Generac Holdings Inc

NYSE:GNRC

Hello, and welcome to Generac Holdings Inc. First Quarter 2025 Earnings Conference Call. [Operator Instructions]. I will now turn the conference over to Kris Rosemann. You may begin.

Good morning, and welcome to our first quarter 2025 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer.

We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors.

In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our first quarter results exceeded our expectations, primarily driven by strong shipments of home standby generators during the period. Residential energy technology sales also outperformed as ecobee had another great quarter and shipments of energy storage shipments systems also exceeded our prior forecast.

Additionally, continued strong gross margins were the primary driver of adjusted EBITDA coming in well ahead of our prior expectations for the quarter. On a year-over-year basis, Overall, net sales increased 6% to $942 million for the quarter. Residential product sales were 15% higher than the prior year, driven by strong growth in shipments of home standby generators and Energy Technology Solutions. C&I product sales declined 5% year-over-year with increases in the domestic telecom and industrial distributor channels more than offset by softness in other C&I end markets.

Favorable sales mix and lower input costs resulted in continued gross margin expansion of nearly 400 basis points from the prior year to 39.5%, which is our highest first quarter gross margin level since '21, resulting in adjusted EBITDA margins increasing to nearly 16% for the quarter. While the first quarter marked a strong start to the year, the dynamic and uncertain nature of tariffs and other federal policy actions has introduced a wider range of potential outcomes for our end markets in 2025.

As Jorge will discuss in more detail, we are widening our guidance ranges for the year to reflect the potential impact of more restrictive trade policy on consumer spending. As disclosed in our press release, our updated outlook assumes that current tariff levels hold for the remainder of the year, with tariffs on Chinese imports at 145%, steel and aluminum tariffs at 25% and all other reciprocal tariffs at 10%, including the assumption that these reciprocal tariffs continue beyond the current 90-day pause.

While we anticipate a more cautious economic environment around the consumer, our updated guidance assumes the U.S. economy will avoid a full recession during 2025. At today's tariff levels and reflecting our current global supply chain, we expect our product cost will increase in the second half of 2025 by approximately $125 million prior to any mitigation efforts. In response to these anticipated higher costs, we have raised prices across a wide range of products. and we expect that our price actions will fully set the cost of tariffs on dollar terms.

Additionally, we are executing on a number of supply chain and other cost reduction initiatives will help to further offset the impact of tariffs and other cost increases over the next several quarters. Now to set first quarter results in more detail. Home standby shipments increased at a mid-teens rate from the prior year as we continue to execute on the strong demand from the elevated power outage environment that occurred in the second half of 2024. Power outage hours during the first quarter were above the long-term baseline average primarily driven by the wildfires in Southern California, which is a growing but underdeveloped market for home standby generators.

As a result, home consultations were lighter than expected relative to the overall outage hours in the quarter as the IHC to outage our ratio in California is below the ratio we have historically seen in other more mature regions. Penetration rates for home standby generators in California are less than 2%, and our sales and marketing teams are focused on continuing to develop an important market through increased awareness for our products as well as further expanding our distribution in the state. As expected, close rates remained under pressure in the quarter as a result of the elevated demand experienced in the second half of last year relative to our sales and installation capacity.

In addition to increased focus on optimizing our marketing investments during 2025 to further drive end customer demand for our products, we will continue to invest in lead optimization dealer development and expansion, consumer engagement and further penetration of home standby finance offerings support longer-term close rate improvements. We ended the first quarter with more than 9,200 residential dealers in our network, growing slightly from the prior quarter and representing an increase of more than 400 dealers over the prior year.

The significant growth [ in account ] over the last 12 months is an important element of our ability to support a new and higher fine level of consumer awareness for the home standby category, by adding more installation and service capacity to our distribution network. Similarly, the continued success of our aligned contractor program, targeting electrical contractors to purchase our products through wholesale distribution has provided an additional channel for us to further engage and align with a broader set of contractors that are selling and installing our products.

Activations or installations of home standby generators increased during the first quarter as compared to the prior year, with particular strength in regions that have recently been impacted by elevated power outage activity, including the Southeast, South Central and West regions. Growth in activations continued early in the second quarter with similar regional trends experienced here in the month of April. Importantly, our next-generation home standby lineup is on track for the previously announced second half 2025 launch, representing the most comprehensive platform update for the product category in more than a decade.

These new products will deliver numerous value-added benefits for homeowners and our channel partners relative to the current product line. For homeowners, this includes a lower total cost of ownership with improved fuel efficiency, quieter operation and lower overall installation and maintenance costs. The new product line also includes the industry's highest output air-cooled home standby generator at 28 kilowatts. Improving affordability on a per kilowatt basis as backup power needs grow in response to increased residential electrification trends.

For our channel partners, the new home standby lineup offers more efficient installation and service processes, including faster commission homes and improved remote diagnostics, ultimately enabling their businesses to provide greater uptime for customers while also saving time and money. Additionally, the transition to our next-generation home [indiscernible] by generator platform has provided our operations and supply chain teams with an opportunity to implement more automation in our manufacturing processes and further increase the resiliency and diversity of our supply chain.

Despite the projected impact of tariffs on the macroeconomic environment, we continue to anticipate growth in home standby generator sales for 2025, driven by an increase in activations during the first half of the year and higher pricing beginning in the second quarter. We also expect the category to hold the new and higher baseline of demand that was achieved following the multiple major [ power outage ] events in the second half of 2024.

Additionally, we will continue to execute on our initiatives to support close rates dealer effectiveness and marketing optimization, while also working on various manufacturing and sourcing initiatives related to the new product launch as well as the mitigation efforts around tariffs. Now moving to our Residential Energy Technology Solutions, which exceeded our expectations during the quarter as a result of continued strong momentum at Ecobee and the further execution of the Department of Energy program in Puerto Rico for our energy storage solutions.

The team at Ecobee continues to perform very well, delivering robust sales growth during the quarter and exceptional gross margin improvement compared to the prior year with higher shipments across channels, most notably to our retail and Pro channel partners. We believe Ecobee's recently introduced lower-cost smart thermostat offering will further drive market share gains by extending the product line into the faster-growing value segment of the market.

Ecobee's connected homes count also continues to grow rapidly, having increased approximately 17% from the prior year, along with improving service attach rates and related recurring revenue. Shipments of energy storage systems increased at a significant rate during the quarter as we continue to execute on the DOE program in Puerto Rico. We also began taking our first orders earlier this month for Power Cell 2, our next-generation energy storage system, and we remain on track for our first shipments of these new systems later in the second quarter.

Our recent discussions with channel partners about the new platform have been very encouraging, and we have received positive feedback on our unique approach to creating a residential energy ecosystem providing unrivaled capabilities for homeowners to generate, store, monitor and manage their own power. We believe our expertise in building and developing distribution our capabilities in direct-to-consumer marketing, the strength of our brand and our financial stability, combined with our differentiated [indiscernible], including Ecobee Smart Thermostats, Power Cell 2 energy storage devices, electric vehicle chargers and home standby generators creates an incredibly unique value proposition for both installers and end customers.

Our prior expectation for residential energy technology sales in the range of $300 million to $400 million for the full year to 2025, is unchanged given our current assumptions that the Department of Energy program in Puerto Rico continues as planned, and the relevant portions of the inflation Reduction Act, including the investment tax credit for homeowners remain intact. We also continue to anticipate Ecobee will achieve profitability during the full year period. Additionally, we believe that our residential energy storage systems will be minimally impacted by tariffs during 2025, given our current inventory levels.

We remain committed to investing in the strategically important area of our business, and believe that the mega trends around lower higher quality and rising power prices will provide growing incentives for homeowners to seek out solutions to help both protect and lower the cost of their electricity over a longer-term horizon. For our commercial and industrial products during the quarter, sales decreased by 5% on a year-over-year basis as growth in shipments to our domestic telecom and industrial distributor customers was more than offset by softness in domestic rental beyond standby and certain international end markets.

Shipments to our domestic industrial distributors grew again during the quarter as we continue to reduce our lead times for C&I products. and the channel also experienced improved quoting activity and project win rates on a year-over-year basis. Although we are encouraged by the resilience of this end market, given recent trends in these leading indicators, we continue to expect that full year sales for industrial distributors will be softer compared to the prior year as a result of entering 2025 with a lower backlog.

Sales to national telecom customers increased at a significant rate on a year-over-year basis during the first quarter and we continue to expect a return to growth in this channel for the full year. The telecom market represents an important long-term growth opportunity for Generac given the secular trend around expanding global tower network hub installations and the increasingly critical nature of wireless communications that require much higher power reliability. As expected, shipments to our national and independent rental equipment customers in the first quarter declined from the prior year, driven by reduced capital spending from these accounts in our product categories.

Although we continue to expect this channel to be softer throughout the year, we believe that this end market has further runway for growth longer term as infrastructure-related projects continue to build out over time. Additionally, our effort to expand our product line into larger megawatt diesel generators remains on track as we formally began taking orders for these products earlier this month and expect initial shipments to begin later in the year. We have experienced strong early indications of interest from prospective customers in the data center market that are seeking a reliable partner with more competitive lead times for emergency backup power gen sets.

We believe that we are well positioned to take share in this market over time given our unique focus, which allows us to provide customized sales, engineering and aftermarket experiences while also providing data center customers with a nationwide service network to ensure greater uptime for these critical applications. Internationally, core total sales increased approximately 5% on a year-over-year basis during the first quarter, driven by strength in residential product shipments in Latin America and higher intersegment sales to the U.S. market.

Although international C&I product sales declined from the prior year, we experienced continued positive order momentum in the quarter, which we believe supports our expectation of improved top line performance in our international segment over the remainder of the year. We are also executing on a growing pipeline of data center opportunities internationally with initial shipments of our new large megawatt generators expected in the second half of this year.

In closing this morning, our first quarter results reflect strong performance in our residential product categories given the benefit from elevated outage activity in 2024 and increasing momentum in our energy technology solutions. As economic uncertainty grows, we will continue to rely on our core corporate value of agility as we react to the rapidly evolving trade policy situation. We have deep expertise across our engineering, supply chain and operations teams and they will be focused on the execution of impactful opportunities to optimize our cost structure and position our supply chain to mitigate the impact of higher tariffs.

Importantly, the mega trends of lower power quality and higher power prices that support our longer-term growth expectations remain firmly intact, and we are confident that our powering a Smarter World enterprise strategy is the correct approach for Generac to help homeowners, businesses and institutions solve these challenges.

I'll now turn the call over to York to provide further details on our first quarter results and our updated outlook for 2025. York?

Thanks, Aaron. Looking at first quarter 2025 results in more detail. Net sales during the quarter increased 6% to $942 million as compared to $889 million in the prior year first quarter. The net effect of acquisitions in foreign currency had a slight favorable impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the first quarter by product class, Residential product sales increased 15% to $494 million as compared to $429 million in the prior year.

As discussed, growth in residential product sales was driven by a strong increase in shipments of home standby generators as we executed on the continued higher demand created by above-average power outage activity in the second half of 2024. In addition, growth in shipments of both power cell energy storage systems and Ecobee products contributed to the strong year-over-year growth. Commercial and industrial product sales for the first quarter of 2025 declined 5% and to $337 million as compared to $354 million in the prior year.

Modest contributions from acquisitions were offset by an unfavorable impact from foreign currency, resulting in a net neutral impact on sales growth during the quarter. The core sales decline was driven by softness in certain international end markets as well as a decrease in sales to national rental accounts and other direct customers for beyond standby applications, partially offset by growth in shipments to domestic telecom and industrial distributor customers. Net sales to the other products and services category increased approximately 4% to $111 million as compared to $106 million in the first quarter of 2024.

Core sales increased approximately 1%, primarily due to growth in aftermarket service parts, connectivity subscription sales and international services revenue. Gross profit margin was strong at 39.5% compared to 35.6% in the prior year first quarter as a result of favorable sales mix given the relative strength of home standby sales and the realization of lower input costs. Operating expenses increased $39 million or 16% as compared to the first quarter of 2024. This increase was primarily driven by increased employee costs to support future growth across the business, additional marketing spend to drive incremental product awareness and ongoing operating expenses related to recent acquisitions.

Adjusted EBITDA before deducting for noncontrolling interest, as defined in our earnings release, was $150 million or 15.9% of net sales in the first quarter as compared to $127 million or 14.3% of net sales in the prior year. I will now briefly discuss financial results for our two reporting segments. Domestic segment total sales Including intersegment sales increased 9% to $782 million in the quarter as compared to $720 million in the prior year, including approximately 2% sales growth contribution from acquisitions.

Adjusted EBITDA for the segment was $123 million, representing 15.7% of total sales as compared to $99 million in the prior year or 13.8%. International segment total sales, including intersegment sales, decreased slightly to $186 million in the quarter as compared to $187 million in the prior year quarter, including an approximate 5% sales growth headwind and from foreign currency, resulting in approximately plus 5% core total sales growth. Adjusted EBITDA for the segment before deducting for noncontrolling interest was $27 million or 14.6% of total sales as compared to $28 million or 15% in the prior year.

Now switching back to our financial performance for the first quarter of 2025 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $44 million as compared to $26 million for the first quarter of 2024. Our interest expense declined from $23.6 million in the first quarter of 2024 to $17.1 million to current year period as a result of lower outstanding borrowings and lower interest rates relative to prior year. GAAP income taxes during the current year fourth quarter were $14.2 million, or an effective tax rate of 24.3% as compared to $12 million or an effective tax rate of 31.2% for the prior year. The decrease in effective tax rate was primarily driven by certain unfavorable discrete tax items in the prior year period that did not repeat in the current year.

Diluted net income per share for the company on a GAAP basis was $0.73 in the first quarter of 2025 compared to $0.39 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $75 million in the current year quarter or $1.26 per share. This compares to adjusted net income of $53 million in the prior year or $0.88 per share. Cash flow from operations was $58 million as compared to $112 million in the prior year first quarter. And free cash flow, as defined in our earnings release, was $27 million as compared to $85 million in the same quarter last year. The change in free cash flow was primarily driven by an increase in working capital during the current year quarter which included the replenishment of home standby and portable generator finished good inventories, partially offset by higher operating earnings.

Total debt outstanding at the end of the quarter was $1.3 billion, resulting in a gross debt leverage ratio at the end of the first quarter of 1.6x on an as-reported basis, which is within our targeted gross debt leverage range of 1x to 2x adjusted EBITDA. Additionally, we opportunistically repurchased approximately 77,000 shares of our common stock during the quarter for $97 million. There is still $250 million remaining on our current share repurchase authorization as of the end of the first quarter.

Moving forward, we will continue to operate within our disciplined and balanced capital allocation framework as we evaluate future shareholder value-enhancing opportunities over the long term. With that, I will now provide further comments on our updated outlook for 2025. As disclosed in our press release this morning, we are updating our outlook to reflect a broader range of potential outcomes for our business resulting from higher tariff levels, uncertain government policy actions and their related impact on the markets that we serve.

While we are maintaining the high end of our guidance ranges for net sales growth and adjusted EBITDA margin, we are reducing the lower end of these ranges to consider the potential impact of a softer economic environment. This guidance includes the following important assumptions. We are assuming that current tariff levels that are in effect today stay in place for the remainder of the year. This includes 145% tariff level for China 10% reciprocal tariffs for all the countries and the USMCA still qualifies.

In addition, we're assuming that government policy around clean energy remains materially intact during the year. This would include sustaining the investment tax credit as part of the inflation Reduction Act as well as continued federal support of our Department of Energy program in Puerto Rico. We're also assuming interest rates continue to remain at elevated levels, resulting in more cautious consumer spending trends through the year, but not falling into recessionary conditions during 2025.

Finally, consistent with our historical approach, this outlook assumes a level of power outage activity during the year in line with the longer-term baseline average and does not assume the benefit of a major power outage event during the year, such as a major landed hurricane or major winter storm. Considering these factors, we now expect consolidated net sales for the full year to increase between 0% to 7% compared to the prior year, which includes an approximate 1% favorable impact from the combination of foreign currency and acquisitions.

This compares to our previous guidance of 3% to 7% net sales growth over the prior year as we expect tariff-related price increases to potentially be more than offset by lower shipment volumes. Specifically for the second quarter, we project net sales growth in the low single-digit range, driven by modest year-over-year growth in residential product sales and approximately flat C&I product sales as compared to the prior year. This results in a second half sales weighting of nearly 56% of full year sales and is expected to be more level loaded throughout the third and fourth quarters.

Looking at our updated gross margin expectations for the full year 2025, we now expect gross margin percent to be approximately flat with full year 2024 levels in the 39% range. This is only a slight decline from our prior expectation for gross margin percent to approach 40% for the full year 2025. Given the incremental macroeconomic uncertainty, we are also proactively addressing potentially lower shipment volumes with targeted operating expense reductions relative to our prior forecast.

These broad-based actions are expected to hold our full year 2025 operating expenses as a percentage of net sales, approximately in line with previous expectations. Turning to our adjusted EBITDA margin expectations for the full year 2025, we have widened our guidance range to approximately 17% to 19% compared to our previous guidance range of 18% to 19%, primarily due to the unfavorable impact of reduced operating leverage on potentially lower shipment volumes. Importantly, the estimated impact of higher tariffs is expected to be fully offset by pricing actions and supply chain initiatives.

Specifically for the second quarter, we expect adjusted EBITDA margins to decline slightly compared to the first quarter 2025 run rate before sequentially improving to nearly 20% for the second half of the year given the projected significant operating expense leverage on seasonally higher sales volumes. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2025.

Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add back items should be reflected net of tax using our expected effective tax rate. For 2025, our GAAP effective tax rate is now expected to be between 24.5% to 25%, a slight increase from our prior guidance of 24% to 24.5%. We continue to expect interest expense to be approximately $74 million to $78 million for the full year 2025, assuming no additional term loan principal prepayments during the year. This is a significant decline from 2024 levels due to a decrease in outstanding borrowings and the full year impact of lower sulfur interest rates.

Our capital expenditures are still projected to be approximately 3% of our forecasted net sales for the year. in line with our historical levels as we continue to invest in incremental capacity and execute other projects to support future growth expectations. Depreciation expense is now forecast to be approximately $90 million in 2025. And GAAP intangible amortization expense in 2025 is now expected to be approximately $100 million during the year. Stock compensation expense is still expected to be between $53 million to $57 million for the year.

Operating and free cash flow generation is expected to be disproportionately weighted toward the second half of the year in 2025. As we expect to replenish home standby and portable finished good inventory levels during the first half of 2025. As a result, for the full year, we expect free cash flow conversion from adjusted net income to be between 70% to 90%. This is a wider range compared to our previous guidance of 80% to 90% and due to a projected larger use of cash for inventory as a result of higher tariffs during the year. As a result of our first quarter share repurchases, our full year weighted average diluted share count is now expected to decrease modestly to approximately 59.5 million shares as compared to 60.3 million shares in 2024.

Finally, this 2025 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Tommy Moll with Stephens.

Aaron, I wanted to ask about the new product launches in C&I for the data center end market. You put out a press release earlier this month with a lot of product details. So my question is really in two parts. One, just if there's anything on the product design, you want to make sure to highlight for us. And then relatedly, you mentioned the ability to service installed base 1 day with the nationwide service network. I just want to make sure the go-to-market here is perhaps similar to your telco sales. So a direct sale, but then leveraging the service and aftermarket through your dealers, if that's an incorrect understanding, please let me know.

Yes. Thanks, Tommy. So yes, super excited about our data center product line, our large megawatt diesel lineup. Data centers, obviously, are prime target. Also though our existing customers, as we've talked before, kind of the existing end markets we serve from municipalities to manufacturing, distribution, health care they all require larger blocks of backup power as well. So we feel like that's a part of the market that we haven't served historically. So we're going to be able to do that.

As it relates to data centers to take the second question first, Tommy, with data centers, the comment about the nationwide service network, your assumption is exactly correct. We're going to ride on the back of what we've built for direct sales to our telecommunications customers primarily. That's a network we've built over the last 40 years. It's a combination of technicians with our industrial distributor customers as well as our own ICs, our owned company stores. And so with that asset, we're going to be able to leverage that to serve on a coast-to-coast basis, the direct sales of data center products.

Now outside of that, for other applications outside of data centers for those larger products, we'll service those products in a similar fashion to the way we take care of products that we sell through those other applications, which is primarily through our industrial distributor channel. They generally do that. We will occasionally jump in if we need to. It's not unusual for us to -- we've got great resources here even in Waukesha, Wisconsin. We can put somebody on a plane, and they can be anywhere in the U.S. in less than 4 hours and be on the ground to get something up and running if there's a problem or to assist a customer or an end operator or a distributor with that.

As far as the product itself is concerned, I think what I would call out, we made a little bit of a reference to it in our prepared remarks. But one of the hallmarks that we have as a company here in our C&I product space is our ability to customize. That is something that we brought to the market and really differentiates Generac. I think there's -- in our business, there's a couple of different models that are deployed. We are a true genset manufacturer here.

Others might just be assemblers and even others might be building a base product and then sending it out to distribution partners or third parties to do that customization. We prefer to do a lot of that customization in-house, both to control the quality and the cost and to control the lead times that are associated with that. And that's one of the things we think is an important differentiator here is that we're going to take that business model as we've deployed it on our broad C&I product line, we're going to extend that into these new products and offer these customers customizations that are done at the factory.

From an engineering perspective and from a manufacturing perspective, sourcing perspective. Obviously, there are still pieces of this that will have to be done by third parties. Sometimes that can be a specific type of canopy or enclosure that's on the unit those could be still done by third parties, but we're going to try and capture much more of that than the market currently serves today. And we think that will help differentiate us, coupled with the lower lead times, the shorter lead times as we've talked in the past.

Our next question comes from the line of George Gianarikas with Canaccord.

I can appreciate the widening of the range and guidance given the macro uncertainty have -- just curious if you can share any anecdotes, any data as to what you may be seeing on growth today that maybe you will see a softening in the business?

Yes. Thanks, George. Great question. There's a lot of different ways that different companies are approaching guidance, right? I mean I think you guys have all seen a wide range of outcomes here with people, some companies preferring not to give guidance. Others maybe giving multiple scenarios. Look, multiple scenarios were not that smart. So we just decided, look, we have our guidance. We know our -- we know what our business does when the economy slows down, and we know the impacts that can occur from -- as an example, higher prices, right?

There are some elasticity of demand that we are aware of in different categories based on history. So we tried to apply all of that, put our best foot forward with guidance. We didn't think that pulling guidance was the right approach either. So we felt like giving just basically sharing everything we know. And so to your question, George, what we know is that higher prices tend to dampen demand. Overcoming that, though, we also know that outages matter more than anything in our business. So as we've said historically here, I think we hesitate to use terms like decouple or we're countercyclical when it comes to the economy.

But when the power goes out, people reprioritize their spending. And we tend to see generator sales be very resilient in the face of any economic condition, good or bad, frankly. And so our assumptions, I think the big assumption that we've made here and make every time we do guidance is that the outage environment is going to be in line with the long-term average. Should the outage environment be lighter than that, we could underperform. Should it be greater than that, we could outperform maybe that's at the low end of the range or the higher end of the range.

I think we chose to take the low end of the range down because primarily where we do see pricing and have history with elasticity of demand impact is in the consumer market. So even though -- even if we were to maintain outages or hit that outage number and the long-term average, there are going to be some buyers who may fall out of the funnel if prices go up. And we just know that. And we try to reflect that, I think, in our guidance to the best of our ability. But time will tell. I mean, there's a tremendous amount of uncertainty right now around the overall economic environment, the consumer in particular.

But I think what we've seen on the ground and what you're hearing from others is the consumer is kind of hanging in there. I think Visa reported this morning. I think you're seeing consumer flows in terms of spending habits and things haven't really changed dramatically yet. But again, this is -- there's a lot of uncertainty, and we have to see what the next kind of 60 to 90 days brings. I think that will tell us a lot both in kind of the statistics that we all watch but also kind of what happens with the current administration with some of the current trade policy efforts and the negotiations that are ongoing.

So we're all waiting eagerly to hear what's going to happen next. I think the good news is we're used to having to pivot. We called out our core -- one of our core values here at the company, which is agility. We're very proud of that agility. I think it underpins what we do here being able to react to external stimuli that happen in demand as well as that things can happen on the supply side, and that's what we're reacting to today.

Our next question comes from the line of Mike Halloran with Baird.

So just kind of a follow-up on that, Aaron. It certainly understand the logic behind the broadening out of the range. I just want to understand the moving pieces. At the lower end of the range, it sounds like that is driven almost exclusively by demand generation -- demand degradation and you still feel relatively comfortable having on an EBITDA dollar basis neutral from all the tariff impacts. Is that true or false, am I interpreting that correctly?

And then secondarily, can you just give some sort of framework for how much of your COGS are exposed and any kind of regional sourcing dynamics you might have?

Yes. Thanks, Mike. So yes, the low end of the range, I mean, what we want to do there, it's to reflect the potential impacts by the way, to the consumer, right? So I mean, obviously, if you look at the midpoint of the guide, it does come down 150 basis points from the previous guidance. And that is, to your point, reflective of -- in our assumption is reflective of a softer consumer environment. That demand destruction, if you want to call it that, being offset by pricing as well, higher pricing.

And all of that going to offset on a dollar-for-dollar basis, those pricing impacts to offset the tariff impacts. And to give you just -- I mean, a little bit of color, we called out $125 million of potential impact here in the second half given no mitigation efforts and the tariffs being exactly where they are today. That's what the second half would bring us to $125 million. Just from a supply chain standpoint, we source about -- so roughly 70% to 80% of our COGS is materials. We source about 50% of those materials are sourced in the U.S. or in North America, the other 50% outside of North America.

And outside -- when you look at kind of as a percentage of our total material purchases, this it's really spread out. I mean it was an incredibly global supply chain. We buy a lot from Europe. We buy a lot obviously from Asia as do a lot of other companies, the China exposure specifically is less than 10% of our material purchases on an annual basis. And frankly, that's been cut in half from where it was 5 years ago. When we went through COVID and the first round of tariffs, we've been working very hard to further diversify our supply chain.

In fact, with our new product offering in home standby, we're kind of taking the next leg of diversification of the supply chain moving away from some of those countries that have higher tariff. And really, we're on our road map to move away from anyway. So they'll come down even further. We think that, that could be half again that less than 10% could be something even half again from that number in the next 12 to 18 months as we launch our new products, and we get the supply chain oriented around further diversification.

So we feel like we're in a good position here. We just have to be very blunt, 125% is a big number for tariffs, right? And so absorbing that is really difficult, and we have to pass that along in price. Now if that doesn't persist here if something changes in the next 30 to 60 days, we can still react to that. Because we have a new product line coming, we're going to reset pricing anyway on that new product line in the second half of the year.

So we've got some time -- and if you look at our balance sheet right now, you see a little bit more inventory on our balance sheet at the end of Q1 because we're building ahead of that transition. So sometimes better to be lucky than smart, right? I mean we were building because of this transition, but in effect, a lot of that inventory is not at these tariff levels. So -- and also, as we called out, just as another note to that, in our clean energy business with storage, we have a lot of inventory left over in that market as well. So we don't believe we're going to have any tariff impact to those products in 2025.

It's really on the consumer side and then on the C&I side, and that's what we're focused on mitigating that and we're pedaling hard to do that.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

So your 1Q to 2Q cadence is a little bit different than normal. I'm just wondering what, if any, you saw of kind of pull forward sell-in versus sell-through kind of getting ahead of price increases with your channel partners? And then just in general, our IHCs after Globe trending in the markets where you saw storms kind of relative to history?

Do you want to take a pacing, York?

Yes. In terms of the pull-forward question, yes, we did have a good quarter lost in all of this Q1 was a very good quarter. I would say there was only a small amount, probably that was pulled forward. to get ahead of the price increases that we're launching on home standby maybe $20 million roughly. So it's a relatively small number on the pull-forward side.

And I would just say a commentary on the IHC kind of after go, Jeff, to your question, it's interesting. I mean, this is a business where you see outages or have seen outages. You'll see strength in a lot of the metrics and where outages haven't happened for a while, you won't. And so if you just kind of parse apart of our 1Q IC numbers, what we -- outage IHCs remain very strong, like in the Southeast, coming out of the strong second half of last year with the outage environment.

And then the Western regions with what we saw in California with the wildfires, even though in our prepared remarks, we talked about that, California represents still a pretty immature market for us relative to other markets. In terms of -- a lot of outage hours, we didn't get a ton of ICs, it grew dramatically, but it kind of underperformed where we would expect a mature market to perform with that many outage hours, but that's really because it's still developing, right? We're less than 2% penetrated there. We're growing, it's double where it was 5 years ago, but it still represents a great opportunity for us, but just not the same level of intensity, if you will, of IHCs per outage over there, and we kind of called that out.

But the trends are -- and then kind of on the off side of that equation, the Northeast, Canada, we didn't have a lot of outage events, winter outage events this year kind of in Q4 and Q1 and that we have lower IHC. So I think we're seeing good afterglow in those markets that struggled with outages last year, second half of last year as well as what we saw in Q1. And in the areas that didn't we kind of got what we would expect there, which is lower IHCs year-over-year.

Next question comes from the line of Brian Drab with William Blair.

I was wondering if talking about the impact, more specifically of the assumption that the China tariff remains at 145%. Can you give us any granularity on what percentage of COGS is currently materials so we can kind of -- I know you said material sales -- materials input from China is under 10%, but it still seems like there could be a really big number that I'm trying to figure out what happens to your guidance if we reverse this situation with China or mitigated significantly?

Yes, sure. I would say the $125 million, about 2/3 of that is really China related. So I mean you can do the math on that, whatever I don't have a calculate in front of me, but whatever that is...

If it goes to $50 you it's [indiscernible].

$80 million, $87 million, whatever that is. If it goes to 50%, then you can impute the impact that, that would have, not only in the second half of the year, but obviously, whatever 2026 models you might be looking at as well, Brian. But -- but yes, I mean, look, again, China continues to be a small part of our supply chain overall and has -- that's been a trend we've been on for some time now and continue to work at. I think the decoupling of these 2 economies is clearly underway has been probably underway for some time.

It's just being accelerated today with these current -- with the current set of trade policy things in force. And if those change, if there's some kind of grand bargain that's struck here between the two countries, we'll watch that closely because obviously, what we don't want to do, and I think what other companies probably are trying to avoid as well is you don't want to -- we're trying to avoid passing along the full impact of that to the market if we don't need to, right? If there's going to be some change or certainly trying to reflect the future changes are going to continue to happen in the supply chain.

We want to reflect that and how we think about we want to be thoughtful in how we think about pricing to the market, right? We don't want to just -- because again, increasing the prices is going to put pressure on demand. even though outages ultimately are the biggest things that matter, you're still going to see people fall out of the funnel around the edges with higher price. That's just part of what the math is when you look at elasticity demand around this category.

Our next question comes from the line of Jerry Revich with Goldman Sachs.

York, we've seen just continued really good category interest into April. And I'm wondering if you could just talk about what kind of conversion rates you're seeing between IHC into orders. I'm thinking of the chart you shared at the Analyst Day, are we closing back to where we were in the last cycle on that category given the high level of interest in IHCs through April.

Yes. Thanks, Jerry. Actually, close rates, we kind of saw pressure in Q4. The back half of last year really is -- and this happens historically when you get big demand events like we saw in the second half of the year, that tends to kind of swamp the boat in terms of our capacity with sales and installation bandwidth. And then we fill in behind that with new distribution we increased awareness in markets like California, like I was speaking to that are a little bit more mature and then close rates recover over time. So it's a cycle that's been repeated...

The 12 months.

Yes, you have to look at kind of the maturity of the close rate over time. looking at it at a point in time is I think it's only representative of maybe what you've seen just over 90 days as opposed to looking over a longer period of time. Some people just take longer to make that decision. And sometimes they need a promotion or they need an extra level of engagement with our teams or our dealer teams to get them over the -- off the fence in terms of buying. So we saw pressure on close rates again here in Q1.

It's moderated from the decline rate that we saw in the second half of the year, but we should start to see and have modeled a recovery of that for the balance of the year, again, consistent with what we would see historically. But those rates were under pressure in the second half of the year last year and remain so here in Q1. As expected. It wasn't anything worse than expected.

Our next question comes from the line of Mark Strouse with JPMorgan.

I apologize, I'm going to ask you to go down another rabbit hole here with kind of scenario analysis. But just thinking about the indirect impact of tariffs and specific to steel prices, which are up 35%, 40%-ish. I'm assuming your 2025 guide is buffered somewhat by your hedges. But assuming tariffs stay in place and steel prices remain elevated once those hedges expire. Can you just kind of talk about how we should think about that in terms of either margin impact or the pricing reaction that might be needed in order to offset it?

Yes. Thanks, Mark. Yes. So I mean, we buy -- obviously, our biggest inputs are steel, aluminum and copper. Those are the three big ones. And to your -- I think the point of your question, we saw some pressure there even if we have metals that weren't impacted directly by tariffs, the indirect effect of tariffs is that it gives steel producers and the mills and other fabricators gives them great air cover for increased pricing in some cases or just the market just is taking those prices higher.

To your point, we have reflected that in our guidance here at the current level. So should they go higher? Could it be a headwind? We do have some hedges on some of those metals, but not dramatically so. It's pretty small. And so I would just say that we react historically, the way we reacted with that is more price -- but we do have other levers to pull. We've referred to it a few times in the past. We have an ongoing product enhancement, profitability enhancement program, we call it [ Pape ]. It's a cost-out program that's kind of institutionalized in our business. And we really use that to help us offset a lot of inflationary kind of typical inflationary pressures. I wouldn't call a tariff-related things typical by any means.

But I think some of the metals things, maybe you could argue they're atypical. But -- then again, you look historically where some of those metals prices are at, and they're not kind of the heights that they hit after when COVID hit, they are elevated. But we'll watch them. I think some of that is going to be offset by I was calling out. We're seeing shipping rates drop dramatically, right? So on sailing rates from Asia to the U.S. are down there in half from what they were even 30 days ago and falling hard.

And I think everybody has seen the reports of just the number of sailings that they're down 25%, 30%, 35% over the last 4 to 6 weeks. And that is opening up, I think, some opportunities there to reduce our logistics cost. So maybe there will be an offset to some of that. So there's always moving pieces with those inputs. But I would tell you that we've reflected everything in the guide today that we know, and we would respond accordingly with additional cost out, so our pricing should those inputs go even higher in the future.

Next question comes from the line of Keith Housum with North Coast Research.

Just trying to understand a little bit better the impact of tariffs across the product line. Obviously, you guys got a pretty diverse lineup focused clearly on HSPs but others as well. Can you just give us an idea which of your products are probably most impacted by the tariffs as well as the increased costs?

Keith, we're not going to provide it on a product-by-product basis because it's just -- I mean, there's so many different products, even within certain product families. We've got certain items that are more sensitive to tariffs because of where we source them from than maybe a similar product in the same lineup. So it's just -- it's not really something that we're going to give that level of granularity around again, we would just point to kind of the $125 million that we've given.

We continue to work that down. We believe we've got great opportunities to mitigate. And again, that $125 million is completely unmitigated. That assumes that other than what we've got in flight here, it assumes that those tariffs stay at high levels and that we don't have any other mitigation opportunities. So should the tariffs either come down or the mitigation grow the opportunities to mitigate grow, that will come down as well. So I wouldn't say that any one of our products is more sensitive or less sensitive. We have sensitivities across all products in some manner.

Tariffs. So just -- there are so many things in supply chain. I just -- I don't know that people really get this. There's just so whole injuries that aren't here in the U.S. We can't buy things. We can't buy everything from the U.S. Maybe over time, that could be developed but definitely not over 30 days. That's just not how it works. And I think everybody is generally aware of that. But just having more time and being thoughtful about how we deploy this would be more helpful for companies, industries markets to absorb. I do think that some of that's already underway has been underway for the last several years and will now accelerate.

But there are also other big challenges on the other side of that in terms of availability of labor here in the U.S. The cost to automate even if we automate a lot of the automation equipment or parts of the automation equipment come from high tariff countries. So cost of automation is going to grow. So there's a lot of kind of structural issues that have to be dealt with here in order to ship these supply chains, whether it be reshoring or near-shoring decoupling from specific other economies. It just takes time to do that. And we're all working towards that goal, and we're going to continue to work towards that goal, but there's going to be no avoiding some level of tariffs.

And by the way, we're already tariffs in our run rate. The $125 million is incremental tariffs based on the latest changes here. So there is a certain level of tariffs already in our run rate reflected from the [indiscernible] 301 tariffs and other tariffs that were put in previous years.

Our next question comes from the line of John Winham with UBS.

Just a quick housekeeping question. Just looking at your global manufacturing footprint, can you remind us the activities for Mexico, India and China, the manufacturing facilities?

Sure. I mean we have facilities in all three of those countries. And a lot of it is around an in-country, for-country manufacturing strategy because generators are big heavy products. And they're also localized for codes. Codes and standards electrically and for a lot of tail pipe emissions that differ from one country to the next. We do manufacture some products. As an example, in Mexico, we called out there was -- the intersegment sales internationally to the U.S., there's a little bit there that we do manufacture, but a lot of what we do in Mexico is for central -- is for Mexico and Central America, some for South America.

What we do in India is almost exclusively for India, and what we do in China is for a mix of China and Europe primarily. So I think those footprints are well established. I do think that it's interesting. I mean, we have some unique flexibility, I think, because of that, as we examine again, looking at mitigation strategies around tariffs, how can we utilize best utilize our footprint, our international footprint to help us mitigate the impact of tariffs.

Are there ways that we can shift more production to areas that -- where we benefit from the USMCA agreement as an example. Today, we don't do a lot of that down in Mexico, but we could maybe do more I do think we have a lot of plants right here in the U.S. as well. We just opened a new plant in Wisconsin and Beeverdam, Wisconsin, one of our biggest plants in the U.S., just went online April 1. And that serves our -- mostly our C&I products here. in the U.S. and Canada for products.

And so pretty proud of that. We've got 7 facilities, 7 big manufacturing plants here in the U.S., been a big supporter of manufacturing here in the Upper Midwest for a long time. It's our heritage. It's our history. And frankly, the U.S. market still represents a great opportunity for us, and that's why we're committed to this market. But we're going to utilize our footprint in the best manner possible to help us mitigate the impact of tariffs.

Our next question comes from the line of Jordan Levy with Truist Securities.

I don't know -- I don't think I heard much on ET in the comment in the Q&A. But maybe just on the resi solar space, it still remains under pressure here in the near term, not a surprise. I know you've got some good inventory of power cells going to Puerto Rico this year to help kind of bolster that segment. I'm just wondering how you're thinking about some of the new product rollouts there and the economics around those given both the tariffs and kind of the domestic challenges to that market?

Yes. Thanks for the question, Jordan. And you're right, we haven't spent a ton of time on ET, but it actually had -- we had a great quarter in Energy tech. A lot of that underpinned by Ecobee,as we said, they continue to just knock the cover off the ball in terms of their market share. They introduced a new low-cost kind of entry-level TSTAT, smart thermostat in the fourth quarter, and it's been very well received and kind of going after that value portion of the marketplace.

But even in the clean energy piece, which is the other piece of the energy technology complex for us, we also had a great quarter. Now it's off of a very small base. And it's primarily right now, as you indicated, Jordan, we've got this nice chunk of business with the Department of Energy program in Puerto Rico. We've got inventory for that program. We've got our installs. We're ramping there. and we're starting to hit our stride in terms of install rates and things. The economics are decent on that. But we've got our eyes on the future as we have talked about here for some time is we've been working on our next-generation product lines for storage, in particular, we opened up our order book here recently for Power Cell 2, which is the next-generation version of our storage system and have had some really good dialogue with installers who are looking for alternative options.

There's been somewhat a consolidation in the storage market given the current state of the solar market in general. There's -- some of the suppliers are exiting. I think you may have seen yesterday, Panasonic announced that they're leaving the U.S. market, and there have been others that have announced they're leaving the U.S. market as well as -- and that consolidation of supply, I think, opens up a couple of things for us. That could end up being positive, again, off of a pretty small base for us. But I think you've got -- we've got some pretty high hopes that storage, in particular, if you look at the economics, you can take away the incentives.

And even if the ITC goes to 0, are there some recombination there of the ITC with more domestic content requirements, whatever that may be, with less support, the reality of it is power costs continue to rise. And that is the real kind of nugget, I think, that's really important here in why things like solar and storage are going to make sense long term with or without support. Those things had to be weaned off of support at some point in the future anyway. And so I don't think anybody saw that coming that it might be an abrupt weaning off of the support.

But that might be filled in by certain state level programs and things like that. I think the market is going to react to that. But I do think that when you look at the payback of a solar plus storage system, in a high cost or a high tariff area, high electrical rate tariff area, the payback is still going to be strong even without incentives. And the need for resiliency is still going to be strong because power quality is continuing to go lower. And so we just -- again, maybe that has some impact on the total addressable market in the near term here over the next several years until that washes through. But our new products, they're going to be lower cost.

They're going to be higher performing, to be kind of on level footing with the rest of the market offerings. And then we've got some other exciting new product offerings behind that, that we've alluded to in the past, but you'll hear more about it [indiscernible] year, that's the renewable energy show in Las Vegas in September. So I encourage you to come and see what we're launching there. But very encouraged by what we're seeing, certainly with our smart thermostats and our Ecobee business and then also the recovery that we're seeing in energy technology at this point for us.

Our next question comes from the line of Sean Milligan with Janney.

I guess on the $125 million impact from tariffs, can you kind of talk about how much do you expect to get back from price increases versus cost out supply chain initiatives? And then also, I don't know if you addressed it, but last quarter, you talked about price increases for the new product and residential home standby Curious if you could update us on kind of how much total price increases you expect for resi HSB this year now with tariffs?

Yes. I think in terms of the pricing impact to offset the tariffs, at least the $125 million in the second half, the philosophy we took is we wanted to have enough mitigations to offset -- the impact of those...

Dollar for dollar.

Well, at the EBITDA margin level. Yes. So EBITDA percent, basically holding our EBITDA percent. So basically. So -- so the price we're putting in the market as well as the supply chain initiatives that we're working on, at least in the short term, we should do that. Now having said that, next -- there's a lot more work going on behind the scenes from a supply chain standpoint to continue to mitigate and diversify our supply chain. So we'll work on that and continue to update our progress on that. But the pricing that we're going out with is to basically hold that EBITDA margin percent at the EBITDA line.

Right now with the announced pricing, the 7% to 8% price increases that we that went into effect March 30. So that's what's contemplated in the guide. That's what York is referring to in terms of the offset to maintain EBITDA margins basically in that category if we're just talking about home standby. Now because we have a new product line coming in the second half of the year, we are going to go with another price adjusted there, but that's really reflective of the additional value that we're extending to customers and channel partners with that product because there's a lot of additional features and things that are in that product that, obviously, there's a little bit more cost that related to those, you even take away the tariffs and everything else.

In fact, I would argue the new product line actually reduces our term exposure because the supply chain is actually effectively more diverse. So it's -- there's a combination of that. So it's a little -- there's a lot of moving pieces underneath that. But at the end of the day, when you look, there might be a little bit more price associated with tariffs alongside of that increase that goes out for the new product line, but it will be much. And 7% to 8% is really kind of the center point of that today. And then we'll have we'll kind of see where the tariffs line. Again, we're trying not to get ahead of ourselves with putting too much price in the market. We will, if we need to, and we've kind of assumed that if we had to do that, we would. But I think we're watching closely to see where these negotiations go on a country of country basis with the current administration.

Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Kris for closing remarks.

We want to thank everyone for joining us this morning. We look forward to discussing our second quarter 2025 earnings results with you in late July. Thank you again, and goodbye.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect.