Aaron P. Jagdfeld
Chairman, President and Chief Executive Officer at Generac
Thanks Kris. Good morning, everyone, and thank you for joining us today. Happy Valentine's Day. I think I can say that.
Our fourth quarter results reflect continued improvement in operating performance as shipments of home standby generators returned to strong year-over-year growth in the quarter despite a softer than expected power outage environment. We also experienced significant margin expansion in the quarter, driven by favorable mix and price/cost tailwinds on both a year-over-year and sequential basis. In addition, we generated record free cash flow in the quarter on the continued reduction of our inventory levels.
Year-over-year, overall net sales increased 1% to $1.06 billion and core sales were approximately flat during the quarter. Residential product sales increased 1% from the prior year as growth in home standby generator shipments offset lower portable generator sales in the quarter. C&I product sales were approximately in line with the strong prior year fourth quarter as softness in the domestic telecom and rental channels was offset by continued strength in broader C&I end markets.
Before discussing our fourth quarter results in more detail, I want to provide some highlights for the full year 2023. Global C&I product sales in 2023 reached an all time record of approximately $1.5 billion, our third consecutive year of strong double-digit growth in the category, resulting in a nearly 30% sales -- compounded annual sales growth rate over those three years. This included record full year performance in our International segment for both net sales and adjusted EBITDA. The strength in our C&I products has helped to offset the headwinds in our residential product categories related to elevated levels of home standby generator field inventory in 2023 and a strong comparable period that included the benefit of excess backlog reduction. Although our shipments to the market were impacted by these factors during the year, home consultations or sales leads increased for the full year despite not having the benefit of a major outage event during 2023.
Additionally, our return to improving margin performance in the second half of the year, together with the continued reduction in our inventory levels, helped drive cash flow from operations to an all time record for full year 2023. This robust cash flow generation provided additional flexibility with respect to our capital deployment as we completed $252 million of share repurchases, while also continuing to invest in advancing our products and solutions roadmaps during the year.
We continued to make significant investments in our engineering and manufacturing capabilities in 2023 as we opened an engineering center of excellence in Reno, Nevada, and broke ground on a new manufacturing facility in Wisconsin to increase capacity for C&I stationary products. We also continued to launch compelling new products during the year, including the introduction of stationary C&I energy storage solutions for the domestic market to help decentralize, digitize and decarbonize the future electrical grid with advanced micro grid applications.
In addition, the ecobee team launched a smart doorbell camera product line, helping to drive engagement to their platform. We also made important progress toward our vision of building a common platform and user interface for our suite of residential solutions through the integration of our home standby generators and propane tank monitoring devices using ecobee as the central hub to manage our products and solutions. Additionally, we introduced our new It's a Power Move advertising campaign to help drive incremental consumer awareness of the home standby generator category to a broader demographic range.
We made further strategic investments in 2023 that helped to accelerate our Powering A Smarter World enterprise strategy as we acquired REFU Storage Systems, a provider of stationary C&I energy storage solutions for European markets, and made a minority investment in Wallbox, a leading provider of EV charging solutions for both residential and commercial applications. Our investment in Wallbox is expected to result in global commercial collaboration as well as the addition of a Generac seat on the Wallbox Board of Directors. We're excited to partner with an innovative technology leader in the EV charging industry and look forward to integrating Wallbox's solutions with our broader energy technology portfolio to further expand the value proposition of the energy ecosystems that we are building for homes and businesses.
Importantly, throughout 2023, the megatrends that we believe will drive our longer term growth were on full display as increasingly severe weather, coupled with the continued evolution of the energy grid in the U.S., further demonstrated the important role that our products and solutions can provide to the market. Although the U.S. did not experience any major power outage events during 2023, and despite the fourth quarter being the lowest fourth quarter for outage hours since 2015, there were numerous smaller scale severe weather events that did occur throughout the year across a number of regions in the -- in North America, which drove monthly power outage activity above the long-term average baseline.
In addition to the increasingly frequent and higher magnitude weather related power disruptions, legislative and regulatory reactions to climate change are also impacting the power grid as well. On the supply side, utility scale solar and wind power are being incentivized relative to traditional baseload thermal sources, but they are intermittent in nature and continue to face growing sighting and permitting challenges. At the same time, demand is increasing as electrification trends are accelerating around heating, cooking and transportation, and power-hungry data center and telecom infrastructure continues to rapidly build out. These changes are creating significant challenges as utilities and grid operators are struggling to reliably match supply and demand, particularly during periods of extreme heat during the summer and cold during the winter.
In its 2023 Long-Term Reliability Assessment, the North American Electric Reliability Corporation, or NERC, continued to warn of the elevated risk of resource shortfalls across the majority of the U.S. and Canada, as key forecasts around supply availability and future electricity peak demand are creating a higher risk of imbalance, leading to potential outages more so than any time in recent history. As a result of these factors, we expect there will continue to be significant opportunities for our portfolio of power resiliency and energy efficiency solutions well into the future. Specifically, for the home standby generator category, we believe a massive penetration opportunity still remains, as only 6.25% of the addressable market of single-family unattached homes, greater than $150,000 in value in the U.S., had a home standby generator installed at the end of 2023. Furthermore, every 1% of incremental penetration is worth approximately $3 billion in market value. And with a market share greater than 70%, we believe Generac is incredibly well-positioned to continue to lead the commercialization of this important product category.
These same megatrends create significant opportunities for our global C&I products and solutions as businesses are also concerned about navigating power reliability issues and volatile energy prices. Near term, we are focused on further executing on our strategic vision, which we believe puts Generac in a unique position to help home and business owners solve for the energy related challenges that lie ahead.
Now, discussing our results in more detail. Fourth quarter home standby shipments increased approximately 10% from the prior year despite continued field inventory destocking and softer than expected -- and a softer than expected power outage activity, which also weighed on home consultations during the quarter. However, in early 2024, severe winter storms pushed outage activity to record levels for the month of January. Power conservation notices sent to homeowners in select markets driven by unseasonably cold temperatures and the related spike in power demand also contributed to consumer awareness of the vulnerability of the electrical grid. As a result of these factors, home consultations in January of this year were an all time record for the month.
Our residential dealer count ended the fourth quarter at approximately 8,700, in line with the prior year count. Dealer productivity trends further improved in the quarter and we continued to execute on our initiatives to train non-dealer contractors, helping to increase overall installation capacity. Notably, close rates improved moderately during the fourth quarter, helping to offset the impact of lower power outage activity and softer home consultations.
More importantly, activations, which are a proxy for installations, were at an all time quarterly record in the fourth quarter, increasing slightly from the previous record of the fourth quarter of 2022, providing further support for our belief that the home standby category is holding a new and higher level baseline level of demand. The record activations in the fourth quarter helped to further reduce the number of home standby generators in our distribution channels as we continued to under-ship end market demand in the quarter.
As certain regions and channels of the home standby market have returned to normal ordering patterns, the gap between shipments and activations further narrowed as we exited 2023 and we continue to expect overall shipments and activations to align later in the first quarter of this year. For 2024, we expect home standby sales to increase at a rate approximately in line with the mid-teens residential sales growth guidance disclosed in our press release this morning. Additionally, we expect home standby generator sales to increase on a year-over-year basis in each quarter throughout the year, assuming that power outage activity is in line with the historical baseline average.
In addition to home standby generator shipments returning to growth, sales of our residential energy technology products and solutions also increased during the fourth quarter as compared to the prior year, led by continued growth at ecobee, as our team there continued to gain share in the smart thermostat market by driving momentum with professional contractors and further expanding their presence with key retail partners. The fourth quarter launch of ecobee's Smart Doorbell Camera was well received by consumers and industry experts and continued to showcase their expertise in delivering consistently positive customer experiences. ecobee finished 2023 with more than 3.5 million connected homes, giving us a large installed base of satisfied customers that we can cross-sell our products and service capabilities to as we work towards rolling out our residential energy technology ecosystem.
We experienced another important event during the fourth quarter as we were awarded grants from the Department of Energy to utilize our residential energy technology solutions for resiliency-focused programs in Puerto Rico and Massachusetts over the next several years. The program in Puerto Rico is expected to utilize our energy storage systems to provide clean energy independence for residents. The program in Massachusetts is expected to include our energy storage systems, ecobee smart thermostats and grid services capabilities, demonstrating our ability to integrate multiple technologies to support a home's energy needs, while also providing additional value for grid operators by aggregating and managing these distributed energy resources in a virtual power plant setting.
As previously mentioned, we made an important minority investment in Wallbox during the fourth quarter, which provides for a future seat on the Wallbox Board of Directors and creates the opportunity for global commercial collaboration across our residential and C&I distribution networks. The partnership also brings future access to industry leading bi-directional charging development, which we believe will play an increasingly critical role in our emerging residential energy technology ecosystem, as the penetration of electric vehicles increases in the future.
For 2024, we expect gross sales for residential energy technology products and services, including energy storage, energy management devices and services, connectivity, and home EV charging solutions, to be in a range of $325 million to $350 million, a year-over-year growth rate of approximately 25%. We continue to make meaningful investments in building out our residential energy ecosystem, including our next-generation energy storage system, which is expected to be commercially available later in the second half of this year.
I would now like to provide some commentary on our commercial and industrial products. Global C&I product sales were approximately flat on a year-over-year basis in the fourth quarter and increased 19% for the full year 2023 to approximately $1.5 billion. Domestic C&I product sales declined modestly during the fourth quarter as softness in shipments to the telecom and rental channels offset continued strength in sales to our industrial distributors and other direct customers for beyond standby applications. Shipments of C&I generators through our North American distributor channel again grew at a robust rate in the fourth quarter. Although order patterns in the second half of the year were impacted by extended product timelines, quoting activity remained resilient despite being off the peak levels experienced earlier in 2023.
Shipments of natural gas generators used in applications beyond traditional standby projects increased at a very strong rate during the fourth quarter. As the leading provider of natural gas generators, we continue to pioneer new market opportunities for beyond standby generator applications and other energy technology solutions in C&I end markets. We are working to facilitate the development of our increasingly comprehensive products and solutions in multi-asset applications, such as pairing our smart grid ready natural gas generators with our emerging C&I storage, connectivity, advanced controls and grid services platforms. While we believe this is an important long-term growth opportunity, today's higher interest rates are putting pressure on project timelines. And as a result, we expect shipments of products for beyond standby related applications to be negatively impacted in 2024.
Sales to our national and independent rental equipment customers in the fourth quarter declined from the prior year as order patterns remained weaker than the stronger prior year comparisons. Despite the normal cyclical softness in this vertical that is impacting our overall 2024 expectations, we continue to believe that this end market has substantial runway for growth given the critical need for future infrastructure related projects that leverage our products sold into the rental equipment channels.
As expected, shipments to national telecom customers declined again during the quarter, particularly when compared to the very strong prior year fourth quarter level as these customers further reduced capital expenditures. Given our current visibility, we expect shipments to telecom national accounts will remain soft in the coming quarters, weighing on our overall 2024 outlook. However, we have experienced these capex spending cycles over the 40 years we've been serving this market, and we believe the near-term cyclicality will not change the longer-term secular trend of increasing global tower and network hub counts and the increasingly critical nature of wireless communications and related services that are requiring significantly greater power reliability.
Internationally, total sales were pressured by lower intersegment sales, primarily related to declines in intercompany shipments from our Mexican operations to the domestic telecom market, as well as lower shipments of portable generators in Europe, as energy security concerns resulting from the Russia-Ukraine war continued to abate. Helping to offset this weakness, International net sales in other emerging markets, such as India, the Middle East and East Asia, grew at a strong rate during the quarter. International growth remains an important strategic focus for us moving forward, with significant opportunities in continued geographic expansion and further penetration of underserved markets as we implement the Generac playbook across a growing global footprint.
As disclosed in our press release this morning, we expect global C&I product sales to decline by approximately 10% for full year 2024, as weakness in shipments to certain direct telecom, rental and beyond standby customers is expected to more than offset growth in other regions and channels.
In closing this morning, we believe our fourth quarter results reflect a return to positive momentum in our overall business as our residential product sales began to grow again, which should help to offset cyclical softness in certain C&I customers and end markets. We believe we are nearing the end of the excess field inventory overhang for home standby generators and expect to realize strong year-over-year growth in shipments of these products in 2024. This momentum gives us confidence in continuing to focus on building out our longer-term vision for both residential and C&I energy technology ecosystems. Our record cash flow performance in the fourth quarter is continued evidence of the earnings power of our business and gives us flexibility to prioritize further organic investments, execute on strategic acquisitions, and opportunistically return capital to shareholders. Most importantly of all, the megatrends that support our longer-term opportunities remain firmly intact and our conviction in our Powering A Smarter World enterprise strategy is as strong as ever.
I'll now turn the call over to York to provide further details on our fourth quarter and full year 2023 results and our outlook for 2024. York?
