Aaron P. Jagdfeld
Chairman, President and Chief Executive Officer at Generac
Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our first quarter net sales, adjusted EBITDA and adjusted EPS were higher than expected, primarily due to continued strong shipments of our commercial and industrial products globally. Adjusted EBITDA margins were also better than expected due to favorable price cost dynamics. Additionally, field inventory levels of home standby generators declined at a rate consistent with our expectations in the quarter. Year-over-year, overall net sales decreased 22% to $888 million, and core sales declined 24% during the quarter. Residential product sales decreased 46% as compared to a strong prior year quarter that included the benefit of significant excess backlog for home standby generators and was also impacted by elevated levels of field inventory for home standby generators as well as a decline in clean energy products.
Global C&I product sales increased approximately 30% to an all-time quarterly record with strength in most regions internationally and all channels domestically. Adjusted EBITDA margin was negatively affected by significant unfavorable sales mix and reduced operating leverage driven by lower home standby shipments and continued energy technology growth investments. These margin headwinds were mostly offset by favorable price cost dynamics. Now discussing our first quarter results in more detail. While home standby shipments declined significantly in the quarter, leading indicators of demand for the category were exceptionally strong during the first quarter. Baseline power outage activity in the U.S. was well above the long-term average during the quarter with several larger localized outages in multiple regions, marking the highest level of baseline power outage activity for our first quarter since we began tracking outages in 2010.
Home consultations or sales leads were up significantly over the prior year period with broad-based growth experienced in almost all states. Additionally, home consultations were approximately flat sequentially during the quarter, which is highly unusual for the seasonally softer first quarter, particularly as we are coming off of a record fourth quarter, and this strength continued in the month of April. For historical perspective, first quarter home consultations were more than four times higher than the comparable period in 2019, supporting our belief that the home standby generator category has reached a new and higher baseline level of demand. Our residential dealer count was more than 8,600 at the end of the quarter, an increase of over 500 dealers from the prior year.
While this is a slight decline on a sequential basis due to seasonal headwinds, we expect our dealer count to grow significantly over the coming years as we continue to focus on expanding our installation bandwidth. Activations, which are a proxy for installs, were impacted by severe weather in multiple regions and declined slightly from the prior year period, which included a challenging comparison in the South Central region that saw a notable strength in the prior year due to the backlog of activations related to the Texas deep freeze in 2021. The number of home standby generators in field inventory continued to decline towards more normalized levels during the first quarter with the number of units falling meaningfully and ending the quarter approximately in line with our prior expectations.
Days of field inventory relative to historical norms also decreased sequentially in the quarter but remained elevated. We expect field inventory to decline further in the second quarter, resulting in another quarter of lower home standby orders and shipments relative to the higher end market demand before returning to more normalized levels as we enter the second half of the year. Our initiative to increase home standby generator installation capacity remains a top priority for the company. We recently launched our dealer talent network, which is showing early signs of momentum as we help our dealers find the talent needed to successfully grow their businesses. We also recently announced a partnership with the Independent Electrical Contractors Trade Group aimed at further elevating the Generac brand within the electrical contractor community and providing additional training resources in key markets, including Texas and Florida.
Additionally, we have identified a number of project management improvement opportunities that we believe can help dealers optimize overall project time lines in addition to several product-related enhancements to further simplify the installation process. These initiatives are not only focused on solving near-term installation capacity challenges, but are also designed to provide sustainable solutions for tighter-skilled labor markets. We believe these solutions as well as continuing to expand overall distribution could further increase Generac's competitive advantage given our unparalleled scale, focus and expertise in the home standby market. Consistent with the comments provided on our fourth quarter earnings call in mid-February, we expect that the first quarter marked the trough for home standby shipments in the current channel destocking process.
We continue to anticipate a return to year-over-year sales growth in the second half of the year as field inventory returns to more normalized levels. The above-average outage environment and robust growth in home consultations thus far in 2023 further support this expectation. The range of threats that utilities and grid operators face was on full display in recent quarters as the outage environment has been driven by severe weather, power supply shortfalls and unanticipated spikes in demand. Outage events are no longer limited to one-off major storms. And as reliance on electricity continues to grow, consumers and businesses have demonstrated that they are less willing to accept a deteriorating level of power liability and they are taking actions to improve their own resiliency. I'd now like to provide some commentary on our residential energy technology products and solutions.
While we're facing temporary headwinds for our residential clean energy offerings, our commitment to success in these markets has not changed. This strategically important area of our business gives us access to a number of highly attractive market opportunities that are supported by strong end demand and further reinforced by unprecedented levels of policy support. We expect that the combined served addressable market for residential solar MLPEs, storage, EV charging, home energy monitoring and management and grid services will grow at strong double-digit CAGR through 2026, resulting in a domestic market opportunity of more than $10 billion. During the first quarter, shipments of power cell energy storage systems remained under pressure as we continue to rebuild and add to our distribution for these products following the loss of a large customer that ceased operations in the third quarter of last year.
Additionally, we continue to make good progress on our SnapRS upgrade campaign in the quarter, and we remain committed to taking care of our customers and the channel partners that are participating in this program. In addition to our residential storage efforts, our energy monitoring and management capabilities remain well positioned as positive momentum in ecobee's device sales, together with a number of product awards are resulting in continued market share gains and highlight the consumer appeal of our feature-rich smart thermostat offerings. ecobee's already strong customer satisfaction scores have improved further since the 2022 release of our latest generation devices, validating ecobee's expertise in user interface and user experience development. We are heavily leveraging that expertise in our single-pane-of-glass initiative, which will act as the central hub of our residential energy ecosystem.
It's also worth noting that customer interest in our grid services offerings remained strong with another quarter of robust sales growth off of a low prior year base. We recently announced a strategic minority investment enrolling energy resources and EV load management software provider as part of our effort to be the leading solution for EV load management to utilities and consumers. We believe this innovative area of our business will help facilitate the transition to the next-generation grid and ongoing policy support remains a potential tailwind as regulators and policymakers increasingly recognize the value of flexible digital solutions to the challenges facing our evolving power grid. We continue to expect gross sales from residential energy technology products and services to deliver between $300 million and $350 million for the full year 2023.
Operating expenses as a percentage of sales are expected to be elevated in 2023 as we continue to build a home energy technology foundation for growth to position our combination of hardware and software solutions for long-term success. With new leadership running this part of our business, our teams are focused on more deeply integrating the products and platforms we've acquired over the past four years. With an eye towards tightening our focus on the solutions where we believe we can create the most value for the consumer as part of the residential energy ecosystem. With improved focus and execution and by leveraging our core competencies around sales and marketing, lead generation, distribution, customer support and global sourcing and logistics, we believe we can create competitive advantages with our residential energy technology products and services that will become evident over time as we continue to develop the smart energy home in the future.
Switching gears, and I want to provide some commentary on our C&I products which have experienced significant growth over the last two years and once again outperformed our expectations in the quarter. Global C&I product sales grew 30% over the prior year to an all-time quarterly record. And backlog for these products also remained at record levels at the end of the quarter as multiple megatrends support demand for backup power and mobile products around the world. Shipments for domestic C&I products grew in the first quarter, highlighted by strength across all channels, including national rental equipment, industrial distributors, telecom and other direct customers for beyond standby applications. Shipments of C&I generators through our North American distributor channel grew significantly again in the first quarter and order trends and channel backlog also increased at a strong rate.
Quoting activity remains robust and close rates improved nicely on a year-over-year basis, highlighting our sustained market share gains and the ongoing strength in demand for backup power in this important channel. As a leading provider of backup power to the North American telecom market, shipments to national telecom customers also increased at a robust rate during the first quarter as compared to the prior -- the strong prior year comparison, as several of our larger national customers continue to deploy generators to harden their existing sites and build out their fifth generation or 5G networks. While shipment and order patterns for certain customers in this channel are expected to be lumpy in the second half of the year, 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.
We also experienced another quarter of tremendous growth for our national and independent rental equipment customers as they continue to refresh and expand their fleets. This end market is supported by the secular trend of critical need for significant infrastructure investments that will require years to complete, and mobile power products and light towers will be necessary in these essential construction projects. Natural gas generators used in applications beyond traditional emergency standby projects also continued to see increased traction during the first quarter as shipments of these products once again grew at an exceptional rate. We believe we are in the very early innings of growth for this exciting new market opportunity as grid stability concerns and volatile energy markets are expected to further drive demand for these solutions.
Additionally, the business models of our direct customers in this vertical are innovating in the generator marketplace by developing as-a-service offerings, which dramatically reduces the need for the large initial capital outlays that have traditionally been required for businesses to add resiliency to their operations. Internationally, robust momentum continued as shipments increased 17% year-over-year during the first quarter with 19% core sales growth when excluding the net impact of contributions from acquisitions and the unfavorable impact of foreign currency. Core total sales growth was driven by strength across key regions, most notably in Europe, where power security for homes and businesses remain the top priority amid ongoing geopolitical and macroeconomic uncertainty.
International segment EBITDA margins also increased meaningfully during the quarter, primarily due to favorable price cost dynamics and improved operating leverage on higher sales volumes. Supplementing our international performance, we're also beginning to see long-term growth potential emerge in new and developing regions such as India, where we are experiencing positive sales momentum for our backup power solutions. This rapidly growing market has unique characteristics for a developing country with the size of its population, broad electrical infrastructure coverage and an increasing number of homes and businesses with direct natural gas connections. We are currently building out our full range of residential and C&I gas solutions to address this large market opportunity.
Additionally, during the quarter, we acquired the remaining 20% minority ownership interest in Pramac, bringing our total ownership to 100%. Pramac is a leading designer and manufacturer of stationary, mobile and portable generators along with energy storage solutions sold through a broad distribution network across the world and it has been a key driver of our successful international expansion since we first acquired a majority interest in the company in early 2016. Through the combination of focused investment and Pramac's global presence, this has become an important strategic element of our international growth aspirations. As we've been experiencing on the residential side of our business, our global C&I product category is similarly in the very early innings of its own energy technology evolution and we've made meaningful progress towards that evolution here in 2023.
In addition to our advanced controls and connectivity solutions, beyond standby natural gas generators and mobile energy storage systems, we've now added stationary energy storage solutions for behind-the-meter applications, both domestically and internationally to our product portfolio. In February, we acquired REFU Storage Systems, a German-based developer and supplier of energy storage hardware products, advanced software and platform services for international commercial and industrial customers. We also recently announced our new series of Generac branded stationary energy storage systems for the North American C&I market in partnership with a leading supplier of behind-the-meter storage solutions. These developments represent our initial foray into this rapidly growing market and advancing our C&I storage capabilities will remain a key initiative for Generac in the coming years.
The long-term opportunity for Energy Technology solutions within our C&I product category is extremely robust, and I'm confident in our ability to leverage our existing position of strength around the world to compete in these markets. In closing this morning, we believe our first quarter performance represents a trough in the current cycle as we continue to focus on reducing home standby field inventory levels and as we work to rebuild sales momentum for our power cell residential energy storage systems. That said, we're extremely pleased with the continued execution in our global C&I product categories that drove overall results ahead of our prior expectations, and we're encouraged by the progress we're making in addressing the near-term challenges that are impacting our residential product categories.
In addition, the robust level of power outage activity and resulting strength in home consultations for home standby generators so far here in 2023, provides incremental support for our expectations to return to year-over-year sales growth in the residential product category in the second half of the year. Importantly, we're maintaining our full year net sales and adjusted EBITDA margin guidance as we execute on our near-term initiatives and position Generac for sustained long-term success in our mission to lead the evolution to more resilient, efficient and sustainable energy solutions.
I'd now like to turn the call over to York to provide additional details on our first quarter results and discuss our outlook for 2023. York?
