Aaron P. Jagdfeld
Chairman, President and Chief Executive Officer at Generac
Thanks, Kris. Morning, everyone, and thank you for joining us today. Our second quarter results were ahead of previous expectations for adjusted EBITDA and adjusted EPS, driven by lower input costs and operating expenses relative to our prior forecast. We are raising our 2024 full year outlook this morning as a result of the recent increase in power outage activity, including the impact of Hurricane Beryl.
Year over year, overall net sales in the second quarter were nearly flat compared to the prior year at $998 million. Residential product sales increased 8% from the prior year due to strong growth in home standby generator shipments. Global C&I product sales decreased 10% from a strong prior year second quarter as softness in the telecom and rental markets was partially offset by an increase in shipments to our industrial distributor customers. Additionally, gross and adjusted EBITDA margins expanded significantly from the second quarter of 2023 as a result of favorable sales mix and the realization of lower input costs.
Home standby shipments were in line with our prior expectations during the quarter, increasing at a mid-teens rate from the softer prior year period that included a meaningful headwind from excess field inventory levels. Power outage activity during the second quarter was above the long-term baseline average, primarily due to strong storms in May that impacted multiple markets in Texas. Early in the third quarter, Hurricane Beryl made landfall in the Houston area, driving year-to-date power outage activity well above the long-term baseline average and increasing demand for home standby and portable generators.
After a slow start to the year, home consultations in the second quarter increased modestly over the prior year and grew at a strong rate on a sequential basis. More importantly, home consultation activity increased significantly during the month of July due to Hurricane Beryl. Additionally, close rates have improved during the first half of 2024 as we continue to execute initiatives to improve sales lead conversion, including data-driven lead optimization practices, sales tool enhancements, and improved lead nurturing practices.
Although we expect close rates to improve over time, they have historically moderated immediately following a major outage event in the affected region. We remain focused on making further investments to bring new and broader demographic categories into the home standby generator market and increase engagement with our end customers, particularly in regions that have not experienced material outage activity in recent periods.
We ended the second quarter with our residential dealer count at approximately 8,900, an increase of 200 dealers from the end of 2023. We also continued to strengthen our relationships with non-dealer contractors as we further grew our aligned contractor program, an effort that helps us expand our installation bandwidth while allowing contractors to purchase product through their preferred channel. We view our dealer and aligned contractor networks as an important competitive advantage for our business and we continue to invest heavily in these relationships with a focus on further developing tools and resources to optimize the selling, service and installation capabilities of our distribution partners.
Activations or installations of home standby generators were down modestly during the first half of 2024, reflecting the lower power outage environment from late 2023 through the first quarter of 2024. However, activations have returned to strong year-over-year growth in the month of July and we expect continued growth in installations as we move through the seasonally stronger second half and impacted by the recent increase in outage activity.
As the clear leader in residential backup power, we are uniquely positioned to respond to major outage events such as Hurricane Beryl. Our ability to leverage our strong financial position to invest in inventory for storm response, combined with our logistics capabilities, allow us to rapidly deploy product into outage impacted areas. Our industry-leading distribution network and our scalable call centers provide 24/7 consumer support and service in our customers' time of need.
We are also increasing our advertising spend in the aftermath of the storm to leverage our expertise in marketing to drive awareness for our products and generate sales leads for our distribution partners, not only in the impacted region but also more broadly across the nation. Simultaneously, we are ramping up our efforts to increase sales and installation bandwidth by adding more dealers and aligned contractors to our distribution network.
Finally, we are increasing our production rates for home standby generators to respond to increases in demand for these products as we have built our supply chain and operating footprint capacities to allow for the rapid expansion of output to respond quickly to market changes. As a result, we are raising our overall 2024 outlook due to anticipated higher demand for home standby and portable generators following the recent increase in power outage activity.
The effect of Hurricane Beryl is also expected to drive higher levels of awareness for backup power longer term as home and business owners seek protection from future power outages. With only approximately 6% penetration of the addressable market of homes in the U.S., we believe there are significant opportunities to further grow the residential standby generator market.
Now, moving to our residential energy technology products and solutions. The overall market for residential solar and storage continues to be negatively impacted from structural changes to California's net metering program, as well as higher borrowing costs, which will continue to weigh on 2024's results for these products.
Although market conditions are challenging in the near term, we recently announced the execution of the previously awarded grant from the U.S. Department of Energy to provide energy storage systems to Puerto Rico with funding from the Puerto Rico Energy Resiliency Fund. The grant provides for up to $200 million in project funding over a five-year term, which is an increase from the $100 million initially awarded when we announced our participation in the program in the fourth quarter of last year. The first shipments of energy storage systems for this program are expected to begin later this year with the bulk of program installations occurring in 2025 and 2026.
Ecobee continues to execute well, gaining market share and driving robust margin improvement over the prior year. Ecobee's connected homes count is now approaching 4 million and services attached rates continue to increase with strong growth in both energy services and home monitoring services. Importantly, we are leveraging Ecobee's expertise in developing hardware and software experiences that are intelligent and intuitive, as their development teams are leading our efforts around building the common platform that will serve as the heart of the Generac residential energy ecosystem.
As disclosed in our press release this morning, we also agreed to make an incremental $35 million minority investment in Wallbox, allowing for the expansion of our commercial agreement globally to include both residential and commercial EV charging solutions across our distribution networks. Additionally, we have aligned on a software development approach that will deepen the integration of Wallbox EV chargers with our dealer and customer platforms. We believe that the ability to manage EV charging as part of our residential and C&I energy technology ecosystems will become increasingly important as growing electric vehicle penetration and the resulting increased demand for electricity have a rising impact on home and business owners, as well as grid operators around the world.
As we continue to build out our energy technology solutions, we believe that the combination of our internal initiatives, strategic investments and core competencies will allow us to effectively compete in these large and growing markets. As we bring increasingly competitive solutions to market over the coming quarters, starting with our next-generation energy storage system later this year, we will accelerate our efforts in expanding and engaging our distribution network. This will allow us to gain market share by further leveraging our expertise in providing superior channel and customer support, as well as our proficiency in delivering qualified sales leads to distribution partners and our brand strength. We believe our unique and comprehensive approach to residential energy management will provide further differentiation as we develop the smart energy home of the future.
Switching now to our C&I product category. As previously expected, global C&I product sales declined 10% from the prior year, driven by a decrease in shipments to both domestic telecom and rental customers. This decline was partially offset by continued growth with our North American industrial distributors as shipments to this channel again grew at a robust rate in the second quarter and quoting activity remained resilient. We continue to expand our market share primarily due to our ongoing focus on operational execution leading to reduced product lead times and further optimization of our domestic distributor channel. This includes additional investment in certain territories where we believe we have a potential to improve our share regionally through M&A or further development of our independent distribution partners.
As expected, shipments to national telecom and rental equipment customers declined in the quarter from the strong prior year period, and we continue to believe these end markets will remain soft for the balance of the year. However, we see long-term growth opportunities in both markets despite the near-term cyclical weakness. We believe the critical need for future infrastructure projects provide substantial runway for growth in the rental channel. In the market for backup power for telecom applications, our long-term growth expectations are supported by the secular trend of growing global tower and network hub counts and the increasingly critical nature of wireless communications and services that require significantly greater power reliability.
As previously announced, in late June, we acquired the C&I battery energy storage system product offering from Sungrid Solutions located in Cambridge, Canada. This small but strategic acquisition brings us engineering and manufacturing expertise to better serve the growing market for behind-the-meter energy storage solutions for commercial and industrial applications, including where it is deployed as a critical component in multi-asset microgrids.
We have an expanding pipeline of commercial projects in which we expect to provide stationary battery storage alongside our traditional generator product offerings. And additionally, we're seeing a number of projects in which EV charging equipment is also included. We believe our commercial agreement with Wallbox is important to helping expand our opportunity to win these and other similar projects.
As we leverage our leading position in natural gas generators and our newly acquired capabilities in energy storage with the Sungrid acquisition, we believe we are uniquely positioned to deliver comprehensive solutions for the developing microgrid market, which is focused on providing C&I customers with important energy resiliency, as well as lower overall energy costs.
Internationally, total sales were lower year over year, primarily related to declines in inter-company shipments from our Mexican operations to the telecom market in the U.S., as well as lower shipments in Europe, most notably for portable generators. Increases in shipments to other key regions such as Latin America and India partially offset the softness.
As previously discussed, our expanded agreement with Wallbox also includes incremental collaboration in international end markets. This is another example of our longer-term international growth strategy as we bring a broad portfolio of solutions to more markets around the world, building on the strong track record of growth and margin expansion in our International segment over the past several years.
In closing this morning, our second quarter margin outperformance and increased 2024 outlook highlight the fundamental momentum occurring within our business. Significant year-over-year margin expansion and robust free cash flow generation in the first half of 2024 have supported our continued investments in accelerating our powering of smarter world enterprise strategy while also enhancing shareholder value through continued share repurchases.
Once again, Hurricane Beryl highlighted the vulnerability of the electrical grid and the need for resiliency. Beryl became the earliest Category 5 Hurricane to form in the Atlantic on record, providing further evidence that the changing weather patterns continue to threaten the continuity of power that we are increasingly dependent on.
Additionally, the rapid adoption of intermittent generation sources and growing demand from electrification trends, as well as the adoption of artificial intelligence are providing additional stresses on our nation's aging power grid. These secular trends will continue to manifest in lower power quality and higher power prices for all ratepayers in the decades to come. By expanding on Generac's core resiliency value proposition and helping optimize for efficiency, consumption, cost and comfort, we remain confident that our products and solutions are uniquely capable of helping home and business owners solve the challenges around resiliency and rising utility costs.
I'll now turn the call over to York to provide additional details on our second quarter results and our increased outlook for 2024. York?
