the asset owners.
Strong momentum also continued in our international segment, as well, with shipments increasing 49% year-over-year on an as-reported basis during the Q1 , with 27% core net sales growth when excluding the benefit of the Deep Sea and Off-Grid Energy acquisitions and the unfavorable impact of foreign currency. The core sales growth was driven by strength across all regions, most notably in Europe and Latin America. Overall demand remains very strong across our international segment, with backlog further increasing since our Q4 earnings call. The European region is seeing particularly strong demand for portable generators, mobile products, and C&I generators, due in part to the Russian invasion of Ukraine. In the near term, a heightened focus on energy independence and security has emerged in the region.
The longer -term implications of the conflict remain uncertain given the troubling and very fluid nature of the situation. In addition to strong core growth, our recent international energy technology acquisitions, Deep Sea Electronics and Off Grid Energy, reported impressive results in the Q1 . Numerous sales synergies are developing for Off Grid Energy's mobile storage systems through Generac's global distribution footprint, resulting in incremental demand in new geographies and driving significant backlog for these products. We have also begun additional product development projects within the mobile storage category to significantly expand the power capacity range of the product lineup. Global demand for Deep Sea's controls and automation products are at all-time highs, and order intake has surpassed our previous expectations. With respect to synergies, we are further embedding Deep Sea controls and technology into our legacy C&I products globally.
Additionally, Deep Sea provides important capabilities that are core to the growth of our portfolio of grid-connected energy as a service and microgrid solutions. Our international segment has also experienced much stronger profitability despite inflationary headwinds and supply chain challenges. Q1 adjusted EBITDA margins expanded to 15.2% from 6.2% in the prior year period due to the accretive margin profiles of the Deep Sea and Off-Grid acquisitions, improved overhead absorption, and better operating leverage on significantly higher volumes. In closing today, I'm extremely proud of Generac team's efforts in delivering record sales, record net sales results, and navigating the difficult operating environment to deliver overall results that exceeded our previous expectations. We'll be discussing in detail our 2022 forecast update during the outlook portion of our prepared comments this morning.
In short, we're raising our net sales guidance for full- year 2022 and maintaining our overall guidance for adjusted EBITDA dollars, which reflects the visibility provided from our increased backlog and confidence in our ability to execute. Supply chain challenges and the overall inflationary environment have persisted, but we believe we've also taken appropriate measures to offset these ongoing headwinds. While we are tactically executing on our near-term initiatives, we remain focused on the longer- term mega trends for our business and their alignment with the strategic pillars of our Powering a Smarter World enterprise strategy. As we execute on our strategic plan, we're building out an ecosystem of connected energy technology solutions for both the residential and C&I markets to address the challenges faced by the aging electrical grid and the serious supply and demand imbalances that are developing.
We remain confident and squarely focused on building out the solutions portfolio as the modernization of the power grid is expected to significantly expand our addressable markets and ultimately lead to further growth opportunities for our business in the years ahead. I now want to turn the call over to York to provide further details on our Q1 2022 results and, our updated outlook for 2022. York?
Thanks, Aaron. Looking at Q1 2022 results in more detail. Net sales increased 41% to $1.14 billion during the Q1 of 2022, another all-time record, as compared to $807 million in the prior year Q1 . The combination of contributions from acquisitions and the unfavorable impact from foreign currency had an approximate +7% impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the Q1 by product class. Residential product sales grew to $777 million, as compared to $542 million 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 Q1 of 2021, including the high-profile Texas winter storm event.
Commercial & Industrial product net sales for the Q1 of 2022 increased 38% to $279 million, as compared to $202 million 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 growth was broad-based, driven by growth across all regions, highlighted by robust telecom and rental volumes. Net sales for the other products and services category increased 28% to $80 million, as compared to $63 million in the Q1 of 2021. Contributions from acquisitions and the impact of foreign currency contributed approximately 8% of revenue growth during the quarter.
Strength in aftermarket service parts continues to be a key driver of the core sales growth in this category due to the heightened power outage activity in recent years and a larger and growing installed base of our products in the field, which is also leading to higher levels of extended warranty revenue. Also contributing to the increase were continued growth in our services offering in certain parts of our business and higher grid services subscription revenue. Gross profit margin was 31.8% compared to 39.9% in the prior-year Q1 , as the challenging supply chain and overall inflationary environment drove higher input costs during the quarter. Specifically, the lagging impact of elevated commodity prices and other component surcharges, higher inbound logistics and expediting costs, increased labor rates, and continued plant ramp-up costs all pressured margins in the current year quarter.
The increasing realization of multiple price actions previously implemented and favorable sales mix partially offset these margin headwinds. Operating expenses increased $73 million, or 55%, as compared to the Q1 of 2021. This increase was primarily driven by the impact of recurring operating expenses from recent acquisitions, together with the increase in intangible amortization expense. In addition, higher employee costs and additional variable expenses from the significant increase in sales volumes also contributed to the increase. Operating expenses as a percentage of revenue, excluding intangible amortization, increased approximately 50 basis points as compared to the prior year period due to the impact of recent acquisitions that have a higher operating expense load relative to sales given their start-up nature.
Adjusted EBITDA, before deducting for non-controlling interest, as defined in our earnings release, was $196 million, or 17.3% of net sales, in the Q1 , as compared to $214 million, or 26.5% of net sales, in the prior year. The decline in EBITDA margin was driven by the previously discussed decline in gross margins. I will now briefly discuss financial results for our two reporting segments. Domestic segment sales increased 39% to $965 million in the quarter, as compared to $693 million in the prior year, with the impact of acquisitions contributing approximately 5% of the revenue growth for the quarter.
Adjusted EBITDA for the segment was $170 million, representing a 17.7% margin, as compared to $207 million in the prior year, or 29.9% of net sales. The lower domestic EBITDA margin in the quarter was primarily due to significantly higher input costs and the impact of acquisitions, partially offset by the increasing realization of previously implemented pricing actions and favorable sales mix. International segment sales increased 49% to $171 million in the quarter, as compared to $115 million in the prior year quarter. Core sales, which excludes the impact of acquisitions and currency, increased approximately 27% compared to the prior year.
Adjusted EBITDA for the segment before deducting for non-controlling interest was $26 million, or 15.2% of net sales, as compared to $7.1 million, or 6.2% 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 and improved overhead absorption and operating leverage on the significantly higher sales volumes. Now switching back to our financial performance for the Q1 of 2022 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $114 million, as compared to $149 million for the Q1 of 2021.
GAAP income taxes during the current year Q1 were $28.6 million, or an effective tax rate of 19.7%, as compared to $35.4 million, or an effective tax rate of 19.1% in the prior year. The year-over-year increase in effective tax rate was primarily due to a lower discrete benefit from equity compensation in the current year quarter as compared to the prior year. The effective tax rate in the Q1 is seasonally below our full- year 2022 guidance, due primarily to the timing of vesting of certain equity awards and the related benefit recognized for tax purposes. Diluted net income per share for the company on a GAAP basis was $1.57 in the Q1 of 2022, compared to $2.33 in the prior year.
Adjusted net income for the company, as defined in our earnings release, was $135 million in the current year quarter, or $2.09 per share. This compares to adjusted net income of $153 million in the prior year, or $2.38 per share. As disclosed in our reconciliation schedules in our earnings release, our adjusted net income and EPS for the current year no longer adjust for cash taxes due to the expiration of our significant tax shield that originated from our LBO transaction in 2006.
Cash flow from operations was negative $10 million, as compared to positive $153 million in the prior year Q1 . Free cash flow, as defined in our earnings release, was negative $37 million as compared to positive $126 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. The higher working capital investment was primarily driven by a seasonal inventory build for certain product categories, increasing production rates, and further increases in inventory levels due to the challenging supply chain environment and extended logistics in transit times.
As of March 31, 2022, we had approximately $500 million of liquidity, comprised of $206 million of cash on hand and $290 million of availability on our ABL revolving credit facility, which matures in May 2026. Also, total debt outstanding at the end of the quarter was $1.09 billion, resulting in a gross debt leverage ratio at the end of the Q1 of only 1.3x on an as-reported basis. In addition, recall our term loan doesn't mature until December 2026. We do not have any required principal payments on this facility until the maturity date, and it has a low cost of LIBOR + 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. With that, I will now provide further comments on our updated outlook for 2022. As Aaron previously discussed, our strong execution and ability to maneuver through this challenging supply chain environment allowed us to exceed shipment expectations during the Q1 of 2022. In addition, the higher-than-expected inflationary environment that has manifested over the last couple of months has required us to implement another round of price increases here in the Q2 of 2022.
As a result of these factors, we are raising our top-line guidance for full- year 2022, as net sales are now expected to increase between 36%-40% as compared to the prior year on an as-reported basis, which includes an approximate 5%-7% net impact from acquisitions and foreign currency. This is an increase from the previous guidance of net sales growth between 32%-36%. This revenue outlook now assumes shipments of residential products increase at a mid- to high 40% rate during 2022, up from prior expectation for a low 40% rate. Revenue for C&I products is still expected to grow at a high-teens rate compared to the prior year, despite larger-than-expected FX headwinds. Importantly, this guidance still 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. Given we are still expected to be producing at full capacity for home standby generators throughout the year, the upside of a major power outage would be more limited to incremental portable generator shipments during 2022, meaning any extra lift for home standby generators from a major power outage would most likely result in incremental revenue in 2023. As we ramp capacity and our supply chain for home standby and clean energy products, and as incremental price realization kicks in over the remainder of the year, we're expecting quarterly revenue to increase sequentially over the next couple of quarters, with net sales in the first half approaching 47% weighted as a percent of full-year sales.
Looking at our gross margin profile, as we have discussed at length, cost pressures have continued to impact our profitability thus far in 2022. We expect Q1 2022 to be the peak of this year-over-year price cost headwind, as price realization has a more meaningful positive impact on our gross margins, certain inflationary pressures progressively ease through the remainder of the year, and as the benefits of our focused cost reduction initiatives further materialize. As a result of these factors, we expect quarterly gross margin percent to increase sequentially throughout 2022, with Q4 gross margins expected to recover back to Q1 2021 levels in the 40% range. This would result in gross ma rgin percent for the full- year 2022 to be approximately in line with 2021 levels.
Looking at operating expenses as a percent of sales, excluding amortization expense, we expect full- year 2022 OpEx percent to increase approximately 100 basis points compared to full- year 2021, primarily due to the impact of recent acquisitions that have a higher operating expense load relative to sales given their startup nature. Adjusted EBITDA margins for the full- year 2022, before deducting for non-controlling interests, are now expected to be approximately 21.5%-22.5%, compared to the previously expected range of approximately 22%-23%. The additional price increases required to offset the higher-than-expected inflationary pressures are resulting in this modest EBITDA percent dilution from previous expectation. Importantly, the midpoint of this guidance range would result in adjusted EBITDA dollars in line with our previous guidance.
From a seasonality perspective, adjusted EBITDA margins are projected to improve significantly as we move through the year, primarily driven by improving gross margins as previously discussed. We expect that the Q1 marked the low point for adjusted EBITDA margins for the year, with the progression of sequential improvement approximately level-loaded by quarter, resulting in Q4 2022 adjusted EBITDA margins returning to the 26% range, similar to Q1 2021 levels. Several additional guidance items that we provide to assist with modeling adjusted earnings per share and free cash flow also require updating for the full- year 2022. Our GAAP effective tax rate is now expected to be between 23%-24% for the remaining quarters of the year, resulting in a full- year 2022 GAAP effective tax rate of approximately 23%.
This compares to our previous full- year 2022 guidance of 24%-25%. This decrease is driven primarily by the higher- than- expected equity compensation deduction in the Q1 , as well as lower state income taxes expected during the full- year 2022. For full- year 2022, we now expect interest expense to be approximately $32 million-$44 million, an increase from the previous guidance of $41 million-$43 million, reflecting higher than previously expected levels of LIBOR rates throughout 2022, while still assuming no additional term loan principal payments during the year. Depreciation expense is now forecast to be approximately $54 million-$56 million in 2022, given our assumed CapEx guidance, as compared to $56 million-$58 million previously expected.
GAAP intangible amortization expense in 2022 is now expected to be at the high end of the previously expected range of $95 million-$100 million. Stock compensation expense is expected to be between $32 million-$34 million for the year. As a result of these updated guidance items and our Q1 performance, net income as a percent of sales is expected to be similar to our prior guidance. Our full- year weighted average diluted share count is expected to be approximately 65.0-65.5 million shares. Our capital expenditures are still projected to be approximately 2.5%-3% of our forecasted net sales for the year. For full -year 2022, operating and free cash flow generation is still expected to follow historical seasonality and be disproportionately weighted toward the second half of the year.
Given the very strong organic sales growth expected during 2022, we still expect the conversion of adjusted net income to free cash flow to be approximately 70%-80% for the full year, as a portion of cash flows will be invested in working capital to support this growth. Finally, this updated 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.
We will now begin the question- and- answer session. If you would like to ask a question, please press star one on your telephone keypad. Again, that's star one on your telephone keypad. Please note to limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Your first question comes from the line of Mike Halloran with Baird. Please go ahead.
Hey, good morning, everyone.
Good morning, Mike.
Can we just dig into the home standby side a little bit? Obviously, you seem pretty comfortable with the in-home consultations or 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, anything like that.
Yeah, Mike, I think, you know, 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. The HSB backlog did come down as projected. Our demand was in line with our expectations. IHC, I think in our prepared remarks. We said they were 3x the 2020 Q1 levels. They're significantly elevated, you know, when you look past the Texas event last year, which was just a very unique set of circumstances. You know, none of our guidance contemplated that recurring, nor does any of our guidance contemplate any major events happening this year.
If something does happen, you know, we're gonna obviously end the year with, you know, even greater demand than we project at this point. You know, on the execution side of things, we did execute better than we thought we would in Q1. Our output levels for home standby were better. We were able to navigate a couple of supply chain challenges that we were facing and continue to face. Our Wisconsin factories, as a matter of fact, just, you know, continue to outpace our projections here. We're getting a lot of output out of the factories here. Then obviously in Trenton, South Carolina, we've been aggressively ramping that factory and that output grows every week that goes by. Continue to lift that up.
The combination of increased output, and then, you know, the demand being in line still puts us with an incredible backlog for HSB, well above kind of where we would've thought we would be at this point, especially if you go back to our Investor Day remarks in September. You know, we really weren't planning on kind of being where we're at today. You know, pretty exciting times for the HSB category.
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, you know, arbitrarily 12 months or so. 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 first, correct.
Okay. Cumulative pricing?
Cumulative pricing, you know, I think, high teens is kind of what we would call it over the last close to, like, 15 months.
18 months, maybe.
Including this latest round that we launched here in April.
Including this latest round here in April, which is the repricing of the.
Yeah.
of the backlog on June 1 effective date.
Got it. Thanks, guys. Appreciate the time.
Thanks, Mike.
Your next question is from the line of Tommy Moll with Stephens Inc. Please go ahead.
Good morning, and thanks for taking my question.
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?
Yeah, no, it's those are great questions, Tommy. I'll probably let York maybe tackle the finance piece. I don't know if I'm given that.
I mean, it's still a relatively small piece.
Yeah.
You know.
It's growing. I mean.
Growing.
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, it.
Yeah, maybe it's, if it's 10% of the volume.
Yeah.
Yeah, 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, you know, we have a ton of data and metrics that we watch very closely. Everything from, you know, inbound consultation requests to obviously the proposal costs that go out on average. You know, recall that, you know, the high teens number that I just quoted for pricing impact on the HSB is just the product itself. You know, it's and the product itself is maybe half of the total cost of the project. You have other inputs there around labor and other materials that, you know, have also increased, of course.
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, you know, the impact of each round of pricing. To date, we're not seeing any significant impact on pricing. You know, it's an expensive product to begin with, right? We used to say it was a, you know, all-in kind of a $9,000-$10,000 project for a home standby generator. Today, it's maybe a $11,000 project to $11,500 when you look at the average proposal costs. You know, that extra $1,000-$1,500 doesn't seem to be dampening the enthusiasm for demand for the category.
I think that really speaks to the underlying mega trends that are driving the need for resiliency and backlog. You know, I would point to, again, in our prepared remarks, we talked about IHCs being up 3x over this point, you know, last in 2020. You know, just up dramatically over that environment. You know, and the pricing would be that kind of mid-teens, maybe 20% overall increase in product category price. You know, we feel pretty good that, you know. I would say this, just my last comment on this. You know, having been around this business as long as I've been around it, we've had to do pricing over the years, you know, in the past.
You know, the category is incredibly durable with respect to the demand and with respect to the impact from pricing. That durability, you know, I'd point you back to the 2008, 2009 recession. You know, our overall consumer, our residential business was up even in the depths of that, you know. I think if anybody would've said that that category would be up, you know, kind of a large ticket, you know, kind of arguably discretionary, you know, product tied to residential investment, you know, I think most people would've said, you know, you're kind of nuts. But we actually did outperform, and I think it speaks to the potential durability of the category. I would, you know, just one last comment. I know I said that was my last comment. One last comment.
You also have to think of the category because it's really a home improvement project. You have to think of it as the impact of the price of that product in relation to the home's value. A lot of home values are way up.
Yeah.
When you think about it in the context of, you know, it's a percentage of the home's value, it's not up significantly at all. In fact, I might argue that home values have risen faster than the price of the project itself. Anyway, I'll leave it at that, but thanks for that question, Tommy.
Yeah, 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. 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 the underlying demand higher? I mean, I'm thinking largely around customer acquisition spend.
Sure.
There's a lot of focus on units in next year once it's a quote-unquote "normal environment." We'll see if we ever get there. What is within your control to drive that demand?
Yeah, no, it's a great question. It's something that we're constantly focused on. I would tell you know, we test a lot of things. We have hesitated to kind of roll out bigger things right now because obviously demand has been strong and backlogs as big as it is. You know, adding to that, you know, we're kind of up against, do we frustrate customers with the lead times versus, you know, adding incremental demand. I would tell you this. Here's an example of a program we're testing. We have accumulated hundreds of thousands of unclosed leads over the last several years. Just, you know, 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, or just a phone call just to reengage them and maybe discuss ahead of, you know, 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. 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, 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 promotion levers, which we've, you know, again, largely not done over the last several years. I think there's a tremendous opportunity there just because we've been lying low. You do have consumers who, you know, want to wait on those promotions. They find, you know, whether they're extended warranty promotions or, you know, if we're talking about, you know, free first year of monitoring type promotions or whatever the promotion may be. We've done those promotions in the past to great effect. We have done a lot less of them over the last two years.
That would be another lever to pull. I think we have a lot of things at our disposal. Look, you know, a lot of people I think are wondering if you listen to this call or you're watching the company, what's going to happen to demand for home standby in 2023? I mean, if you've learned nothing about following this company over the last decade, it's that, you know, we're not sitting around waiting for, you know, some exogenous event to happen. We're very active, very proactive, and we're constantly pushing the category forward. We always have been, we always will be. That's one of the reasons we have such a massive share of the category. We are the category.
When you've got the leader like that we are, it's incumbent on us to continue to move the needle, and we have definitely moved the needle to a new place. You mentioned at a new higher, you know, a new baseline level. We've seen this happen time and time again with this category. It's expanding. It continues to expand, and I'm confident that in the future, it will continue to expand. That's just, you know, I think being around it as long as we have and understanding the drivers, the purchasing drivers, and seeing what we're seeing in terms of, you know, the demand markers out there, we're really encouraged that the category is gonna continue to grow.
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. If you take your new guidance, you're at $5.1 billion-$5.2 billion in revenue in 2022, and your three-year target from your Investor Day, I think is $5.5 billion or $5.6 billion. 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 a larger or smaller business than where it will finish in 2022?
If we see the HSB come off its highs in the next one to three years, do you have enough other growth levers to comfortably get to the five and a half?
I think, you know, when we laid out the guidance in the Investor Day, Ross, you know, we never said we were going to grow in a straight line. The company continues to grow. We're a grower and a dynamic grower at that. We know that there are things that happen in the category sometimes that are outside of our control, things like, you know, what happened in Texas and, you know, you don't know if you're going to get a strong hurricane season. Recall that none of our, you know, I think in our Investor Day, we really only had one major event assumed in the three-year period.
You know, to that effect, you know, we've got a number of things that weren't in the guidance back in the Investor D ay, things like ecobee. You know, 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, you know, we do strategic planning like every company, I'm sure, and we go through a pretty rigorous exercise around, you know, 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, you know, even a couple of years ago, that, you know, based on, you know, 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. You know, it's just, it's actually pretty stunning. I think it's, to me, when I think about why is the company growing the way it's growing? We grew 50% last year. Our guide here this morning is to grow between 36% and 40% again this year. You know, there aren't a lot of companies doing that, you know? 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 effect. We're leveraging it into these bigger addressable markets. I think that is a big, you know, 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. I do know that, you know, all the signs that we have and all the success that we've experienced point to, you know, much bigger market opportunities based in particular on the mega trends that we're tapped into strategically here.
I think we're just in the right place at the right time with the right products. I think, you know, we're going to continue to build on that, you know, not only the remainder of this year but, you know, in the years going forward.
Thanks, Aaron. Just HSB dealer inventories, you know, are they normalized yet? Just when you talk about production, you seem to be saying more so that you're squeezing more out of Wisconsin. Is trend naturally 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?
Yeah, it's a great question. Trenton's 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. You know, 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 I've been around it, they're mind-blowing in terms of the daily rates that we're producing. It's, you know, but to see our Wisconsin facilities continuing.
working through supply chain.
The supply chain challenges, you know, getting around some of that stuff.
We had baked some of that in.
We had maybe hedged a little bit in Q1 for that. That's the answer to that question. On the dealer inventories, you know, we're seeing, you know, 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, you know, coming out of the winter season, you know, it's been, and the spring weather's been, I don't know, you know, about many of the people on the call here, but if you live anywhere in the upper Midwest, you know, it's a wonderful winter we're having this spring. And I think I actually saw snowflakes again yesterday, so on May third. It's been difficult to get out and install product at the kind of pacing we want to see.
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. That's been a hurdle. We've called it out a couple of times. It just continues to befuddle me how, you know, how difficult that is, permitting in that particular region. You know, we need to increase the install pace because output's increasing. That is a massive area of focus for us. We're working hard with our existing dealers, but also, you know, with new dealers in terms of increasing their ability to install products more quickly.
They're struggling also, by the way, with labor. You know, that's another struggle point for the channel out there. You know, it is something we're watching closely, but we are seeing install rates move up. We just need to see them move up even faster.
Yeah, we believe there's buyers for those units that are in the field. I think that.
Oh, absolutely. Yeah.
Yeah, based on the C&I volume.
Based on C&I volume. We think the demand's there to support what we're.
Yeah.
You know, what we're seeing in the field in terms of field inventory.
Gonna increase the install bandwidth.
Yeah. 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%. Is that effective June 1? Can you talk through if that's right? And then also, you know, what is the chance that we could see more price increases in Q3 and Q4? Is that a meaningfully low probability, or is that actually on the radar because of the inflation you see ahead?
Yeah, it's a great question, Phil. You know, I would tell you that you're pretty close on the price increase. It depends on, you know, which SKU and which model. You know, kind of mid-single digits, you know, 5%-6%, somewhere in that range, was the last round of pricing, and that was across a number of products in the home standby category for sure. Then, even a little more aggressive in some of the clean energy products you may have from your channel checks. In terms of, you know, 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, you know, that's going to read through a lot quicker than previous price increases. Today, you know, we feel like our guidance, you know, if you just look at kind of the margin progression here, Q1's 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. That's, you know, that's a pretty big step, right, to get from today to there.
A lot of that is because of that 5%-6% kind of reading through the back, you know, through the balance of the year here, alongside, you know, some additional cost reductions, plus previous pricing actions that we've done also reading through, you know, to get the full impact of all the pricing. We feel pretty good. That said, obviously, you know, sitting here, like on the last call, it was prior to, you know, the Russian Ukrainian conflict, you know, we were actually starting to see some, you know, some pullback in some of the basic commodities. You know, we're big users of steel, copper, and aluminum. We were actually seeing some moderation in those commodity costs.
You know, that conflict happened, and we saw kind of a re-engagement of those inflationary trends on those basic commodities, as well as, you know, just continued and persisting high logistics costs, which have been, you know, really, somewhat amazing to watch. You know, 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.
In our latest guide, we've got steel prices at their higher levels here and copper. Now copper's actually moderated since then, but.
It has actually. It's pulled back.
Yeah. We are starting to see the beginnings of some of the logistics costs moderate. That will be helpful. Yeah, if costs continue to rise from like, let's say, today's levels, then it's something we would have to evaluate.
Right.
I think the team was able to react very quickly to these higher inflationary pressures that we're seeing today.
Given the elasticity comments I made prior, it doesn't worry us if we have to do that, you know? The thing that we probably could have done to help ourselves earlier is to reprice the backlog more fully earlier on. You know, that's an extraordinary step. We try to avoid doing that because we know that our distribution partners, oftentimes, you know, they've already bid out a job. They already have a contracted arrangement with end customers. 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, you know, different channel partners approach that differently. That's a pretty painful step, and we understand that.
That's something that, you know, it doesn't worry us. If we have to do that, we will do that again.
Okay. Thanks, guys. In terms of capacity, Aaron, you just talked through hitting your Q2 2022 double- double, and you've talked through the strong demand, the new baseline level. 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 it through over the past few quarters here, and you've been waiting for something. What is that something, and if we are looking at another leg of expansion, where is it, and to what degree can you sketch it out? Thanks.
Yeah. Thanks, Philip. You know, and we've been in the process of evaluating, you know, either an expansion at our existing facility in Trenton or perhaps another facility for home standby production in particular. You know, 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 Q1 of next year in 2023. Where we deliver that tooling to and where, you know, 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. 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'd be in pretty good shape not knowing what's gonna 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. If we do see an active hurricane season, obviously we'll wanna move faster, not slower on those capacity expansion plans.
In the meantime, you know, we're going to have to figure out where we deliver this tooling, and we're going to have to figure out, you know, what that kind of longer- term capacity for HSB looks like. We do have some similar challenges on the C&I side of our business, which has been growing at a very similar clip. We know that we need to add capacity there and are also in the current evaluation phase of, you know, do we add another facility? Do we expand existing facilities? What do we do to address that as that category builds out? We've been in the meantime filling up our facility south of the border outside of Mexico City.
We have a brand-new beautiful facility down there that we built a couple years ago, mainly for the Latin American markets, and it was going to give us really nice long-term growth capacity down there. We've just filled it up very quickly with, you know, our capacity needs here in the U.S. and Canada. We're starting to get really tight on capacity in C&I. That's another area. Clean energy is another area where, you know, we have to evaluate capacity needs for the longer term. That is a very active process across the entire business. When you grow 50% in one year and 36%-40% the next year, you know, figuring out what that footprint's going to be to accommodate that growth and growth in the future, it's almost an everyday discussion.
Your next question is from Jeff Hammond with KeyBanc. Please go ahead.
Hey, guys. Good morning.
Hey, Jeff.
I know you covered some on kinda price cost, but I just wanna kinda level set on, you know, your confidence in the second half kinda margin ramp. Just as it relates to kinda the startup, you know, freight and component surcharges, if you need, you know, some reprieve there to kinda, you know, hit that margin ramp. Thanks.
Yeah, Jeff, this is York Ragen. Yeah, I mean, looking at, you know, our commentary, gross margins are expected to go up, let's say roughly 8% from Q1 to Q4. I'd 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. You know, if you think about, like, where steel was at its peak, it is actually off from its peak. Relative to, you know, what we're experiencing Q1, which was the peak, and as that progresses through the year, you know, steel should come off a bit. We are starting to see 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 quarters. We just believe that inbound logistics costs should moderate a bit. As we ramp, we'll start absorbing in particular our Trenton plant better. We do have a line of sight on focused bill of material cost reductions on home standby, telecom product, et cetera. We feel like we have got good line of sight on some of the easing input costs to execute on that gross margin improvement. As I mentioned before, the guidance does assume, you know, steel costs at these higher levels that ramped up after the Russia-Ukraine invasion there.
We feel like, you know, from a future commodity standpoint, we think we've embedded the current environment into the guide. You know, good line of sight to all the pieces to get that 8% increase in gross margin.
Okay, great. I don't know if I missed it. Can you give us the updated lead time on home standby? Just, you know, any updates on kind of just the net metering noise and kind of this trade circumvention, you know, kind of having any impact on your clean energy businesses?
Yeah, no, it's great questions there, Jeff. About 20 weeks on HSB today on inbound orders, so still pretty extended, pretty long. Backlog's still well north of $1 billion on HSB. You know, we're continuing to make progress there as we ramp production. In terms of, you know, on the clean energy business, the impacts to, you know, with the net metering discussions that have been going on, you know, kind of coast to coast, right? From California to Florida. You know, we've seen the Florida thing play out. The governor there vetoed you know, the potential rule changes around net metering, the curtailment of net metering. California is reevaluating the proposed draft rulemaking there by the PUC.
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 you know, really probably kind of a non-event for us. In fact, I would say probably you know, that kind of a situation, net metering kind of being curtailed. 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 just doesn't work longer term. 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 you know, pulling the punch bowl away kind of situation.
I think that's detrimental to the industry. In what's being proposed in California, that would, you know, if they did pull the punch bowl away and net metering was curtailed dramatically there as being as proposed, storage is the answer. We've actually seen marked increase in interest in storage systems as a result. I think inevitably that is what is going to drive storage attachment rates even higher. You know, we're kind of in that 20%-25% range now, right now on storage attachment rates. Then the trade circumvention discussion, really that we're, you know, 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 gonna be the ones that are caught up first in this, evaluation or this investigation. On the residential side, you know, frankly, there are other panel providers that might push panel prices up a bit. Again, looking at the total cost of these projects, not dramatically so in terms of the impact to the projects. I just don't think there'll be any real demand destruction on the back of that at the residential level. 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.
Hi, good morning. This is Blake Keating on for Brian.
Hey, Blake.
Appreciate you taking 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? Do you see that as a potential risk moving forward if they continue to be under lockdown?
Yeah, it's a great question, Blake. It's not helpful. Just broadly, you know, we have a supply chain there in that part of the world, and, you know, the lockdowns have created, you know, just another kind of struggle or challenge for our operational teams. We're working around it. I do think that, you know, York may have made this comment before relative to our current working capital situation. You know, we're feeling like, you know, we got a lot of inventory sitting here that we're preparing for season.
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, or 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, you know, we can't get something here on a timely basis. If those lockdowns extend, could that impact us? I think, you know, like anything, probably would have some kind of an impact.
I do think that, you know, we've done a really nice job over the last couple of years, broadening our supply chain, meaning, you know, 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 de-risks the category a bit, and makes, you know, 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'll pass along.
Thanks.
Thanks.
Your next question is from Mark Strouse with JP Morgan. Please go ahead. Mark, your line is open.
Oh. Sorry about that. Can you hear me now?
Now we can.
Can hear you, Mark.
Yep, we're good.
Yes. 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 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. You know, 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 in you know 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, you know, 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, you know, if we look forward. We feel really bullish about where that category is going.
Great. Okay. That's it for me. Thank you.
Thanks, Mark.
Your next question is from Jerry Revich with Goldman Sachs. Please go ahead.
Yes, hi. Good morning, everyone.
Hey, Jerry.
Hey, Jerry.
Aaron, I wonder if you 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, you know, 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, you know, 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, you know, the way you're positioned today? Thanks.
Yeah, Jerry, that's a really interesting question and one that, you know, we continue to ponder here as well. I would tell you that, you know, when you think about Sandy and even Rita and some of the back, you know, kind of go back, that's more than a decade ago.
Yeah.
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, you know, kind of, you know, a consumer's view on the need for backup power, right? Just given everything that's transpired in the last decade, you know, outages are more frequent. Outages are lasting longer. People are spending more time in their homes.
Grid is in a different spot.
The grid's in a different spot. You know, I think, we're that much more dependent on, you know, a continuous source of power in our homes in everything that we do. You know, so I don't know if I'm ready to make a comment that, you know, it'll be in terms of numerically how it'll differ, but I think the category, there's no question that category is in a completely different place. Awareness levels around the products are much higher today than they've ever been. I feel like, you know, 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, you know, 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 'nother angle to this.
Whole 'nother angle.
You know, 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, that's a great example, York.
I'm wondering, can you just expand on that last point? You know, how close are we to seeing these contracts moving forward in, 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.
Yeah. No, you know, that's an area we're watching very closely as well. Grid services, you know, our prepared remarks, we said, you know, we've won a number of deals. I mean, in Q1, our grid services team, I think it was eight or nine, you know, really kind of important deals for us that, you know, some small, some large, that, you know, 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. You talk about that, which, you know, is the only thing you can talk about. For us, you know, it's just one more thing we're marching forward here, building that out.
It's given us a lot of confidence about, you know, the future opportunities there, not only just kinda how we think about the balance of this year, but how we exit this year and going forward with grid services. It's a mix of products. It's not just home standby. You know, it's everything from PWRcell to, you know, thermostats. You know, we talked about ecobee in some of the prepared remarks, but lot of interest in thermostats. There's a reason for that because you know, utilities understand that, you know, 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.
When you talk about low and moderate income households in particular, you know, utilities have to solve for all of their rate payers. They have to solve this problem across their entire rate-paying base. Not every one of those rate payers is gonna be able to put in a battery, a storage system or a home standby generator. In order to, you know, really address all of the rate payers, thermostats are a great way to do that. 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, you know, I think it's one of the many areas of traction that we're seeing, but one that I think longer term just makes a lot of sense because, you know, you can deliver a lot of value across the entire rate-paying base, for, you know, not a lot of investment. 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.
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, you know, the 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.
Yeah, no, great questions, Maheep. Thanks. Yeah, we don't break out backlog traditionally by region or by state, but you know, obviously, the demand curve, we did call out last year, in the last, you know, quarters last year, that, you know, we were seeing obviously tremendous interest from those two markets specifically that you mentioned, California and Texas. Seen a lot of distribution growth in those markets, which would lead to, you know, 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, you know, kind of the, you know, the field inventories. But California, in particular, the permitting process there has continued to, you know, kind of be challenging.
It's 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, you know, kind of the 2020 level, you know, that's something that we still see, you know, elevated levels in Texas and California for sure in terms of interest in the category. Again, I just mentioned on the last Q&A question I took, you know, 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 products.
I think there are a lot of homeowners who maybe were disenfranchised when they, you know, tried to get a quote a year ago in the height of, you know, 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. 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. They're actually starting to see and talk to customers who, you know, were not in the funnel. You know, they just kind of self-selected out because it was just, you know, too long to wait, and so they're coming back in and revisiting it.
I feel like those markets are going to be, you know, continue to be growth markets in the future and an important part of the overall story for, you know, 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. 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, you know, quote-unquote, the normalized baseline level 3x as backlog as more or less being 3 x your U.S. residential revenues from back in Q1 2020, since, you know, 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 rates at. That's a part of that equation.
Go from there.
Recall that IHCs are not our full—that's not everything we do, right? It's representative or a proxy for the HSB market, but that just is a, you know, it's a portion of what we do. 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. You know, I have to run the numbers. I have to unpack kind of the, you know, the HSB growth as we've seen it and kind of the backlog there and where we're at if we took that away.
I'm not sure that I could say with, you know, 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, Kash.
You'd have to forecast future close rates and then what is the storm season this year? Like, there's a lot of.
If you're thinking about baseline, which I think is his question, you know, I think it's an interesting question, but there's a lot that goes into that. It is, you know, 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. 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, you know, the brand recognition and everything that goes into that. Invariably, it holds those higher baseline levels. It's really quiet something to see.
You've got our clean energy business growing rapidly.
Right.
You've got our global C&I business that is doing very well on top of all this.
Right. Those would be accretive to that.
Gotta put all the pieces together, yeah.
Would be accretive, yep.
That's helpful. Thank you. Just as my follow-up, I was wondering if you could just maybe circle back to the relationship between the HSB lead times and backlog. You know, you mentioned lead times are now around 20 weeks, from 27-30 at year-end, but you still have over $1 billion in backlog, and you expect to carry some of that into 2023. I was wondering if you could just maybe remind us what you consider, quote-unquote, normal lead times to be.
You know, are there, like, seasonal market dynamics that would stop the reduction in lead times from being linear, meaning that, you know, the time of the next call, you wouldn't just shave off 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 may be a good place to end the call today. You know, obviously the HSB backlog. I think the thing that for us, you know, we're going to have a meaningful backlog in HSB when we exit this year. That has become clear to us given, you know, the demand has remained robust in line with our expectations in Q1, but, you know, was elevated off of from Q4, where we thought it was going to be coming into this year. That pushed, you know, kind of the original assumption when we sat at our Investor Day was that we would maybe be back down to our historical lead times, which are zero to two weeks. That was part of your question, what are our historical lead times? zero to two weeks.
You know, it's almost like we inventory for the product. We want ta have product available so that when there are, you know, 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, you know. Lead times will remain fairly elevated. They won't be at 20 weeks, but they won't be back at zero to two weeks. Remember that, you know, because 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. 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.
That's without, by the way, our assumption does not include a major event. It includes, you know, no major events, so a muted hurricane season, which is not what's projected. You know, 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. You know, that's the way we guide. 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, you know, 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, you know, it'll 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, you know, major outages this year. You know, we're going to have a sizable backlog going into next year, and that's the big, I think that's where we'll probably leave it at here for this call. Great question.
That concludes the question and answer session. Now I'll hand the conference back to Mike Harris for final comments.
We want to thank everyone for joining us this morning. We look forward to discussing our Q2 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 good day.