Aaron P. Jagdfeld
Chairman, President and Chief Executive Officer at Generac
Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our second quarter results were very strong with robust revenue growth, significant sequential margin expansion and all-time records in net sales, adjusted EBITDA and adjusted EPS. Shipments of home standby generators and global C&I products outperformed our previous expectations, primarily driven by continued progress on our capacity expansion and our team's ability to effectively manage the challenging supply chain environment.
Growth in adjusted EBITDA margins were also ahead of our expectations in the quarter, reinforcing our prior forecast of margins bottoming in the first quarter. Gross margins benefited from favorable product mix, largely driven by home standby generators. These dynamics drove adjusted EBITDA margin outperformance and sequential margin expansion, combined with impressive top line growth, resulted in an all-time quarterly record for adjusted EBITDA dollars.
Positive underlying demand trends led to continued backlog strength with C&I products and home standby backlog, both providing us with considerable visibility for the quarters ahead. Year-over-year, overall net sales increased 40% to $1.29 billion and grew sequentially from the first quarter of 2022, which was the previous all-time record. 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.
Overall, residential sales growth was again very robust, driven by a substantial increase in shipments of home standby generators as well as the impact from recent acquisitions. The C&I sales increase was broad-based, led by growth across all channels domestically, all regions internationally and the contribution from recent acquisitions. Adjusted EBITDA margins expanded sequentially from 17.3% in the first quarter to 21% due to improved price realization and the moderation of input costs. Importantly, we expect growing realization of previously announced price increases in the second half of the year, further execution on cost reduction projects and continued easing of input cost headwinds resulting in sequentially improving margins over the remainder of the year.
Now discussing our second quarter results in more detail. Shipments of home standby generators grew at an exceptionally strong rate over the prior year. Growth also accelerated sequentially from the first quarter as we continued to expand production and power outage activity in the US as measured on a rolling four-quarter basis at the end of the second quarter remained above the long-term baseline average. In addition to elevated baseline outage activity in the US, severe storms left more than 1 million utility customers without power in Ontario and Quebec in May, which resulted in robust leading indicators of demand in Canada as well.
Power grid stresses are expected to persist, with forecasts for the upcoming hurricane season pointing to another year of above-average activity and multiple grid operators warning of potential outages as a result of excessive demand coinciding with supply challenges. Home consultations or sales leads continue to point to strong underlying demand for home standby generators, growing at a mid-teens rate despite a prior -- a strong prior year comparable period driven by the Texas winter storm event in February of 2021. This demand was broad-based, with 4 or 5 regions experiencing year-over-year growth in home consultations in the quarter.
To frame just how much home standby baseline demand has grown over the last several years, second quarter home consultations were more than 4x greater than pre-COVID levels seen in the second quarter of 2019. Importantly, strength in this leading market indicator has continued here in the month of July. In addition, activations, which are a proxy for installs, continued to grow at a solid rate in the second quarter compared to the prior year, led by the South Central and Midwest regions as we further added to our residential dealer base as we ended the quarter with approximately 8,200 dealer partners.
We continue to make excellent progress increasing our production levels for home standby generators, with daily build rates dramatically higher as compared to prior year levels and ramping sequentially as our Trenton, South Carolina facility continues to expand capacity. As we have increased build rates, lead times have continued to improve, and we are getting product in the hands of our customers and channel partners in a more consistent and a more timely basis.
As a result of this progress, close rates on our sales leads have begun to improve, supporting our belief that reducing our lead times will improve our ability to capture more of the new and higher baseline of home consultations or sales leads within our sales pipeline. Our build rates and supply chain challenges have been the main growth constraint for the home standby category over the last few years. We have now ramped production capacity to the point that our lead times for the product category have materially improved.
However, the constraint has now shifted to the installation capacity of our dealer base, driven primarily by contractor labor availability, permitting and utility-related delays and shortages in certain materials needed to complete an installation. As a result, project lead times for homeowners, as measured by the time between the signed contract and the installation date, have not come down in proportion with our production lead times.
We have a number of initiatives focused on increasing installation bandwidth in the market, including aggressive campaigns to add new dealers to our network, cultivate and train non-dealer contractors on home standby installations and decrease the overall time associated with the project. Additionally, as housing construction activity begins to slow, we believe we have a greater ability to focus installing contractors on improving the pace of home standby installations.
I'd now like to discuss our increasingly diverse suite of clean energy products and solutions. With the closing and integration of the ecobee acquisition, and given the growing commercial sales synergies and cross-functional initiatives between residential energy storage and microinverters, monitoring and management devices and grid services solutions, we now have one of the broadest portfolios of clean energy products and solutions in the industry.
Net sales from these combined clean energy products grew well over 50% on an as-reported basis in the second quarter over the prior year. Macroeconomic uncertainty, input cost pressures, industry-wide supply chain and logistics challenges and lack of clarity around regulatory policy have impacted residential clean energy markets as of late. But rising prices for traditional energy sources and a growing focus on energy independence and security have the potential to more than offset these concerns and continue to drive adoption of alternative and emerging solutions over time.
Additionally, we're very encouraged by last week's announcement of the Inflation Reduction Act as a potential positive catalyst for demand, although it's still not fully through the legislative process. As we work to capture this demand, our residential clean energy installer network continues to grow as we ended the second quarter with approximately 2,800 trained and certified technicians, with approximately 1,150 registered dealers on our PowerPlay sales platform.
We remain excited about the new and innovative products we're bringing to market in 2022, including the recent product launch of PWRmanager and the pending launches of our PWRgenerator, which is the industry's only engine-driven battery charger, an AC coupling solution for our PWRcell storage product for use in retrofit applications and our new PV microinverter product called the PWRmicro. As expected, we began shipping PWRmicros for beta testing in June and are now working to expand beta testing with full commercial launch expected in the fourth quarter.
I'd now like to provide a quick update on ecobee. Integration is proceeding as planned, and we continue to make good progress in developing cross-selling opportunities for ecobee's hardware solutions through Generac's distribution partners. The ecobee team successfully launched 2 new thermostats with industry-leading features during the quarter. And high temperatures and rising energy costs across North America are driving increased interest in the smart thermostat category. Early reception on these new products has been encouraging, reinforcing ecobee's differentiated competitive position,focused on intelligent, intuitive, feature-rich devices that maintain comfort while unlocking significant value creation and energy conservation for homeowners and grid operators.
This differentiation also drives significant market opportunity for ecobee's energy services offering, which has been further enhanced by synergies with Generac's grid services efforts. ecobee's installed base of more than 2 million connected homes is particularly valuable to grid operators seeking load flexibility and resilience. Consumer awareness of elevated energy market volatility is also driving potential growth for recurring services revenue as ecobee enables consumers to take advantage of variable rate pricing structures. Additionally, we are beginning to leverage the amazing talent within the ecobee team to help accelerate the development of our residential energy ecosystem, a key element of our connected devices strategy.
Now expanding a bit more on Generac Grid Services, the team continues to drive momentum in its increasingly impressive and diverse sales pipeline, building on the recent success across software-as-a-service, turnkey and performance contracts as well as experiencing an increasing mix of hardware sales, which are proving to be a competitive differentiator for our Grid Services business.
From distributed generation and storage to load flexibility assets, our grid services suite of solutions is unmatched in the market. We announced a number of recent contract wins since our first quarter call that highlighted our expanding capabilities, including EV charging, monitoring and optimization, a turnkey program for low- and moderate-income households utilizing PWRcell energy storage systems and a unique solution for the German power market.
Utilities and grid operators continue to warn of potentially significant disruptions to the power grid as a result of supply/demand imbalances, underscoring the need for new technologies to decentralize and digitize the power grid through the development of virtual power plants or VPPs. As an example, this need was on full display during the recent heatwave in Texas, as a number of home standby generators enrolled in the VPP program were autonomously controlled by our Concerto software platform to take demand off the grid and help keep critical community resources online.
The market opportunity for residential energy storage and microinverters, monitoring and management devices and grid services solutions remains extremely compelling and we believe will prove to be a key long-term future growth driver for Generac. For the full year 2022, we expect net sales of these clean energy products and solutions to approximately double from the prior year to more than $500 million in sales, with strong core and inorganic growth contributions and an even larger opportunity in the years ahead.
Now let me make some comments on our C&I products, which also grew at a strong rate in the second quarter across nearly all end markets and geographies. Specifically, global C&I net sales increased 22% on an as-reported basis and 16% on a core basis as compared to the prior year. Strong growth in net sales for domestic C&I products in the second quarter was led by national rental equipment and telecom customers as well as our North American distributor channel.
We saw continued strength in demand during the quarter, which contributed to a further increase in our backlog for C&I products and supports our expectations for solid growth to continue in the category. Shipments of C&I stationary generators through our North American distributor channel also grew significantly in the second quarter, and improving close rates helped drive growth in orders and backlog in this channel. Strong momentum in quoting activity has continued as of late, highlighting the sustainability of demand trends for backup power for C&I applications.
Shipments to national telecom customers increased again during the second quarter as compared to the prior year as several of our larger telecom customers further invest in hardening their existing LTE sites and begin to build out their fifth generation or 5G networks. Telecom infrastructure upgrades remain one of the key megatrends we expect to drive growth for our business in the coming years.
We also experienced substantial growth with our national and independent rental equipment customers during the quarter. These customers have been investing heavily in equipment to refresh and expand their fleets, to serve increased commercial construction activity as well as other infrastructure projects, supporting a resilient demand environment for mobile products and the megatrend of the critical need for infrastructure improvements.
We also continue to see material traction in orders for Off Grid Energy's mobile energy storage systems from our key North American rental channel partners as they work to reduce the carbon footprint of their equipment fleets. Momentum remains strong across our domestic C&I channels and is being supplemented by emerging capabilities that support the long-term growth profile of the category. Specifically, we're establishing a strong reputation and applications beyond traditional emergency standby projects, driven by our ability to deliver customized turnkey solutions to serve this market.
Our unique hardware and software portfolio in this vertical is highlighted by expanding smart grid-ready features that allow connection to grid services programs. Large C&I generators can provide enhanced resiliency and stability for grid operators while simultaneously providing a tangible and meaningfully improved return on investment for the asset owners, which is driving demand for these solutions across a diverse range of customers.
Strong momentum also continued in our international segment, with total sales increasing 43% year-over-year during the second quarter, with 34% core 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. The European region has seen strong demand across product lines as the heightened focus on energy independence and security that emerged following Russia's invasion of Ukraine has continued. But longer-term implications are uncertain as geopolitical and macroeconomic conditions in the region remain volatile.
International energy security concerns are not unique to Europe, and we are evaluating additional opportunities for home standby generators across multiple regions as a result. External sales in the Latin American region continued to grow at a solid rate, while intersegment sales grew substantially as our Generac Mexico operations continue to ramp production of telecom products for the North American market.
In addition to strong core growth, our recent international acquisitions, Deep Sea Electronics and Off Grid Energy reported impressive results in the second quarter. Demand for Off Grid Energy's mobile storage systems continues to grow across our global distribution footprint as we integrate the product offering through our commercial sales branches and channels. In addition, we have several product development projects underway within the C&I energy storage category, including expansion of the power capacity range of the mobile product lineup as well as potential stationary applications.
Concerns around power security and energy prices in key international markets underpin the opportunity for an increasingly broad storage product portfolio for C&I applications. Deep Sea also benefited from healthy global demand for advanced generator controls during the quarter. And we remain very excited about the additional engineering capabilities Deep Sea brings as we leverage the team's electronics controls expertise to advance product road maps across our enterprise.
Our international segment has also experienced much stronger profitability despite inflationary headwinds and supply chain challenges. Second quarter adjusted EBITDA margins expanded to 14.5% from 9.7% 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 this morning, I'm extremely proud of our team's continued ability to deliver record results and maintain our 2022 outlook despite the developing uncertain economic environment. Our strong sequential margin improvement reinforces our expectation that margins bottomed in the first quarter of 2022 and will continue to improve throughout this year. Additionally, our recent refinancing has provided further liquidity to accelerate our evolution into an energy technology solutions company.
We remain focused on executing against our Powering a Smarter World enterprise strategy, and the megatrends supporting this strategy are as compelling as ever, many of which have the potential to decouple from the broader macroeconomic environment. Structural supply-demand imbalances facing the grid are not impacted by inflation, and increasingly severe and volatile weather cannot be slowed by higher interest rates.
The energy ecosystems that we are building for the future will give our end customers the ability to take control of their power security, lower their energy bills and reduce energy consumption while also helping utilities and grid operators to balance supply and demand. With our broad portfolio of products and solutions, combined with our services, our distribution, our brand and importantly, our expertise, Generac is uniquely positioned to lead the evolution to a more resilient, efficient and sustainable energy future.
I now want to turn the call over to York to provide further details on our second quarter 2022 results and our outlook for the year. York?
