Aaron P. Jagdfeld
Chairman, President and Chief Executive Officer at Generac
Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our third quarter was in line with the preliminary results we announced on October 19. Momentum in the commercial and industrial product category remains strong, but residential product sales, while still growing compared with the prior year, were weaker than expected in the quarter, driven by lower shipments of home standby generators and clean energy products relative to our prior expectations. Year-over-year, overall net sales increased 15% to $1.09 billion, primarily driven by core sales growth of 10%, which exclude the impact of acquisitions and foreign currency. Overall, residential product sales grew 9% during the quarter, led by sales of home standby generators and the impact from recent acquisitions, partially offset by lower shipments of PWRcell energy storage systems. C&I product sales increased 20%, led by growth across all channels domestically, strength in the European region and the contribution from recent acquisitions. Now discussing our third quarter results in more detail. Home standby generator sales grew at a mid-teens rate over the prior year.
Baseline power outage activity in the U.S. during the quarter remained above the long-term baseline average and Hurricane Ian, which occurred in the last week of the quarter, drove total power outage activity well above the long-term average. Home consultations or sales leads were lower in the quarter when compared to the prior year, which included Hurricane Ida. However, the third quarter of 2022 was tied for the second highest total for any given quarter since we began tracking the metric in 2013. And we experienced a return to year-over-year growth in the month of October resulting from Hurricane Ian. We continue to focus on expanding our distribution network as we experienced sequential growth in our residential dealer base and ended the quarter with nearly 8,500 dealer partners, a net increase of approximately 300 dealers sequentially. Activations, which are a proxy for installs, continued to grow in the third quarter compared to the prior year. However, as we mentioned in our preliminary announcement, installation capacity for home standby generators lagged our production output. The ability of installing contractors to fully service the demand for backup power from homeowners continues to be constrained by labor availability, permitting and utility-related delays and shortages in certain materials needed to complete an installation.
Furthermore, growth in our dealer base was constrained in prior quarters by our extended production lead times. All of this resulted in elevated levels of field inventory and lower-than-expected orders from our channel partners despite the continued strength in end customer demand. Importantly, to address these activation challenges, we're working on a number of specific initiatives to increase home standby installation bandwidth, such as providing resources to help existing dealers expand their labor forces and additional installation training locally for non-dealer contractors. We are working to streamline home standby projects by creating universal permitting packages and replicating past successes and simplifying approval processes from certain local utilities. Other efficiency-related initiatives include dealer scheduling and quotation refinement to enhance the top of the sales funnel and optimize the allocation of sales leads within the dealer channel to favor those dealers that have capacity to install more generators. Importantly, we have also intensified efforts to further expand our overall dealer count, and we expect another strong quarter of sequential growth in the fourth quarter.
Our dealer count growth initiatives have recently benefited from our shorter production lead times, which have now mostly returned to normal levels as we ramped our production output of home standby generators in prior quarters. Although installation capacity constraints have resulted in lower orders from our channel partners, it is important to reiterate that underlying demand and market fundamentals of the home standby category remains strong as supported by meaningfully sequential improvements in a number of key dealer-related metrics during the third quarter. In-home consultations grew, close rates continue to rebound, and while still elevated, the time between contract signing and installation declined meaningfully as compared to the second quarter. Dealer productivity, as measured by activations per day per dealer, improved to an all-time high during the third quarter. In addition, our dealer survey data suggests approximately half of all the field inventory is allocated to an active customer contract, highlighting the need to further increase the pace of installs to close the gap between strong end customer demand and installation capacity.
While the previously mentioned sequential improvements provide evidence that our channel partners are beginning to make progress in working through their elevated backlogs and field inventory, we expect home standby order headwinds to persist through the first half of 2023 as field inventory levels normalize. Even when assuming no major outage events, in the second half of 2023, we expect significant sequential sales growth from the first half of the year and only a modest decline in sales on a year-over-year basis as we maintain a new and higher baseline level of demand. Over the last 30 years, the home standby category has grown in a step function pattern as penetration rates have expanded rapidly for several years at a time, driven by notable major power outage events, followed by periods of flatter growth as demand normalizes. With each successive growth period comes increased awareness around home standby generators and increased distribution for these products, both of which have been critical in helping the category reach new and higher levels of baseline demand.
The latest growth step that the product category has experienced was underpinned by an increase in power outage activity over the past several years, with four of the top 10 major outage events since 2010 having occurred in just the last two years alone. This growth can be evidenced through a number of key market metrics in comparing the first three quarters of 2022 to the comparable period of 2019 as activations per day more than doubled, home consultations more than tripled and our dealer count increased by nearly 40% from 6,200 to 8,500. The approximate mid-teens compounded annual growth rate in the category over the past several decades can be tied to the increase in power outages over that time as the nation's electrical grid has struggled to reliably supply power to homeowners and businesses. The aging and under-invested grid infrastructure has become more vulnerable to the increasing severity of high-impact weather-related events, such as hurricanes, heat waves, tornadoes, ice storms and polar vortexes. Additionally, new mega trends have emerged that we believe will drive the next step of growth in the category.
Grid resiliency concerns have been increasing as decarbonization trends accelerate, causing a widening gap between supply and demand, leaving many utilities and grid operators scrambling to avoid rolling blackouts over the past several years. And we believe little has been done to rectify this situation. We also believe the home as a sanctuary megatrend will persist as the shift to remote or hybrid work remains intact. The electrification of homes continues to grow and demographic trends are driving increased levels of aging in place. With the nationwide penetration rate still in the mid-single-digit range, and these megatrends firmly intact, we are confident that the long-term growth trajectory for the home standby category remains significant. I'd now like to discuss our residential clean energy products as shipments of PWRcell energy storage systems in the third quarter were negatively impacted by the significant liquidity challenges of a large customer that ceased operations and subsequently filed for bankruptcy. Additionally, during the quarter, we continued to address certain warranty-related matters for the upgrade of a component within our PWRcell energy storage system.
As part of this effort, we have engaged a number of third-party service companies to assist with the completion of these upgrades, and these efforts are well underway. As a result of these items, we recorded a $55 million charge in the quarter, comprised of an $18 million bad debt reserve and a $37 million warranty charge. The challenges we experienced in our clean energy business in the third quarter were very disappointing, but we believe that the solar-plus energy storage market continues to represent an important strategic opportunity for Generac longer term. However, this quarter's results have demonstrated the need for us to further expand our distribution by focusing our efforts on partnering with high-quality, reputable sales and installation companies for these products. Importantly, we are committed to supporting the dealers that are participating in our warranty coverage upgrade program as they play a vital role in restoring our competitive position in the residential clean energy space. In addition, we continue to broaden our product offering and bring new innovations to this market as we announced an update to the PWRcell energy storage system during the quarter that enables AC-coupled battery storage, as well as AC generator integration.
Work also continues on our PV microinverter product called the PWRmicro, as our beta testing began late in the second quarter and will continue through the balance of this year. We anticipate a phased commercial rollout beginning in the first half of 2023 and a full commercial launch targeted for the second half of the year. I'd now like to provide a quick update on our ecobee acquisition, which we completed last December. During the initial period of our ownership, we have been focused on developing cross-selling opportunities for ecobee's hardware solutions through Generac's distribution partners, and have seen positive indications of demand for smart thermostats alongside other clean energy products. Synergies between ecobee and Generac's grid services teams continues to be validated, and we are identifying higher potential value creation for ecobee devices and demand response programs amid ongoing concerns around grid stability and rising energy prices. We have also begun leveraging the talented ecobee team to help accelerate our connected devices strategy, which is core to the development of our residential energy ecosystem that will ultimately be accessed and controlled by a single pane glass user interface.
I also want to provide some additional color on the efforts of our grid services team as they continue to execute on a growing and diversified sales pipeline. We have further expanded our efforts to extract synergies across our commercial teams as they work to offer an increasing mix of Generac hardware alongside our Concerto grid services software platform. Our comprehensive suite of solutions aimed at distributed energy resource management-related programs is unmatched and is proving to be a competitive differentiator for our grid services team as the number of devices and megawatts of capacity connected to the Concerto platform continues to grow. We announced a number of program wins since our second quarter call, including Software-as-a-Service contracts with Dominion Energy and U.K.-based Pearlstone Energy, as well as a performance contract with Arizona Public Service, which demonstrates Generac's unique ability to deliver end-to-end solutions in grid services programs. The long-term market opportunities for residential energy storage, microinverters, monitoring and management devices and grid services solutions remains highly attractive and core to our strategic vision. However, the loss of a major customer during the quarter, along with the specific warranty-related issue, has impacted near-term demand and our outlook for the full year 2022.
We now expect the combination of clean energy technology products and services to deliver sales between $300 million to $330 million for the full year 2022 as compared to our previous guidance of approximately $500 million. Our continued investment in the people and processes involved in the development of these products remains a key focal area for the company, as we work to further broaden our product offering, while also improving the quality and performance of the technologies we've acquired and developed over the last three years. With that in mind, we're building a talented and focused clean energy technology management team, beginning with the addition of Norm Taffe in August as our new President of this organization, along with the new Chief Technology Officer, Senior Vice President of Finance and a Senior Vice President of Policy. Norm and his team bring decades of industry leadership experience, as well as robust technical expertise that will help drive Generac's integrated clean energy technology solutions forward. Additionally, the policy backdrop for this market has never been more favorable with the Inflation Reduction Act providing the necessary visibility for long-term value-creating investments.
We will continue to build out our energy technology leadership team and our suite of products and solutions as we expect to play an important role in the transition to a cleaner, more sustainable and more reliable electric grid. As a result of these investments and the strong outlook for this market, we expect clean energy technology sales to return to strong growth for the full year 2023, with sequentially improving results throughout the year. Our C&I products continue to perform exceptionally well in the quarter, as global C&I net sales increased 20% on an as-reported basis and 23% on a core sales basis, which excludes the impact from acquisitions and foreign currency as compared to the prior year. Both in-shipments for domestic C&I products in the third quarter was led by strength across national rental equipment, telecom and industrial distributor customers. We experienced continued strength in demand during the quarter as backlog for our C&I products remained at record levels, and expanded further in the month of October, giving us excellent visibility that solid growth will continue in the category well into 2023. Shipments of C&I stationary generators through our North American distributor channel grew significantly again in the third quarter, and order trends indicate this momentum will continue in the quarters ahead as backlog in the channel increased on a sequential basis.
Quoting activity and close rates remain elevated compared to prior year levels, highlighting our market share gains, as well as the durability of demand trends for backup power for C&I applications. Shipments to national telecom customers also increased again during the third quarter as compared to the prior year, as several of our larger national customers continue to invest in hardening their existing sites and the build-out of their fifth generation or 5G networks. These networks are increasingly considered as part of the nation's critical infrastructure, and require backup power for resiliency. Upgrades to telecom infrastructure remain one of the key megatrends that we expect to drive growth for our business in the coming years as global tower and network hub counts continue to expand. We also experienced another quarter of substantial growth with our national and independent rental equipment customers as they continue to invest in equipment to refresh and expand their fleets. We anticipate the demand environment for mobile products will remain robust in the quarters ahead as the mega trend around the critical need for infrastructure improvements continues to play out. Strong customer interest for our natural gas generators used in applications beyond traditional emergency standby projects also continued in the quarter, with sales of these products growing at an exceptional rate.
We believe we are in the very early innings of growth for this exciting new market opportunity, as grid stability concerns and volatile energy markets are expected to further drive demand for these innovative solutions. We also took a significant step forward in our C&I generator connectivity efforts shortly after quarter end with the acquisition of Blue Pillar, an industrial Internet of Things platform developer that enables distributed energy generation monitoring and control. Blue Pillar's connectivity solutions can make previously stranded C&I backup generators available for using grid services programs by connection to the Concerto software platform, and will provide a foundation for our longer-term vision of creating a single user interface for a suite of connected C&I assets. Our International segment continued to experience very strong momentum, as total sales increased 14% year-over-year during the third quarter, with 22% core total sales growth when excluding the benefit of acquisitions and the unfavorable impact of foreign currency. Core total sales growth was driven by strength across all regions, most notably in Europe and Latin America, with intersegment sales also growing substantially in the quarter as our Generac Mexico facility further ramps production of telecom products for the North American market.
The European region has seen remarkably strong demand across product lines, most notably in C&I and portable generators due to a heightened focus on energy independence and security. Concerns over power security amid the conflict in Ukraine have continued to rise, and we are providing backup generators to the region through our European sales branches. Longer-term demand trends are less certain, however, as geopolitical and macroeconomic conditions in the region remain volatile, but end market awareness of the need for resiliency has increased across the continent in recent quarters. The subsequent effect of the war on Europe's energy complex has highlighted the dependence on continuous power sources for homes and businesses around the globe. Looking into 2023 for our global C&I products, given the strong demand fundamentals and existing backlog, our preliminary view anticipates continued strong year-over-year growth throughout the entire year. In closing, this morning, we were disappointed that our third quarter results were below our prior expectations. But we believe we have action plans in place to address the underlying challenges in the business.
New clean energy technology leadership has brought an increased emphasis on quality and innovation, and we remain confident in the long-term growth opportunity for this strategic area of our business. Important initiatives to help ease home standby installation bottlenecks are well underway. And as the home standby market normalizes, we are confident that the new and higher baseline of end demand for the product category will become clearer. Hurricane Ian is the latest example of increasingly severe and more volatile weather patterns, and we believe the power grid's growing supply and demand imbalance is far from resolved, as we add intermittent renewable generation sources, while simultaneously pursuing the electrification of our homes, our businesses and our transportation. The secular growth themes and megatrends supporting the company's Powering a Smarter World enterprise strategy remain firmly intact, and as reliance on electricity around the world grows further, we will continue to invest in innovative products and solutions to lead the evolution to the next generation grid.
I now want to turn the call over to York to provide further details on our third quarter 2022 results, our outlook for the year and our preliminary views on 2023. York?
