Aaron P. Jagdfeld
Chairman, President and Chief Executive Officer at Generac
Thanks, Mike. Good morning, everyone, and thank you for joining us today. Our fourth quarter results reflect continued strong momentum in our commercial and industrial product categories during the quarter, but softer residential product sales resulted in consolidated net sales at the low-end of our previous guidance range. Specifically, higher home standby field inventory levels continue impact orders and shipments in the fourth quarter and clean-energy product shipments were lower as we work to further improve the reliability of these products and expand our distribution capabilities.
Year-over-Year, overall net sales decreased 2% to $1.05 billion and core sales declined 7% during the quarter. Residential product sales decreased 19% from the prior year due to the previously mentioned home standby and clean-energy product headwinds. C&I product sales increased 27% on a year-over-year basis, with robust core sales growth across all channels domestically, and all regions internationally.
Adjusted EBITDA margins declined during the quarter as the unfavorable effect of sales mix, reduced operating leverage and the increase in recurring operating expenses from recent acquisitions were partially offset by favorable price cost dynamics. For the full-year 2022 Generac achieved another year of record top-line growth with total net sales increasing 22% over 2021, which marked our third consecutive year of double-digit growth. While residential product shipments faced headwinds in the second-half of 2022, the category still experienced strong year-over-year growth of approximately 19%.
Additionally, sales of our C&I products have never been stronger. As global shipments grew 26% over the prior year, resulting in $1.26 billion in annual sales. We exited 2022 with record backlog for these products setting our expectations for another strong year in 2023. In addition to record net sales, our International segment achieved all-time highs in adjusted EBITDA and adjusted EBITDA margins for the year as we continue to benefit from increasing global demand for backup power and mobile products. Also our strong liquidity position allowed us to opportunistically repurchase more than 2.7 million shares during the year.
Before discussing fourth quarter results in more detail, I want to provide an update on the progress we've made over the course of the year to advance our evolution into an energy technology solutions Company and discuss the continued development of the powerful mega-trends that are driving our business. Despite the softer second-half of 2022 for our residential products, we continue to make important progress in building out our portfolio of energy technology-related solutions during the year. Importantly, we began assembling a significantly deeper and more experienced leadership team focused on improving and advancing our clean-energy products and distribution capabilities, while further integrating the multiple energy technology investments we've made in recent years. We also continue to develop and invest in numerous new technologies and capabilities, including taking a minority equity interest, investment in WATT Fuel Cell, acquiring Blue Pillar and launching our single pane of glass initiative.
Blue Pillar capabilities provide us with the foundation for connecting our growing portfolio of C&I focused energy technology solutions, while our single pane of glass initiative is focused on developing the end-user interface or central hub of our smart home energy ecosystem and heavily leverages ecobee's platform development expertise. We also brought multiple new solutions to market during the year, as we began shipping our second generation load control device called PWRmanager launched align of portable battery solutions called Portable Power Stations and announced new EV charging solutions for utilities and EV owners. Our grid services team also announced several additional project wins during 2022 and had a strong year across several key operating metrics.
Additionally, the mega trends that drive the long-term growth trajectory of our business became even more evident in 2022. Extreme weather and multiple high-profile outage events further highlighted the poor reliability of the U.S. power grid while war and geopolitical instability in Europe forced consumers and businesses to evaluate the importance of energy security. The Home as a Sanctuary and aging in place trends that are helping drive demand for residential backup power solutions remain very compelling. A structural shift in consumer preferences and work habits in the U.S. in recent years has further increased sensitivity to power outages with the percentage of individuals working from home tripling and home health referral volumes doubling since 2019.
As the effects of climate change become increasingly evident, the policy backdrop for our energy technology solutions has ever been more favorable, most notably with the passage of the Inflation Reduction Act in 2022, providing additional conviction for us to maintain a long-term focus with our investments in energy technology. Additionally, increased federal infrastructure spending and the ongoing upgrade of global telecom networks help support our future growth expectations for our C&I products as well. The massive changes taking place with our nation's power grid are yet another mega trend that continues to strengthen as growing demand for electricity is met with less reliable supply. According to the North American Electric Reliability Corporation or NERC, approximately 25% of Americans are at high-risk of resource adequacy shortfalls during normal seasonal peak conditions in the 2023 to 2027 period due to the growing supply-demand imbalances across our power grid. With the electrification of everything trends accelerating and the growing penetration of EVs, coupled with an increasingly higher mix of supply from intermittent renewable power generation sources, we believe this mega trend will drive a significant focus on the need for power resiliency for years to come. NERC's high-risk categorization comes before considering the notable increase in severe and volatile weather we've witnessed in recent years, which we believe only further magnifies the need for reliable decentralized energy technology solutions.
Now, discussing our fourth quarter results in more detail. Residential product sales declined at a double-digit rate as compared to the prior year, primarily driven by lower home standby shipments in the quarter resulting from higher field inventory levels. However, end-market conditions continue to be strong during the quarter. Baseline power outage activity in the U.S. was above the long-term average, with winter storm Elliott and other larger localized outages providing yet another stark reminder of the fragility of our electrical infrastructure. The extreme temperatures over the holiday season created a surge in-demand for power for residential heating and coincided with supply disruptions as the nation's largest grid operator saw nearly a quarter of its power plants fall offline resulting in rolling blackouts. This event took place in an especially inconvenient insensitive time for many households, further supporting the continued increase in consumer awareness of the growing need for backup power solutions.
Home consultations or sales leads in the quarter remained strong, matching the record-high for a fourth quarter period in the prior year. Additionally, home consultations for full-year 2022 were more than three times 2019 levels. This strength has continued early in 2023 with home consultations growing again on a year-over-year basis, and reaching record levels for the month of January following the holiday season outage activity.
We remain focused on expanding our distribution network, as we experienced sequential growth in our residential dealer base and ended the quarter with more than 8,700 dealer partners, a net increase of approximately 200 dealers from the third quarter. Activations which are a proxy for installations grew at a robust rate in the fourth quarter compared to the prior year and also grew sequentially as a result of increased installed bandwidth. In addition, to this encouraging growth in activations and dealer count, we also experienced sequential improvement in close rates and dealer project lead times, although these two metrics are not yet back to normalized levels. The number of home standby generators and field inventory declined sequentially during the fourth quarter, and are down more than 20% from peak levels, benefiting from reduced production rates and record activation levels in the quarter.
Days of field inventory, which considers recent trends and activation rates also declined sequentially during the fourth quarter. However, relative to historic seasonal patterns, days of field inventory are still well-above normalized levels as of the end of 2022. We expect the field inventory levels will remain elevated through the first-half of 2023, which will continue to weigh on orders and shipments of home standby generators during the first and second quarters.
Improving installation bandwidth for home standby generators is a key initiative for the Company in 2023. We are focused on adding more dealers, providing support for dealer recruiting, training to improve installation efficiency and developing additional technical innovations to make it easier for contractors to install our products. Recent dealer count growth has been very encouraging as we added over 500 dealers in the second-half of 2022. We also rolled-out our Dealer Talent Network to help channel partners recruit qualified labor and are actively engaging with trade groups, such as the independent electrical contractors to further drive awareness for the home standby generator category among contractors.
Initiatives to help dealer streamline the installation process are also progressing well, including the launch of a universal permitting package that allows dealers to pull the necessary project documentation for their specific location. In addition, we have further expanded our field training efforts and the sharing of installation best practices for dealers and non-dealer contractors. The combination of these actions is expected to result in meaningful improvement in activation rates as the year progresses.
Consistent with the comments provided in our third quarter earnings call in early November, we expect home standby sales to decline for the full-year 2023 due to significant weakness in first-half shipments resulting from elevated levels of field inventory with the first-quarter expected to mark the trough for shipments during the current channel destocking process. We continue to anticipate more normalized field inventory levels in the second-half of the year based on our current view of home consultations, activations and our production rates along with the assumption of power outage activity in-line with the long-term baseline average.
As we ramp home standby shipments sequentially into the second-half of the year, we expect home standby sales to return to solid year-over-year growth in the third and fourth quarters even when assuming no major outage events. Favorable end-market demand metrics, significant growth in our dealer counts, low nationwide penetration in the mid single-digits and strengthening mega-trends reinforce our confidence in the long-term growth trajectory for the home standby category and also support our near-term expectations for a return to growth once the home standby market reaches more normalized field inventory levels.
I'd now like to provide some commentary on our residential energy, technology, products and solutions as sales were in-line with the low-end of our prior expectations during the fourth quarter with continued softness in residential energy storage shipments, offset by strong top-line performances from ecobee and Generac Grid Services.
Shipments of our PWRcell energy storage systems were again negatively impacted by the loss of a large customer that ceased operations in the third quarter and the overhang of the SnapRS quality-related concerns. We are committed to supporting the dealers that are participating in our SnapRS warranty coverage upgrade program, as well as ensuring that end-customer systems are performing as intended. Channel partner response to these efforts has been favorable thus far and we are working to build a larger and stronger network of installers and distributors, which remains a top priority for the Company in 2023 as we position our residential clean-energy product offering for long-term success.
We are investing heavily on further improving the quality and reliability of our clean energy products and view the residential storage market as a key strategic opportunity for Generac. Additionally, we're making good progress towards our next-generation energy storage system and we'll begin alpha testing of these products in the second-quarter of this year with an anticipated launch to the market in 2024.
I'd now like to provide a quick update on ecobee, which forms the core of our connected devices strategy within our residential energy ecosystem. Ecobee sales continue to grow at a strong rate in the fourth quarter despite aggressive promotional activity from competitors, which underscores the strong competitive positioning of ecobee's feature rich solutions. In addition to their core smart thermostat product continuing to gain traction in the professional contractor channel, a number of larger utilities have been seeking out grid service partnerships with ecobee further validating our differentiated offering. We also recently-announced the integration of home standby monitoring capabilities into the ecobee platform, which allows homeowners to monitor their home standby generator and propane tank fuel levels and receive alerts directly on the ecobee platform. This marks an important first step forward in our single pane of glass initiative in developing the central user interface for our suite of residential products that will heavily leverage the ecobee platform and the development team.
I also want to provide some commentary on our grid services team and their efforts as they closed out a strong year in 2022 with continued growth across key performance metrics, including connected megawatts, assets under management, number of customers and gigawatt-hours of capacity delivered. The growing grid services sales pipeline is being driven by both new and existing customers, as well as a wide range of connectability hardware including the Blue Pillar acquisition, which will now provide our C&I products with connectivity capabilities to allow previously stranded C&I assets to be made available to grid services programs.
In addition, grid services programs can also provide incremental economic support to the residential solar-plus-storage market as higher financing costs impact traditional consumer loan driven demand. Not only can these programs improved the economics for homeowners that own storage systems, but we're also seeing increased opportunities to deploy grid services programs utilizing utility and third-party owned systems. We believe our unique portfolio of hardware and software solutions remains a key competitive advantage within the grid services space.
The long-term market opportunities for residential energy storage, power conversion, energy monitoring and management services and grid services remains highly-attractive and core to our strategic vision and we will continue to target these markets and adjacent opportunities. To that end, we recently-announced the launch of our new EV charger, which marks Generac's initial offering into this large and rapidly-growing market. This product will be available later in 2023 through Generac's omnichannel distribution network including our residential dealer network, leading home-improvement in hardware retailers and electrical wholesalers. We're excited to incorporate this product into our smart home energy ecosystem while continuing to pursue future EV charging innovations and capabilities. EV charging will become an increasingly important part of the energy ecosystem to the home. And as a leader in residential power, this product is a natural extension of Generac's portfolio of energy technology solutions.
Given the significant market opportunities, we continue to invest heavily in the people and processes involved in the development of these products and solutions, and this remains a key strategic area of focus for the Company. We are encouraged by the progress of our new residential energy technology leadership team in integrating and improving the solutions we've acquired and developed in recent years. The investment level necessary to build a home energy technology foundation for growth will contribute to higher operating expenses as a percentage of sales for the Company in 2023, but we anticipate strong returns on these investments well into the future as we position Generac as a leader in the deployment and integration of hardware and software solutions for home energy ecosystems.
As a result of these initiatives and investments, we expect the combination of residential energy, technology, products and services to deliver gross sales between $300 million and $350 million for the full-year 2023. We anticipate that these results will sequentially improve throughout the year, driven by strong growth from ecobee and grid services alongside our expectations for continued improvement from our clean-energy products and distribution efforts in the coming quarters.
Switching gears. I mean I want to provide some commentary on a part of the business that has continued to outperform our expectations. As our C&I product experienced an outstanding quarter globally, as sales grew by 27% as compared to the prior year, benefiting from very strong demand and higher production levels resulting from capacity expansion initiatives. Growth in shipments for domestic C&I products in the fourth quarter was highlighted by strength across all channels, including national rental equipment, telecom, industrial distributors and other strategic customers. We experienced continued strength in-demand during the quarter, as the backlog for our C&I products grew again sequentially and ended the year at record levels giving us excellent visibility into continued growth for the category in 2023. Shipments of C&I stationary generators through our North American distributor channel grew significantly again in the fourth quarter and order trends indicate growth will continue in 2023 as backlog in the channel also increased again on a sequential basis.
Quoting activity and close rates remain elevated compared to prior year levels, highlighting our sustained market-share gains, as well as the durability of overall demand trends for these products. Shipments to national telecom customers also increased at a robust rate during the fourth quarter compared to 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.
Investment in telecom infrastructure remains one of the key mega-trends that we expect to drive growth for our C&I products in the coming years as global tower and network hub counts further expand and the increasingly critical nature of wireless communications requires backup power for resiliency. As the leading provider of backup power to the North American telecom market, we expect to benefit from the secular trend. We also experienced another quarter of tremendous growth with our national and independent rental equipment customers as they refresh and expand their fleets. We believe the demand environment for mobile products will remain robust in the quarters ahead as evidenced by order growth outpacing shipment growth in the quarter and the mega-trend around the critical need for infrastructure improvements continues to play-out. Additionally, we are helping these customers advance their sustainability goals with solid demand for our newly introduced mobile energy storage systems and as we delivered the first containerized hydrogen fuel-cell unit to a national rental customer through our recently-announced distribution agreement with EODev.
Strong customer interest for natural gas generators used in applications beyond traditional emergency standby projects also continued in the quarter as shipments of these products grew at an exceptional rate. Order rates also remained strong with our quarter-end backlog for these products up substantially, both year-over-year and sequentially. 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 innovative solutions.
Internationally, robust momentum continued as shipments increased 22% year-over-year during the fourth quarter with 28% core total sales growth when excluding unfavorable impact of foreign currency. Core total sales growth was driven by strength across all regions, most notably in Europe and Latin-America with intersegment sales again growing substantially in the quarter as our Generac Mexico facility continued to ramp production to telecom products for the North American market.
International segment EBITDA margins also increased during the quarter, primarily due to improved operating leverage on the higher sales volumes. The European region has seen remarkably strong demand, most notably for C&I products and portable generators due to a heightened focus on energy independence and security. Power security concerns amid the war in Ukraine have remained and we are providing backup generators to the region through our European sales branches. Although geopolitical and macroeconomic conditions in the region remain volatile, driving less certain long-term demand trends and market awareness of the need for resiliency has undoubtedly increased across the continent. The subsequent effect of the war on Europe's energy complex has highlighted the need for reliable, onsite power resources for homes and businesses around the globe.
We also recently announced the acquisition of REFU Storage Systems, a German developer and supplier of battery storage hardware products, advanced software and platform services for the commercial and industrial market. This acquisition represents our initial entrance into the large and rapidly-growing C&I stationary energy storage market for behind-the-meter applications, which we view as a natural extension of our long history in the C&I backup power generation market. Given the continued momentum in the international segment, along with strong demand fundamentals and existing backlog across domestic C&I channels, we expect net sales growth for our global C&I products to be in the mid to-high single-digit range for 2023.
In closing, this morning, we're encouraged by the initial progress in our interaction plans to address the near-term challenges that have impacted our results over the past two quarters. We believe we have a line-of-sight to normalization of home standby field inventories as we right-size our production and continue to expand our installation bandwidth. We have significantly strengthened our residential energy technology leadership team over the last six months and they are driving an increased focus on quality and innovation, while we further build-out our product and distribution capabilities in the strategically important part of our business.
Global interest in our C&I products and services have never been stronger and is well-positioned to continue growing in 2023. We remain confident in the long-term strategic growth themes within our business, including the still significant penetration opportunity for home standby generators and the rapidly developing market for energy storage. The previously discussed mega-trends that support these growth themes have never been more evident.
Our refined focus on execution through our portfolio of backup power and energy technology solutions has uniquely positioned us to create value in the transition to the next-generation grid. I am extremely confident in our team's ability to continue developing innovative products and services as we execute on our mission to lead the evolution to more resilient, efficient and sustainable energy solutions.
I'll now turn the call over to York to provide further details on the fourth quarter as well as full-year 2022 results and our outlook for 2023, York.
