Aaron P. Jagdfeld
Chairman, President and Chief Executive Officer at Generac
Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our third quarter results were ahead of our previous expectations as elevated power outage activity drove a return to robust growth in overall net sales and strong execution helped to deliver significant margin expansion. The recent increase in outage activity pushed year-to-date power outage hours through September to the highest level since we began tracking this data in 2010. As a result of the third quarter outperformance and the higher-than-expected outage activity, specifically the impact of Hurricane Helene and Hurricane Milton, we are raising our 2024 outlook.
Year-over-year, overall net sales in the quarter increased approximately 10% to $1.2 billion. Residential product sales increased 28% from the prior year due to accelerating demand for home standby and portable generators in the quarter. Global C&I product sales decreased 15% from a strong prior year as capex spending for U.S.-based rental, telecom and beyond standby products remained lower in the quarter and as market conditions further weakened in Europe. These softer end market conditions were partially offset by continued growth in shipments to our domestic industrial distributors as we continue to reduce our lead times.
Additionally, favorable sales mix, lower input and logistics costs and improved production efficiencies drove significant expansion in gross and adjusted EBITDA margins in the quarter, with gross margins reaching their highest level since the third quarter of 2010. This margin expansion, together with our return to overall net sales growth demonstrates the earnings power here at Generac as we continue to execute our strategic vision. Home standby shipments in the quarter increased at a high 20% rate from the prior year as a result of the elevated outage activity.
Outage hours during the third quarter were at their highest quarterly level since the fourth quarter of 2012 and drove home consultations to an all-time quarterly record and continued to be strong in October due to the combined impacts of Hurricane Helene and Milton. Consistent with historical trends following periods of elevated outage activity, close rates have moved lower relative to the first half of 2024. This expected compression in close rates is expected to be temporary as our dealer network absorbs the rapid increase in home consultations and as we anticipate a return to the longer-term trend of improving close rates over time.
We continue to invest heavily in lead optimization, sales tool enhancements and improved lead nurturing practices to help improve the longer-term trajectory of close rates. We ended the third quarter with our residential dealer count at approximately 9,100, an increase of 400 dealers from the prior year with notable growth in Texas. We expect our dealer count to grow further in the regions recently impacted by severe weather, which not only helps drive overall category awareness but this expansion in distribution also plays a critical role in supporting a new and higher baseline level of demand for home standby generators going forward.
Our aligned contractor program also grew during the quarter and is quickly becoming an important new element of our distribution network particularly with the additional installation bandwidth they provide. Aligned contractors, which now number over 2,000, purchase products through our wholesale channel partners and have access to several important sales and service tools. The scale of our installation network, including dealers and nondealer contractors is an important advantage for Generac, particularly following accelerations in demand as we have seen in recent months.
Activations or installations of home standby generators returned to year-over-year growth in the third quarter, driven by strength in the South Central region, and to a lesser extent, the Northeast and Southeast regions. Activations have continued to increase early in the fourth quarter, supporting our expectations for ongoing growth throughout -- through year-end despite a strong prior year comparison. With unmatched scale in this industry, we are uniquely positioned to meet the rapid increase in homeowner demand for residential backup power.
In addition to our scale and logistics capabilities, our industry-leading distribution network and scalable call centers provide 24/7 consumer support and service to homeowners in their time of need. We also have unique marketing capabilities with the resources and capacity to drive additional awareness of our products and generate sales leads for our distribution partners, both within the impacted regions and more broadly across the nation.
Additionally, we are further ramping our home standby production rates and have increased hiring in our Whitewater, Wisconsin and Trenton, South Carolina plants to meet the elevated demand levels we're seeing after Helene and Milton. Given our prior investment in additional home standby manufacturing capacity, we have been able to increase -- to accelerate production at a much quicker pace. In fact, as a result of these investments and the tremendous effort of our teams, we expect to ship approximately $200 million of incremental home standby and portable generators in 2024 related to the impact of the major hurricanes in the second half of the year.
The combination of Hurricanes Beryl, Helene and Milton is also expected to result in higher levels of awareness for backup power longer term as homeowners and businesses look for solutions as protection against power outages. With a nationwide home standby penetration rate at only approximately 6% and the combined penetration rate of the states recently impacted by severe hurricane activity being slightly below that level, we believe there is significant runway for future growth in the category as the mega trend around lower power quality continues to play out.
Demand for portable generators also surged in the quarter as a result of the dramatic increase in power outage activity over the last four months with third quarter shipments increasing at a very strong year-over-year rate. These products not only provide an essential solution for many homeowners in emergencies, but they also often serve as an introduction for most first-time buyers to the backup power market helping to drive Generac brand awareness. In addition to the recent storm-driven benefit, we are leveraging our product breadth and our ability to react to sharp demand increases to further expand our relationships with the major retailers that serve as primary distribution channel partners for portable generators.
Now moving to our Residential Energy Technology Products & Solutions. Our energy storage system sales benefited from initial shipments associated with the previously awarded Department of Energy Grant in Puerto Rico.This program is accelerating as we enter 2025 and provides favorable top line momentum, particularly with the upcoming commercial launch of our next-generation PWRcell energy storage system that we introduced at RE+ in September.
PWRcell 2 includes important upgrades over our previous generation of storage products with PWRcell 2 positioned as the market leader in storage capacity per cabinet, while also delivering improved continuous and peak power output. The AC coupled PWRcell 2 also brings additional flexibility, including an improved retrofit installation experience and seamless generator integration with both home standby and portable generators as well as a differentiated user interface through our ecobee platform.
The introduction of the PWRcell 2 Series marks a key milestone for the company as we believe we are building a unique energy management ecosystem for the market, centered around the ecobee Smart Home Energy Hub and focused on both resiliency and energy savings. Additionally, as we accelerate our efforts in expanding and engaging our channel partners for these products over the coming quarters, we expect to further leverage our expertise in building and developing distribution, lead generation via direct-to-consumer marketing and our brand strength.
In addition to growth in our clean energy storage solutions, our team at ecobee continues to execute very well, driving growth and significant gross margin expansion from the prior year, while also adding new products and partnerships. We believe ecobee's market share continues to grow as a result of these initiatives, building on the current installed base of more than 4 million connected homes. We see the intelligent HVAC control that ecobee provides within our energy management ecosystem as a meaningful differentiator, and we are working towards similar capabilities for EV charging management through our partnership with Wallbox.
Switching gears now to our C&I product category. As previously mentioned, global C&I product sales declined 15% from the prior year. Shipments to our North American industrial distributor channel, again, grew at a robust rate in the third quarter, and quoting activity has remained resilient. Although our operational execution has allowed us to reduce lead times, and customer project time lines have extended more recently, and we will be monitoring these trends closely as we head into 2025. As expected, shipments to national telecom and rental equipment customers declined in the quarter from the prior year period.
While we expect that our sales to the telecom market have bottomed, we believe demand for -- from our rental equipment customers will likely remain softer in the coming quarters. Despite the cyclical weakness we've experienced in 2024, we continue to view both the telecom and rental categories as long-term growth opportunities, given the mission-critical wireless networks and infrastructure-related projects that our products support. Shipments of our natural gas generators for use and beyond standby applications also declined during the quarter from a very strong prior year comparable period.
End market activity remains subdued, but we are optimistic regarding the longer-term prospects for these applications and adjacent projects due to the supporting megatrends of lower power quality and higher power prices. We continue to develop a growing pipeline for our C&I battery energy storage systems or BESS, as well as our multi-asset microgrid offerings, which often include traditional generator products as part of these solutions. In early August, we acquired Ageto, a leading provider of microgrid controllers.
This small but strategically important deal follows our recent acquisition of SunGrid's C&I BESS product offering and brings us important technical capabilities that enable end users to coordinate, optimize and monitor multiple energy assets from a single interface. Ageto also brings commercial synergies, given its strong reputation in the C&I microgrid space. By leveraging these capabilities, Generac was selected for negotiations by the Department of Energy to receive a grant of $50 million to deploy microgrid solutions across approximately 100 California water utility sites.
The total investment from the DOE grant and water utilities, inclusive of all hardware components, installation costs and community benefits associated with the project is expected to be approximately $100 million. These microgrids will also form virtual power plants capable of delivering critical grid support during times of stress. We believe this award provides important validation of our strategic vision for energy technology within the C&I product category and has the potential to serve as a successful proof point for similar applications across the country.
Internationally, total sales decreased year-over-year primarily due to lower intercompany shipments from our Mexican operations to the telecom market in the U.S. as well as a decline in portable generator and C&I product sales in Europe. Our international results continue to be impacted by varying market conditions around the globe as softness in Europe in the third quarter was partially offset by growth in other key regions, most notably Latin America.
Adjusted EBITDA margins have been impacted by this decline in shipment volumes, but as we execute on our global growth initiatives, we expect to drive continued improved profitability over time in this important segment of our business. In closing this morning, our third quarter outperformance and increased 2024 outlook highlight our strong execution alongside the megatrends that support our long-term growth expectations. Significant margin expansion and robust free cash flow generation thus far in 2024, have helped to enable our disciplined and balanced capital allocation strategy.
I also want to take a moment to thank the teams here at Generac that have been executing our rapid response to the significant increase in power outage activity over the last several months. Our operations, supply chain and customer support teams have been working tirelessly in response to Hurricanes Beryl, Helene and Milton. I'm incredibly proud of our team's efforts, particularly those of our field service storm response teams that travel directly into the areas impacted by these events to provide vital boots on the ground support to customers and distribution partners.
As power outages have steadily trended higher over the last 30 years, the need for continuous and reliable sources of power is growing due to the increasingly electrified and connected nature of our homes, businesses and our transportation. These electrification trends together with the adoption of artificial intelligence and the reindustrialization of North America are driving expectations for power demand or load growth far beyond what has been seen in the last two decades.
At the same time, renewable intermittent generation sources are being prioritized. We expect that these secular trends will drive grid-related supply-demand imbalances ultimately resulting in lower power quality and higher power prices for all ratepayers. By building on our well-established resiliency value proposition with solutions that optimize for efficiency, consumption, cost and comfort, we are confident that Generac is uniquely positioned to help home and business owners overcome the challenges of the evolving electrical grid.
I'll now turn the call over to York to provide further details on the third quarter results and our increased outlook for 2024. York?
