Generac - Q3 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the third quarter 2023 Generac Holdings Inc. earnings 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 the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one, one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kris Rosemann, Senior Manager, Corporate Development and Investor Relations. Please go ahead.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Good morning, and welcome to our third quarter 2023 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.

Aaron Jagdfeld (President and CEO)

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our third quarter results reflect improving operating performance, led primarily by continued strength in C&I product shipments and sequential growth in home standby generator shipments. Year-over-year, overall net sales decreased 2% to $1.07 billion, with core sales declining 4% during the quarter. Residential product sales decreased 15% as compared to the prior year, representing a significant improvement in sales decline from the prior two quarters, as field inventory levels of home standby generators continued to decline during the quarter, and portable generator sales decreased from a strong prior year comparison that included the impact of Hurricane Ian. Global C&I product sales increased approximately 24% to an all-time quarterly record, with growth across nearly all regions.

We returned to year-over-year margin expansion for gross and adjusted EBITDA margins in the quarter, driven by lower input costs and continued production efficiencies. In addition, we generated significant free cash flow during the quarter, allowing us to complete approximately $100 million of share repurchases. Third quarter home standby shipments grew at a strong sequential rate, but declined on a year-over-year basis as we continued our efforts to reduce field inventory levels. Power outage activity in the U.S. was well above the long-term baseline average during the quarter, despite not having the benefit of a major outage event, which we had experienced in the third quarter of each of the three previous years.

Against a strong comparable period, the higher outage activity, combined with well-publicized grid stability issues, drove home consultations in the quarter meaningfully higher from the prior year and marked the second highest quarter on record, behind only the third quarter of 2021, which included the impact of Hurricane Ida and was only months after the Texas deep-freeze major event in February of 2021. Our residential dealer count was approximately 8,700 at the end of the quarter, an increase of 200 from the prior year and over 2,000 from pre-COVID levels. Additionally, we continue to make good progress in training non-dealer contractors as our initiatives to grow installation capacity maintain positive momentum in the third quarter.

Activations, which are a proxy for installations, improved at a solid sequential rate in the quarter, but declined from a strong comparable period in 2022 that marked an all-time high for our third quarter. Activations in the month of October continued this strong sequential improvement, providing further confidence that the home standby market has formed and is holding a new and higher baseline level of demand. The number of home standby generators in our distribution channels declined further in the quarter as we continue to make progress in reducing field inventories. As previously disclosed, certain regions and channels are at healthier levels of field inventory than others, and field inventory levels of certain models are declining more quickly than others.

Although we continue to under-ship end-market demand during the third quarter, the gap between shipments and activations narrowed meaningfully as compared to the first half of the year. These factors, together with the continued strength in leading indicators of demand during the third quarter, support our projection for home standby generator sales, returning to growth in the fourth quarter of 2023, while still working to reduce field inventory to more sustainable levels. In addition to the positive near-term momentum that is building within the home standby market, we remain confident in the long-term outlook we shared at our recent Investor Day in September. The megatrends that are driving awareness for backup power remain as compelling as ever.

As electrification trends drive demand forward and the adoption of intermittent renewable power generation accelerates, we expect that consumers will become even more reliant on an electrical grid that is increasingly susceptible to power outages caused by the combined threats of more severe and volatile weather and deteriorating supply-demand dynamics. We believe home standby generators will remain the most effective and economical solution for whole-home resiliency for many years to come, as homeowners look for peace of mind to address the impact of increasingly frequent and longer-duration power outages. In addition to the stronger-than-expected home standby shipments, our Residential Energy Technology Products and Solutions returned to year-over-year sales growth in the third quarter, as continued strength in Ecobee sales more than offset weakness in shipments of our power cell energy storage systems, as broader market conditions for residential, solar, and energy storage deteriorated further in the quarter.

As a result of these softer end-market conditions, we now expect full year 2023 gross sales for residential energy technology to be approximately 10% below our prior guidance of $300 million. Ecobee continues to take market share with strategic retail partners in the smart thermostat market, and the team successfully launched our new smart doorbell camera in the month of October. In addition to providing increased levels of homeowner engagement with our home energy management platform, the smart doorbell camera showcases Ecobee's ability to drive innovation and differentiated product development. Ecobee's strong product development capabilities, combined with their focus on creating an exceptional user experience, are central to the continued build-out of our home energy ecosystem. Also, during the third quarter, we announced the opening of a new engineering center of excellence in Reno, Nevada.

This facility will house the development and testing of batteries, switches, power electronics, and other clean energy solutions as we continue to invest in the R&D infrastructure and world-class talent that is required to develop and test the innovative residential energy technology solutions we are bringing to the market in the years ahead. Additionally, our grid services team was awarded a $50 million grant from the Department of Energy in the month of October as part of the Grid Resilience and Innovation Partnerships program to pursue a project demonstrating the efficient building electrification can be achieved while minimizing system overload, reliability issues, and the need for infrastructure upgrades. We're proud to receive this validation of our vision to utilize multiple energy technologies to support homeowners while providing valuable products and services that benefit both the grid and homeowners.

I now want to provide commentary on our C&I products, which continued to outperform our expectations in the quarter. Domestic C&I product sales grew at a robust rate compared to the prior year, as strengthened shipments to customers for beyond standby applications and industrial distributors more than offset weaknesses in the sales in the telecom channel during the quarter. Shipments of natural gas generators used in applications beyond traditional emergency standby projects again grew at an exceptional rate during the third quarter. We believe we are in the very early innings of this compelling new market opportunity as ongoing grid stability concerns and volatile energy markets drive interest in these solutions. These emerging applications are just one of the many ways that we're leveraging our position as the leading provider of natural gas generators to support increased adoption of energy technology solutions in C&I end markets.

We also continue to build an increasingly comprehensive solution set to enable the deployment of our products in multi-asset applications, such as pairing our smart grid-ready generators with our emerging C&I storage, connectivity, advanced controls, and grid services platforms. Shipments of C&I generators through our North American distributor channel also grew again at a strong rate. Quoting activity remained resilient in the quarter, growing on a year-over-year basis and supporting our expectations for continued growth in this important channel that serves a wide range of end markets. As previously disclosed, order patterns from rental companies have moderated after several quarters of exceptional performance, and third quarter sales to our national and independent rental equipment customers were approximately flat from the prior year.

Despite the expected near-term softness, we continue to expect that this historically cyclical and end market has a substantially long-term runway for growth, given the critical need for future infrastructure-related projects that leverage our products sold to this channel. As expected, sales to national telecom customers declined during the third quarter as compared to a strong prior year comparison. While we continue to expect shipment and order trends for these products to be softer in the coming quarters, we believe investment in telecom infrastructure remains a secular trend as global tower and network hub counts further expand, and the increasingly critical nature of wireless communications requires backup power for resiliency. While we are seeing near-term softness in the telecom and rental channels as previously expected, the longer-term growth opportunity for backup power and energy technology solutions in C&I end markets remains significant.

To help serve the expected future demand growth, we recently announced an expansion project in Beaver Dam, Wisconsin, which is scheduled to be complete in early 2025 and will expand our manufacturing capabilities and capacity for a range of C&I stationary products for the North American market. Total sales for our international segment increased 14% year-over-year during the third quarter, with the combined impact of acquisitions and favorable foreign currency effects contributing approximately 11% sales growth. Core total sales growth was driven by strength in important long-term growth markets such as India, Latin America, Australia, and the Middle East, partially offset by lower portable generator sales in Europe, as energy security concerns in the region have moderated from peak levels seen in prior quarters.

International growth remains an important strategic focus as we replicate the Generac playbook in a growing number of regions around the world. Geographic expansion, together with the increasing breadth of our product portfolio of backup power and energy technology solutions, is expected to drive continued growth in the segment. Power resiliency concerns related to increasingly severe and volatile weather and rising supply-demand imbalances are not unique to North America, and as the global energy transition accelerates amid rising geopolitical tensions, we will continue to support businesses and homeowners in solving for their energy resiliency needs. In closing this morning, our third quarter results and reiteration of our full year 2023 overall net sales and adjusted EBITDA guidance reflect the improving operating performance and the hard work and strong execution by our teams.

We believe we are moving closer to more sustainable levels of in-field inventory for home standby generators as we experience positive momentum in key fundamental metrics during the third quarter, supporting our expectation for a return to year-over-year sales growth for these products in the fourth quarter and 2024. These sales growth expectations, together with the return to margin expansion and robust free cash flow generation, validate our commitment to a long-term focus on executing our Powering A Smarter World enterprise strategy. We will continue to invest for future growth and position Generac's growing residential and C&I energy ecosystems to drive value for homes and businesses around the world, as detailed at our Investor Day in September. The megatrends that support the longer-term demand for growth profile for backup power and energy technology solutions remain firmly intact.

We maintain our conviction that Generac is uniquely positioned to lead the evolution to a more resilient, efficient, and sustainable energy future. I'll now turn the call over to York to provide further details on our third quarter results and our remaining outlook for the year. York?

York Ragen (CFO)

Thanks, Aaron. Looking at our third quarter 2023 results in more detail, overall net sales decreased 2% to $1.07 billion during the third quarter of 2023, as compared to $1.09 billion in the prior year third quarter. The combination of contributions from recent acquisitions and the favorable impact from foreign currency had an approximate 2% net favorable impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the third quarter by product class, residential product sales declined 15% to $565 million, as compared to $664 million in the prior year. As Aaron discussed in detail, lower shipments of home standby and portable generators drove this decline in residential product sales.

To a lesser extent, solar and clean energy products also contributed to the year-over-year decline, partially offset by growth in Ecobee Smart Thermostat sales. Commercial and industrial product sales for the third quarter of 2023 increased 24% to $385 million, as compared to $311 million in the prior year quarter. Contributions from recent acquisitions and the favorable impact of foreign currency contributed approximately 5% revenue growth in the quarter. This strong core sales growth was driven by an increase in domestic shipments to industrial distributors and direct customers for beyond standby applications, as well as a more modest growth in international shipments of C&I products. As expected, shipments to our telecom customers were down sharply compared to prior year.

Net sales for other products and services increased 7% to $121 million, as compared to $113 million in the third quarter of 2022. Core sales growth of 6% was primarily due to growth in sales of of parts and accessories, company-owned industrial distributor project and service revenue, and energy technology grid services revenue. Gross profit margin was 35.1%, compared to 33.2% in the prior year third quarter, as a result of lower raw material and logistics costs, production efficiencies, and marginally higher pricing compared to the prior year. This was partially offset by the impact of unfavorable sales mix, primarily driven by lower home standby shipments in the current year quarter. Operating expenses decreased $3 million, or 1%, as compared to the third quarter of 2022.

As highlighted in our reconciliation schedules in the earnings release, the current year quarter included a $22 million dollar provision for legal charges related to certain Ecobee patent litigation matters. The prior year includes $55 million of charges, comprised of $18 million of bad debt expense related to a clean energy product customer that filed for bankruptcy, and a $37 million charge for clean energy product warranty-related matters. Excluding these items in the current and prior year, operating expenses increased by $31 million, or 14%, primarily driven by increased employee and marketing costs in the current year period, and a favorable contingent consideration adjustment in the prior year period.

Adjusted EBITDA, before deducting for non-controlling interests, as defined in our earnings release, was $189 million, or 17.6% of net sales, in the third quarter, as compared to $184 million, or 16.9% of net sales, in the prior year. This improved EBITDA percent was primarily driven by higher gross margins as compared to the prior year, partially offset by an increase in operating expenses as we continue to invest for future growth. I will now briefly discuss financial results for our two reporting segments. Domestic segment total sales, including inter-segment sales, decreased 6% to $894 million in the quarter, as compared to $947 million in the prior year, with minimal favorable impact from acquisitions.

Adjusted EBITDA for the segment was $160 million, representing 17.9% of total sales, as compared to $160 million in the prior year, or 16.9% of total sales. International segment total sales, including inter-segment sales, increased 14% to $208 million in the quarter, as compared to $183 million in the prior year quarter. Core sales, which excludes the impact of acquisitions and currency, increased approximately 3% compared to the prior year. Adjusted EBITDA for the segment, before deducting for non-controlling interest, was $28 million, or 13.6% of net sales, as compared to $24 million, or 13.2% of net sales in the prior year.

Now, switching back to our financial performance for the third quarter of 2023 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $60 million, as compared to $58 million in the third quarter of 2022. In addition to the items just discussed, the current year net income includes approximately $9 million of additional interest expense compared to the prior year due to higher borrowings and interest rates. GAAP income taxes during the current year third quarter were $19 million, or an effective tax rate of 24.3%, as compared to $12 million, or an effective tax rate of 16.1% for the prior year. The increase in the effective tax rate was primarily due to the prior year quarter, including certain favorable discrete tax items and a larger benefit from equity compensation as compared to the current year quarter.

Diluted net income per share for the company on a GAAP basis was $0.97 in the third quarter of 2023, compared to $0.83 in the prior year. The strong year-over-year increase in GAAP earnings per share relative to growth in GAAP net income was primarily driven by a lower share count in the current year period, coupled with a redeemable non-controlling interest redemption value adjustment that was recorded in the prior year period. See our earnings per share footnotes for further information on our EPS calculations. Adjusted net income for the company, as defined in our earnings release, was $102 million in the current year quarter, or $1.64 per share. This compares to adjusted net income of $112 million in the prior year, or $1.75 per share.

Cash flow from operations was $140 million, as compared to -$56 million in the prior year third quarter, and free cash flow, as defined in our earnings release, was $117 million, as compared to -$73 million in the same quarter last year. The increase in free cash flow was primarily due to a significant use of cash for working capital in the prior year period that did not repeat in the current year quarter, partially offset by higher interest payments and capital expenditures. Total debt outstanding at the end of the quarter was $1.58 billion, resulting in a gross debt leverage ratio at the end of the third quarter of 2.6x on an as-reported basis.

Additionally, during the third quarter, we repurchased approximately 876,000 shares of our common stock for $100 million. There is approximately $178 million remaining on our current share repurchase authorization as of the end of the third quarter. With that, I will now provide further comments on our remaining outlook for 2023. As disclosed in our press release this morning, we are maintaining our overall net sales outlook for the full year 2023. We continue to expect overall net sales for the full year to decline between -10% to -12% as compared to the prior year, which includes approximately 2% net favorable impact from acquisitions in foreign currency.

Looking at the product class mix, given the outperformance of C&I products and softness in solar and clean energy products during the third quarter, we now expect the mix of C&I product shipments for the full year to be approximately 100 basis points higher relative to our previous guidance, with the offset in residential product shipment mix. Our gross margin expectations for the full year 2023 are also unchanged, as we still anticipate approximately 100 basis points of gross margin improvement over 2022 levels, driven primarily by favorable price-cost benefits, partially offset by the unfavorable mix impact resulting from lower home standby generator sales for the full year.

Our adjusted EBITDA margins, before deducting for non-controlling interests, are still expected to be approximately 15.5%-16.5% for the full year, implying that fourth quarter 2023 EBITDA margins would be over 20%, a significant improvement over prior year fourth quarter. We expect to generate strong operating free cash flow in the fourth quarter, resulting in an adjusted net income to free cash flow conversion at well over 100% for the full year, as inventory levels are projected to further moderate. This return to robust free cash flow generation allows for continued capital allocation optionality as we move through the remainder of the year. We are also providing updated guidance details to assist with modeling adjusted EPS and free cash flow, for the full year 2023.

Importantly, to arrive at appropriate estimates for adjusted net income and adjusted EPS, add back items should be reflected net of tax using the expected effective tax rate. For 2023, our GAAP effective tax rate is still expected to be approximately 25%. Interest expense is now expected to be approximately $95 million, compared to the prior guidance of approximately $92 million, due to higher projected interest rates and borrowings. Our capital expenditures are still projected to be approximately 3% of our forecasted net sales for the year. Depreciation expense is still forecast to be approximately $62 million in 2023. GAAP and tangible amortization expense is now expected to be approximately $104 million during the year, compared to the previous guidance of $102 million. Stock compensation expense is still expected to be between $40-$43 million for the year.

Given the share repurchases executed during the third quarter of 2023, our full-year weighted average diluted share count is now expected to decrease to approximately 62.3 million shares. And finally, this 2023 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

Operator (participant)

In order to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please be advised that we are only taking one question and no follow-ups. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tommy Moll with Stephens Inc. Your line is now open.

Tommy Moll (Managing Director, Equity Research Analyst, Industrials)

Morning, and thank you for taking my question.

Aaron Jagdfeld (President and CEO)

Morning, Tommy.

Tommy Moll (Managing Director, Equity Research Analyst, Industrials)

Aaron, maybe no big surprise here. I wanted to start on your comments regarding the home standby field inventory. I think I heard you say that units were lower quarter-over-quarter, and so my related question was, can you give us an update on the times normal? I think last quarter it was 1.2-1.3. Where do we sit today? And what additional commentary can you give us, in particular on the wholesale and retail channels? Thank you.

Aaron Jagdfeld (President and CEO)

Yeah. Thanks, Tommy. Yeah, we did say this morning that, that, you know, field inventories continue to come down, and the way we phrased it, you know, it's they're reaching a more sustainable level because we're definitely seeing areas as we, as we noted, I think, not only at our investor day, but maybe even on the last call, where we have certain regions, and certain models, you know, certain channels, like our dealer channel in particular, that are, are, you know, are feeling like we're, we're kind of at normal. And then you're back to the whole question of what is normal, right? I mean, we, we picked a pre-COVID kind of average to, to, to say what that is. And so, we, you know, we continue to work towards that and, making good progress.

You know, we're still under shipping the market in terms of, you know, overall end market demand. So, but it's, but it's narrowing up. You know, it's, it's not nearly what it was earlier this year. We were severely under shipping the market earlier this year. That's why, you know, the results were what they were. And as we get closer to kind of that, you know, I would call it in line, you know, shipping to market and market demand, you're seeing the impact of that on the results, you know, both in the gross margin level as well as the EBITDA margins. We're able to, you know, really focus on, improving the efficiency in our factories because we're taking up our production rates, to, you know, to get closer to that end market demand.

The really good news is we continue to see end market demand remain quite strong for home standby. And that's in spite of having, you know, it's really kind of a light season relative to, you know, the third quarter here. Outages in total were above average, the long-term average. And of course, there were a lot of well-publicized articles around potential outages with, you know, with some of the demand, supply/demand challenges that remain out there. But we feel really good about where the category is at, and we feel like, you know, as we've been saying all along, as we finish up the year here and we get into 2024, we're gonna be much, much closer to, you know, normal at all channels.

So the other part of your question on wholesale and retail, as we've said in the past, you know, if you look at all, kind of the three major channels as we think about them, dealer, wholesale, and retail. Dealer feels like it's closest to normal. Wholesale would be next in line, and then retail would be a little bit further out, but they're all approaching a more normal level.

Operator (participant)

One moment for your next question. Your next question comes from the line of Michael Halloran with Baird. Your line is now open.

Aaron Jagdfeld (President and CEO)

Hey, Mike. Mute. Oh. We need to come back to Mike?

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Yeah, we might have to come back to Mike.

Operator (participant)

Okay, one moment for your next question. Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is now open.

Aaron Jagdfeld (President and CEO)

Hey, Jeff, are you there? Hmm. Problematic. And we may need to-

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Just try the next one.

Aaron Jagdfeld (President and CEO)

Let me try the next one.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Hopefully.

Operator (participant)

All right, one moment. Next question is from Christopher Glynn with Oppenheimer. Your line is now open.

Christopher Glynn (Managing Director and Senior Analyst)

Hey, thanks. Good morning, guys. Can you hear me?

Aaron Jagdfeld (President and CEO)

Yep.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

We can hear you, Chris. Loud, loud and clear.

Christopher Glynn (Managing Director and Senior Analyst)

Great. So was just curious about dealer and close rate productivity. I know you're doing a lot with dealers. You had a bit of an explosion during the pandemic, a little bit of a lack of training, that you're catching up on. So, you know, just, just curious how that productivity selling commercial is playing out and what percent of HSB sales go through the, the dealer channel, where I think you said the inventories are now about normal, in fact.

Aaron Jagdfeld (President and CEO)

Yeah. Thanks, Chris. So, so the majority of the sales, as we say, you know, more than 50% go through that dealer channel. It's a really important channel for us. Our wholesale and retail channels are important channels as well, but the dealer channel with 8,700 dealers is clearly, you know, a critical area of focus for us. And of course, the bandwidth in that dealer channel around sales and installation and service as the market grows, you know, we've got over three million units in the field. That's a, you know, that's a really important area.

As far as close rates, you know, and that is the channel that we can measure close rates on because we have our PowerPlay Sales System is offered through that channel, so it's a way for them to quote and sell product. And so we get really good visibility into close rates by dealer, by product, by region. And you know, as we said on the last call, close rates had kind of flattened out, and that's how, you know, they've kind of played out similar to that. You know, actually, I mean, we've seen some near-term improvement here, but we're not ready to call it a new trend up. But the month of October has been relatively good.

You have to think of it in the context, this is a look back, right? So when we talk about close rates, we have a window of time we look back because it takes time for quotes to mature to a point of a, you know, for us to make a call on whether it's closed as a sale or not. But we are seeing, you know, some green shoots there, but we're not ready to quite call it a trend yet, so we've still kind of forecasted things here as being somewhat flat. The consumer, obviously, as everybody's well aware, you know, there's some uncertainty out there looming around the consumer in certain big-ticket discretionary purchase categories.

But as we've said, in our category in particular, outages tend to help us overcome any general macro weakness in the consumer, and that has been the historical case for us. And I think that might be why we saw what we saw in the third quarter, is outages were above the long-term average. And so we've, you know, we've seen the consumer perform quite well in our category of products. But, you know, we're keeping a very close eye on it. We want to see how things play out here for the balance of the year and into 2024. But, you know, we're encouraged by sales leads for sure. I mean, October was another strong, you know, the third quarter was another strong quarter for us.

York Ragen (CFO)

Second best ever again.

Aaron Jagdfeld (President and CEO)

Second best quarter ever for us in terms of just sales leads. And so that's, that's been really encouraging to see, in terms of just the interest, the overall interest and awareness in the category.

Christopher Glynn (Managing Director and Senior Analyst)

Close rates maintaining?

Aaron Jagdfeld (President and CEO)

Yep.

Christopher Glynn (Managing Director and Senior Analyst)

Good.

Operator (participant)

One moment for your next question. Your next question comes from Michael Halloran with Baird. Your line is now open.

York Ragen (CFO)

Maybe not. Weird.

Aaron Jagdfeld (President and CEO)

Yep. I have to come back to Mike again.

York Ragen (CFO)

Yeah, we'll see if

Operator (participant)

One moment.

York Ragen (CFO)

Technology.

Operator (participant)

Next question is from Jeff Hammond, with KeyBanc Capital Markets. Your line is now open.

York Ragen (CFO)

Yep, 0 for 2.

Operator (participant)

All right, one moment. We will move on to the next question. Your next question comes from the line of Jerry Revich, with Goldman Sachs. Your line is now open.

Aaron Jagdfeld (President and CEO)

Got an epic fail going here on the Q&A, so might have to move to another one, operator.

Operator (participant)

All right. Next question comes from the line of Mark Strouse, with JPMorgan. Your line is now open.

Mark Strouse (Executive Director and Senior Equity Analyst)

Yeah. Hey, guys. Good morning. Can you hear me?

Aaron Jagdfeld (President and CEO)

We can hear you, Mark. Thankfully.

Mark Strouse (Executive Director and Senior Equity Analyst)

Good. Great. Thanks for taking the questions. York, you touched on this a bit, but I'm curious on the gross margin upside that was a bit higher than what you were guiding on the last call. Can you just quantify how much of that was driven by mix? I mean, it's encouraging to see that higher despite the higher mix of C&I, but is there something about kind of the mix within the mix versus just kind of something more structural with your cost savings or pricing initiatives?

York Ragen (CFO)

Yeah, no, I mean, I think in terms of year-over-year improvement there, price cost has been a very nice tailwind, really, all throughout the year. And I guess the beginning part of the year, we were having, I guess, pretty, pretty significant mix headwinds at the beginning, this first part of the year that was offsetting that. I think what we're seeing now in the third quarter is those mix headwinds now are starting to subside as we're starting to get closer to comping prior year. So the positive price cost that, you know, that we've been recognizing, you know, the vast majority of the gross margin increase is price cost with only a modest, I'd say, slight impact on mix year-over-year.

So I think, you know, we're, we're pleased to see some of those mix headwinds start to subside. And, and then when you flash forward to Q4, then, you know, we'll, we'll obviously expect gross margins to continue to improve as we could sequentially increase those home standby shipments, then we'll get mixed positive there, and we'll see significant year-over-year improvements in, in gross margin at that point, because then you'll get, you'll get the benefit of.

Aaron Jagdfeld (President and CEO)

Both, yeah.

York Ragen (CFO)

-of price cost and favorable mix. So we're pleased with the trajectory of where margins are headed, and just like we had guided earlier in the year.

Operator (participant)

All right. One moment for your next question. And the next question comes from the line of Brian Drab with William Blair. Your line is now open. Brian, your line is now open.

Brian Drab (Partner and Co-Group Head of Industrials)

Can you hear me?

Aaron Jagdfeld (President and CEO)

Yep.

York Ragen (CFO)

Yep.

Aaron Jagdfeld (President and CEO)

We got you, Brian.

York Ragen (CFO)

We got you.

Brian Drab (Partner and Co-Group Head of Industrials)

Okay. Well, it's not on our end I guess. It's something, because you couldn't hear me at first.

York Ragen (CFO)

Wow!

Brian Drab (Partner and Co-Group Head of Industrials)

Okay, so I have a bunch of questions. Just, I guess, California, you know, I'm curious, we haven't been talking as much about California lately, but what are you seeing in terms of the longer-term opportunity there? I didn't feel like the utilities were shutting down power as much lately. What's the penetration rate, or penetration level in California today? And what's the latest thinking on, you know, there's a lot of rumblings around natural gas bans in different cities and counties, and how has that affected demand?

Aaron Jagdfeld (President and CEO)

Yeah, Brian, you know, California was always a smaller, you know, small-ish market for us in terms of home standby. It grew during the, you know, the well-publicized power safety shutoff events of a couple of years ago. But, you know, the penetration rate's around 2% now, so still quite underpenetrated relative to the, I think, the full average, was somewhere like 5.75%, you know, across the U.S., so slightly below that for California, a little less than 2%. So, you know, it still represents an area of potential growth. I think those gas bans are, you know, pretty localized, and in fact, some of them have actually been overturned in courts of law. So I don't know where that's going to ultimately go.

We need natural gas as a bridge fuel to get to the other side of, you know, the full transition to renewables. Natural gas is a great way to get there in terms of just the cleanliness of that fuel source and the plentiful nature of it to help us to make the transition, the energy transition. So, yeah, I think it'd be very short-sighted to ban nat gas, but that's, I know that that varies location to location, so. But, you know, still opportunities there. You're right, though, I would say in, you know, recent quarters, for sure, you haven't seen the high-profile nature of Power Safety Shutoffs as you maybe saw them a few years ago.

We did see, you know, some outage activity coming out of, you know, the kind of spring storms, winter storms of last year, and IHCs were pretty robust in California. So we continue to see growth there. And again, it was a lot less than 1% before, so it's less than 2% now, so it's still growing and represents, obviously, a huge market just in terms of the opportunity, in terms of, you know, the number of homes in that state.

Operator (participant)

One moment for your next question. The next question comes from the line of George Gianarikas with Canaccord Genuity. Your line is now open.

George Gianarikas (Managing Director and Senior Analyst)

Hey, guys, can you hear me?

Aaron Jagdfeld (President and CEO)

Yep. Hey, George.

York Ragen (CFO)

Hey, George.

George Gianarikas (Managing Director and Senior Analyst)

Great.

Aaron Jagdfeld (President and CEO)

I guess George Gianarikas is always powered on. So good to hear you George.

George Gianarikas (Managing Director and Senior Analyst)

Quick question on clean energy. Curious as to whether the upheaval in the market there with some of your competitors either accelerates or maybe delays some of the strategy points you talked about at your Analyst Day. Do you see more of an opportunity here near term, or does this give you kind of comfort that, you know, you have your products coming out in the second half of next year? Thank you.

Aaron Jagdfeld (President and CEO)

Yeah. Thanks, George. You know, it is interesting. I mean, with the-- and we said it this morning in the prepared remarks, you know, we're seeing softness in that solar plus storage, the residential solar plus storage market. Actually, Ecobee's continued to just, you know, they're posting record quarter after record quarter here, which is pretty amazing. They have new products coming out, and they're killing it, actually. We're doing really well with that business, and there's a lot of great things around that. But when it comes to the plus storage side of the market, which we're still bullish on long term, given, you know, the structural nature of the grid transition and, you know, the policy tailwinds that should be there.

We feel like, you know, the current environment, while negative, is, you know, kind of a, I think, more temporary than permanent. And so, but the good news for us is, you know, we have a lot of new product coming next year, so I don't feel like we're missing out on maybe, you know, what's going on in the market today, by, you know, by having. Our product offering is fine today, but our next generation product offering is going to, is really going to be, I think, set us apart from the competition. I think it's going to establish us as the leader we think we can be in that marketplace going forward, or a leader.

You know, I think we all know we struggled with our acquired products initially, and I think we've worked very hard and will be working very hard over the next 12 months to bring the new products we have to market. We've got a huge team working on that. It's why, you know, the level of investment, as we said at our Investor Day, is so heavy, and we do believe in it long term. So I don't think, to answer your question directly, I don't think it changes the trajectory necessarily of anything we're doing there. But I think it probably does soften maybe the fear of missing out, if you will, the FOMO around maybe not having, you know, leading products there today.

You know, we just getting a pause in the market here. Maybe the timing is just good for us. But we expect to be in the market in a big way later next year with our new products, and we're pretty excited about where we're going with that.

Operator (participant)

One moment for your next question. The next one comes from the line of Donovan Schaeffer with Northland Capital Markets. Your line is now open.

Donovan Schafer, CFA (Managing Director and Senio Research Analyst)

Hey, guys, thanks for taking the questions. I want to follow up on close rates. So one of the things I came across with talking to some dealers is with the kind of revamped marketing campaign you guys launched or talked about Investor Day, and, you know, how you're trying to increase product category awareness among, you know, the, the next generation people, maybe, you know, in their 30s to 40s, kind of in the middle of family formation right now?

The dealers were saying, you know, they're getting more IHCs that, you know, they used to—like, they used to get IHC, you know, before COVID, they get an IHC, they'd go out there, and it was almost always someone, you know, 60 years older, who was retired. It was really easy to schedule 'cause the person didn't have a day job. And, you know, this retired individual would have tons of peers who have backup generators.

So, you know, there was almost no education curve or anything like that. So I'm just curious if you think this increasing amount of IHCs coming from, you know, people in their thirties and forties, you know, where they have to actually schedule around work hours and other considerations, and where they maybe don't know the product category as well. You know, is that, do you think that that's a material factor in close rates, you know, still being a bit below where they were historically? And if so, you know, does that mean it could be a longer process to get back to kind of historical highs? Just anything you can, any color you can provide on that would be great.

Aaron Jagdfeld (President and CEO)

Yeah, it's a great line of questioning, Donovan, and an area that I would say that you know in the last 12 months we've been focusing a lot more closely on you know the IHCs that are coming through, and that really goes hand-in-hand with you know the pull-down in the close rates we saw happen during COVID. We, you know, initially, our explanation around that was all around the long lead times of the product. And I do think that that had you know a material effect on coming off of the high point for close rates you know where we were to where we dropped down to in during COVID.

You know, there was no doubt in our mind, based on the information and feedback that we had, that the close rates were being impacted negatively by the long lead times for the products. Now, as the lead times have recovered, and close rates have recovered, but not to the level that, not nearly to the level they were at, that's where you start to look at other factors. And so I think you're, you know, you're onto something there. And we've started, as I said, over the last 12 months, to really dig into this with more vigor. And I think what we found, one of the things that we're concluding is that, you know, the category itself, you know, the buyers of the category have largely remained fairly concentrated in the demographic that you highlighted.

You know, over age 60, people who wanna stay in their home as long as possible, power outages are, you know, are more than just an inconvenience as you age in your home. And, you know, I think that that had largely driven the category in the early days. But as the category expands and we reach different levels of penetration, we're now reaching different demographics that are interested in resiliency as much or more, perhaps, than some of the traditional demographics. You know, we all live in a very digital age today, and I think, again, maybe owing to the pandemic, you know, people are, the way the nature of work, the way we live today is different, right? I mean, we're all working in a more hybrid nature.

I'd wager to bet that some of the folks in the Q&A queue here today, that we can hear anyway, are working from home rather than, you know, sitting in an office somewhere. And you can't do that if, or you can't do it well, if you're in the dark. So, you know, power outages have a bigger impact today on people and on your livelihood and maybe on your children's ability to be educated, all the things that, you know, we've, you know, we've taken for granted for many, many years. We're doing those things from home today, and we're doing it at a time when the grid has become ever more fraught with, you know, with challenges in terms of uptime.

And we see it. It's there's some very high-profile examples, but day in and day out, you know, there's tens of thousands of people every day in this country that suffer outages. And actually, those numbers are bigger, and the outages are lasting longer. And so as we reach deeper across, you know, in terms of penetration rate, we are seeing different demographics, but your point is well taken. The learning curve or the education curve, that process, the sales process, is longer for different demographics that, you know, we have, that there's more salesmanship, if you will, that has to be done to educate those consumers on the product category and the options that are available. You know, sometimes financing is a bigger consideration for younger demographics, right?

Older demographics tend to have maybe more readily available funding that they can pay for a project like this, whereas younger demographics may have to you know arrange for that in a different way. And that can elongate the sales process. So we do think that that is part of what's going on today. As we dig and continue to dig deeper, you know, Amanda Teder, our Executive VP of Marketing that you know spoke at the Investor Day, is incredibly focused on this.

She comes from a consumer product marketing background, and, you know, understanding very deeply, you know, who the potential buyers are, and the buyers are of our products, is central to, you know, not only the messaging around marketing, but just, you know, this process of selling and also the process of nurturing, right? We talked about how we nurture sales leads. We've had to adapt our nurturing processes to adjust for some of the newer demographics we're seeing. So anyway, a lot of cool things coming there. We're putting a lot of science behind it, and I feel, you know, I feel like we've got an appropriate level of calorie burn against it. But it's a I think it's these are these are good problems to have.

I think longer term, I think we're gonna figure them out, and it's gonna, you know, potentially continue to widen out the category as we grow and the penetration rate grows.

Operator (participant)

One moment for the next question. Your next question comes from the line of Jon Windham with UBS. Your line is now open.

Jon Windham, CFA (Senior Equity Analyst)

Perfect. Thanks. Congrats on the good result. I wanted to dive back into Ecobee, a little bit. I see it's a product that's having quite some success. I'm just curious if you could talk through how far along you are in pulling the levers to incentivize installers to sell the value proposition of that product. Is there still more things you can do to incentivize installers there, or do you feel that's pretty rolled out already? Thanks.

Aaron Jagdfeld (President and CEO)

Yeah, thanks, John. Yeah, Ecobee's been having, you know, a lot of success here recently. I think a lot of that owes, you know, I, I don't wanna be overly basic about the explanation here, but obviously, energy costs continue to rise. And as energy costs go up, I think homeowners are, you know, I think they're in, in search of ways to, to save money. And there's a very strong payback on an Ecobee Smart Thermostat. You can save upwards of 40% of your energy costs annually by using a smart thermostat. And this is not a, you know, not a product that you basically just set a regular schedule for, that you can remotely check the temperature on. I mean, that's, those are basic features.

You know, there are T-stat companies out there that are offering those features and calling themselves smart thermostats. These are, those are not smart thermostats. The Ecobee Thermostat is different in that, you know, it actually learns your patterns in terms of when you're home, when you're not. There are sensors in the home that give it context around, you know, occupancy, and it can adjust for different variables, both heating and cooling, preheating, pre-cooling. There are some really cool things that it does, and it looks at, you know, energy costs in your market to make some of the decisions it's making on your behalf or with your input.

And so these are, I think, really strong and important considerations for why we think the smart thermostat category, in particular, is growing and why Ecobee's Solution is the best offering in that category. And that's something that, you know, when you think about, to your question about installers, you know, I mean, I think installers, you know, they do try to offer, I think, you know, the value prop or to extend the value prop in their sales process. But I think it really comes down to the homeowner requesting that, right? And I think what installers appreciate mostly is the ease of installation and the level of technical support that they get from Ecobee.

The level of support from Ecobee, whether you're a homeowner or whether you're a contractor installing the product, is phenomenal, and that's what wins the day with an installer. It can win the day with a homeowner as well, but I think for installation, from an installer standpoint, time is money. So if you're dealing with a product that doesn't have great support, and you have challenges with that, and you're not able to get answers to the questions you need in a timely fashion, you're wasting time, you're wasting money. If you have an Ecobee Thermostat and you have a problem or you have a technical question, you can get a response, very quickly and a high-quality response at that.

And so they get incredibly high marks for technical support, and I think that's why installers largely are choosing the product over other options in the marketplace.

Operator (participant)

One moment for the next question. We have a question from Jeff Hammond with KeyBanc Capital Markets. Your line is now open.

Aaron Jagdfeld (President and CEO)

Third time's not a charm.

York Ragen (CFO)

Yeah, I guess it's not a charm. I don't know what-

Aaron Jagdfeld (President and CEO)

Odd.

York Ragen (CFO)

I don't think it's on our, on the call side. I don't know, the conference call side. But we'll follow up with you, Jeff.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Sorry about that.

Operator (participant)

Moving on to the next question. Your next question comes from the line of Stephen Gengaro with Stifel. Your line is now open.

York Ragen (CFO)

All right.

Stephen Gengaro (Managing Director, Oilfield Services)

Thanks. Good morning.

Aaron Jagdfeld (President and CEO)

Good morning.

Stephen Gengaro (Managing Director, Oilfield Services)

I'll tell you, my generator has been a lot more reliable than some of these questions so far. So I was just curious, you talked about underselling demand still so far as you work through the inventory channels. As we think about the dynamics, I know it's early to tell, but as we think about dynamics in the next year, do you think you get back to kind of a more normalized annual growth rate in 2024?

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Yeah, I mean, obviously, you won't have the headwinds that we've had with bringing Field Inventory down. We've been undershipping that.

Aaron Jagdfeld (President and CEO)

From that standpoint, it'll be more normalized, but-

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Just, I mean, just in terms of raw shipments, we should see growth that way in that home standby business. Your question maybe is more like, will activations grow, installations grow, which is our proxy for, I guess,

Aaron Jagdfeld (President and CEO)

Sales.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

-sales, in terms of, the end market that way. We obviously are, you know, we're evaluating, you know, market conditions, IHCs, again, second best on record, so that obviously is a leading indicator. So, you know, we got-

Aaron Jagdfeld (President and CEO)

But let's, but let's be clear, I mean, over the category's history, over the last 20 years, it's grown 15% on a compounded basis, so it just hasn't been in a straight line. And this, this time around, it definitely wasn't a straight line because of the field inventory challenge that, you know, we've had as a persistent headwind this year. It's getting better, but, it's really lasted the full year. So I, I mean, I'm confident longer term, the category is going to continue to grow. It is still, by far, the most cost-effective way to deal with a power outage. And outages are, you know, you can look at the long-term baseline average, and these are numbers that are readily available from, you know, third-party, collectors of government data, you know, FERC and NERC and others who, who focus on reliability.

You know, the statistics don't lie. I mean, power outages are on the rise, and they're lasting longer. We hear it from customers who are frustrated. You know, there's another outage in Michigan today. You know, and Michigan has just been hammered by outages, and that's one of the reasons why it's a, you know, it's a, it's a really good market for us, penetration-wise. I mean, pen rates in Michigan are over 15%, which is, is, you know, 15% of all single-family homes over $150,000 in value have a, have a home standby generator installed, which is, you think about that for a second, you put that in context, and I think it, it tells you where the pen rate can go, right?

I mean, pen rate nationally is 5.75%, and we're at states like Michigan, which is a major state, it's at 15%. So and every 1% of pen rate is a, you know, is a $3 billion market opportunity. So you start adding that up, and the numbers get really big, really fast. And, you know, we're at 75% share there, maybe even a little better than that. And that's something that, you know, I think, from a focal area is obviously something we put a lot of effort against as we look forward. In terms of just whether that's going to happen next year or not, in terms of normalized growth rate, there's a lot of factors that go into that, but longer term, it's definitely, you know, a category that is going to continue to grow.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Yeah, we typically short-term guide without any major events-

Aaron Jagdfeld (President and CEO)

Right.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

- and we know those happen, so that's always a catalyst for growth over the longer term. So, you know, those are obviously the drivers. And then all the mega trends around that we've talked about for a while that are driving the demand for the category higher, those are still intact.

Operator (participant)

One moment for the next question. The next question comes from the line of Jordan Levy with Truist Securities. Your line is now open.

Henry Chien (VP and Senior Equity Analyst)

Hi, all. Henry on for Jordan here. I was just wondering if you could dig a bit deeper into some of the different dynamics you're seeing between the U.S. and the international C&I segments in the business, and then how some of those segments are looking for 2024. Thanks.

Aaron Jagdfeld (President and CEO)

Yeah, so, it's a great, great question. Thanks. You know, in the U.S., you know, we have outsized market verticals, I would say, in telecom and the national rental channels as well, which I'll roll up in that C&I. So in the U.S., as we've said, national accounts, the national rental accounts have, you know, last couple of quarters have cooled off. They were heavy buyers of equipment last year and even earlier this year. That's cooled off, as you know. I think there's some broader slowdowns in just some of the C&I markets overall, you know. I think owing to some of the higher interest rate environment that we're in today.

New construction, you know, you look at the architectural billings index last month being, or like a couple weeks ago, being quite a bit softer. You know, I think you're starting to see that and feel that, certainly we are in the rental markets as we said. And then the other large vertical for us is telecom, which, you know, is also slowed down considerably here. The CapEx spend for the large telcos, I think has been, you know, reined in a bit just as they wait to see what the end markets look like for the wireless, you know, consumer. And, you know, I think you're going to see that on a long-term basis, both of those verticals are going to be growing long term.

They just, in the short term, have pulled back. So that's a dynamic that differs from, I would say, the rest of the world. We do sell into telecom, and we sell equipment rental companies as well. But in terms of just their outsized nature of the size of those verticals here in the U.S., they're bigger. Outside of, you know, when you get outside the U.S., I would say, you know, one of the areas that for C&I that, you know, we've seen, you know, great interest for backup power has been in Europe with, you know, I think some of the war with Russia, Ukraine, and just the concerns around energy security. You know, in the C&I space, that, you know, impacts businesses. It may have had to, you know, concerned about power interruptions last winter.

That's abated a bit, you know, I think, in recent quarters. But, you know, we're heading into winter, and that's something that could pick back up, but we're watching that. But I would say that's a unique consideration when you get outside the U.S. And then there's some markets that are. When we called them out this morning in the call in our prepared remarks, but there's a couple of markets that are growing in their importance, India being one of those, where we're a leader in natural gas gen sets. We have a factory there and a business there in India that's been doing quite well. We continue to see demand in the Middle East for our products, which are, you know, there's quite a bit of, you know, I think around higher energy prices.

I think the Middle East has continued to move forward in terms of their economies, and that's reflected in our order rates from that part of the world. And so those, you know, I think there's some specific areas. Australia is another area of market that we continue to see nice improvements in our growth rates. So I think that, you know, kind of just some of the dynamics give you a little flavor of that. You know, I think the business outside the U.S. for us is highly concentrated in Europe, though. We don't have as much exposure to Africa. You know, we have some limited exposure to Asia. South America is a nice market for us and a growing market as well, but it's relatively small relative to the size of Europe.

But, I think that's probably the most color, unless, York, I'm missing anything there.

York Ragen (CFO)

I think the IHCs have been hanging in there, too, domestic.

Aaron Jagdfeld (President and CEO)

Our industrial distributors have been doing quite well here in the U.S.

York Ragen (CFO)

Been good.

Aaron Jagdfeld (President and CEO)

We're gaining market share there.

York Ragen (CFO)

Yep.

Operator (participant)

Your next question comes from the line of Keith Housum with Northcoast Research. Your line is now open.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Whoa! Oh, we had a good string.

Aaron Jagdfeld (President and CEO)

We did.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Now we're not. Two in a row.

Operator (participant)

Keith, your line is now open.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Oh, guess we'll follow up with Keith.

Operator (participant)

All right. Moving on. Next question is from Chip Moore with ROTH MKM. Your line is now open.

Chip Moore (Managing Director and Senior Research Analyst)

Hey, everybody. Thanks for taking the question. Can you hear me?

Aaron Jagdfeld (President and CEO)

Yep.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

Yep. Hey, Chip.

Chip Moore (Managing Director and Senior Research Analyst)

Fantastic. Wanted to follow up on some of the green shoots you talked about for consults and close rates, as it relates to the current housing market. Just, I guess I'm curious if you'd expect to see any impacts from a slowdown there in this higher rate environment, or this may be a situation where people might decide to stay in their houses longer and pull the trigger. Just curious what you're seeing there.

Aaron Jagdfeld (President and CEO)

Yeah. Thanks, Chip. Yeah, the, you know, obviously, there's puts and takes, I think, with that, with housing. First of all, you know, it's really less than 20% of our sales going to new housing. So I would say with housing starts, if those slow and as they slow, you know, not as big of an impact on us. Most of what we do is retrofitting existing housing with products. And then that gets to, you know, kind of the question of, for most people, you know, how long do you stay in your house? And if housing turnover slows down because of the higher rate environment, you know, does that mean that people are going to start to look at projects in their house, and think about that?

Or is there some dampening of the enthusiasm around that, even because of the higher cost of money for borrowing, either against your house or, you know, just the, the concerns, overall economic concerns that consumers might have? Those things have to play out yet. I would say that, again, kind of consistent with our previous remarks on this, is that when outages happen, the one thing we do know is that, you know, homeowners generally have a list in their head of, like, things they want to do to their house. And a generator is probably on that list somewhere for most people, depending on how many outages they've had and how long outages have lasted. But when they get an outage, that category of product tends to move up on their list.

Outages tend to trump, you know, some of the other, you know, macro things that you might see around housing or the consumer as the economy cycles. We've seen this time and time again in our, in our history in the business, is if we get the outages, people will reprioritize their spending. Maybe they won't, you know, hold off on that kitchen remodel or putting in a pool or doing a bath remodel or taking a family vacation even in some cases. They reallocate their, their, you know, consumer dollars, their spending, to other categories that they deem more important. So as outages, you know, if, and again, this is the, the underpinning all of this, is you have to have a belief that power outages are going to be on the rise, and they're going to last longer.

They're going to be happening more frequently, and they're going to last longer. The data bears that out. Everything else that, you know, we've been talking about here would indicate that that is going to be the case for the next several decades, just as the grid goes through a transition. And as that happens, you know, I think that even though we may run into some economic cycles here that could put pressure on the consumer, I think as long as the outages happen, we feel pretty good about where, where we're going to be.

Operator (participant)

We have no further questions at this time. I will now turn the call back over to Chris Roseman.

Kris Rosemann (Senior Manager, Corporate Development and Investor Relations)

We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter and full year 2023 earnings results with you in mid-February. Thank you again, and goodbye.

Operator (participant)

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