Generac Holdings Inc

NYSE:GNRC

Earnings Call Transcript 2021-Q3

[Operator]

Good day and thank you for standing by. Welcome to the Third Quarter 2021, Generac Holdings Incorporated Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions]. Be advised that today's conference is being recorded. [Operator Instructions]. With that, I would now like to hand the conference over to your speaker today, Michael Harris, VP Corporate Development and Investor Relations. Thank you and please go ahead.

[Michael Harris, Vice President, Investor Relations]

Good morning and welcome to our third quarter 2021 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer, and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation, as well as other information provided from time-to-time by Generac or its employees, may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements.

Please see our earnings release, our SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures is available in our earnings release or SEC filings. I will now turn the call over to Aaron.

[Aaron Jagdfeld, CEO]

Thanks, Mike. Good morning, everyone and thank you for joining us today. We experienced another quarter of exceptional demand as interest in our home standby generators, clean energy systems, and C&I products remained incredibly strong. Production levels were also the highest we have ever experienced in a quarter with shipments of home standby generators increasing at a substantial rate over the prior year, as we continue to ramp output at our new facility in Trenton, South Carolina.

This led to record revenue growth of 34%, in spite of significant operational obstacles faced across the supply chain environment that deteriorated further during the third quarter. Even with the higher output levels, demand remained very strong and broad-based, leading to higher backlog levels, particularly for home standby generators, providing us with good visibility and a significant revenue growth for 2022. Additionally, we recently announced several strategic acquisitions that will accelerate our new Powering a Smarter World strategy, and provide additional avenues for growth as we continue our evolution into an energy technology solutions Company.

Year-over-year, overall net sales increased 34% to $943 million, an all-time record, and also increased sequentially relative to the second quarter, which was the previous all-time record. The growth in the quarter was driven by strength in both residential and C&I products as compared to the prior year. Residential product growth was led by a 50% increase in shipments of home standby generators, as production levels continued to increase significantly relative to prior year levels, as well as tremendous year-over-year growth in shipments of PWRcell energy storage systems, which also grew double-digits on a sequential basis. Shipments of C&I products were also up dramatically in the quarter, with revenue of these products now growing materially above 2019 levels due to strength across a number of end markets and geographies.

[Aaron Jagdfeld, CEO]

Adjusted EBITDA margins of 22.2% were lower as compare to the prior year, as they were unfavorably impacted by higher logistics and commodity costs. In response to the escalating costs we are experiencing, we've undertaken a number of additional pricing actions and cost reduction initiatives to mitigate the longer-term impact to margins.

Now, discussing our third quarter results in more detail, the megatrends driving consumer interest in backup power continued in the third quarter. Most notably, the Home as a Sanctuary trend, combined with more extreme weather, which again resulted in elevated power outage activity. Overall, baseline outage activity for the trailing 4 quarters grew on a year-over-year basis in the quarter, despite a very strong prior year comparison and remains well above the long-term baseline average.

In fact, since we began tracking the impact of outage activity more than a decade ago, four of the top ten power outage severity quarters have occurred since the second half of last year. The convergence of the heightened power outage activity, broader electrification trends, and people spending more time at home has driven unprecedented demand for home standby generators. As a result, home consultations or sales leads increased again at a strong double-digit rate in the third quarter over the robust prior-year comparison and broad-based growth continues to be experienced as almost all U.S. regions grew on a year-over-year basis in the third quarter.

It's also relevant to note that home consultations in the third quarter increased over three times the comparable 2019 levels. And on a year-to-date basis are more than 4 times 2019 levels. Activations of home standby generators, which are a proxy for installations, also grew at a double-digit rate compared to the prior year.

We continue to experience a strong expansion of our distribution footprint as we ended the third quarter with approximately 8,100 residential dealers. An increase of 1,100 dealers over the last 12 months. California and Texas alone continue to account for nearly 1/3 of the year-over-year increase.

Early in the third quarter, we achieved a significant milestone by starting production of home standby generators at our new facility in Trenton, South Carolina. We continue to make encouraging progress increasing production levels for home standby generators across our operating footprint, with daily build rates much higher compared to prior-year levels. Despite the higher output, demand for home standby generators continues to outpace our ability to produce them, which has caused lead times to further grow to approximately 30 weeks.

These significant lead times provide excellent visibility as we head into 2022 with our home standby backlog projected to be well over $1 billion entering the next year. As we consider the longer-term capacity requirements for home standby production, we have made a number of strategic decisions to further expand our footprint. Yesterday, we announced plans to expand warehousing and distribution capacity at our trend facility by adding 200 thousand square feet, which will increase the current size of building by nearly 50%.

In addition, we recently made commitments to purchase additional lead -- long lead time automated manufacturing equipment that would be available to come online in 2023. Further increasing our capacity for several key components to provide for needed surge production as the category continues to grow. In addition to these capacity expansion actions, last week we introduced the industry's largest air-cooled home standby generator, our new 26-kilowatt unit.

Building upon the success of the launch of our 24-kilowatt unit last year, the new 26-kilowatt unit will allow homeowners to access the kind of power only previously available in larger size liquid-cooled generators at a significantly lower cost. As the trend to decarbonize accelerates, the electrification of everything in the home, including heating, cooking, cleaning, and ultimately transportation, will lead to much greater residential electricity consumption.

The new 26 kilowatt home standby unit will be capable of providing the kind of resiliency needed with these larger electrical load s and will provide an ability to future proof a home as these electrification trends intensifies in the years ahead. With a strong outage environment and megatrends like Home as a Sanctuary underpinning tremendous demand for home standby generators, those same factors, along with the increasing penetration of solar installations, are also driving rapid growth for our clean energy product offering.

As previously mentioned, shipments of our PWRcell Energy Storage Systems grew significantly as compared to the prior year. It also grew at a double-digit rate sequentially. Despite numerous supply chain challenges also impacting clean energy products, we continue to experience growth well above the broader U.S. residential solar market, driven by ongoing increases in storage attachment rates and continued market share gains. In addition to strong revenue growth, key performance indicators for clean energy products continued to show favorable trends.

Home consultations expanded as compared to the prior year and accelerated throughout the quarter. System activations, which are a proxy for installations and commissioning more than doubled in the third quarter as compared to the prior year, and also increased sequentially. In addition, we further build out our installer network as we ended the third quarter with approximately 2,300 trained and certified dealers with nearly a thousand of those dealers registered on our PowerPlay CE sales platform.

Despite the industry-wide supply chain and logistics challenges, we expect clean energy revenues to approximately double for full-year 2021 on a year-over-year basis. In addition, we continue to drive profitable growth within the product category as we scale volumes and optimize the supply chain.

Building on the early success we've experienced with our clean energy product offering. We formally announced several exciting new clean energy related products during the third quarter that we believe will further grow our competitive advantage in this exciting new market.

We introduced the industry's first purpose-built dedicated battery charging generator during the quarter, the power generator, which is a one-of-a-kind power product enabling a homeowner to create a Solar Plus storage system that is completely grid independent.

We also introduced our new PWRmanager load control system that maximizes battery performance and offers homeowners the ability to control specific electric loads from a mobile device via our existing PWRview energy monitoring platform. And building off the early integration success with the recent Chilicon acquisition, we introduced the PWRmicro, a Generac branded microinverter that allows us to fully participate in the residential solar only market.

A meaningful expansion beyond the solar plus storage space we previously addressed. In another example of our focus on continued innovation, we announced the acquisition of Apricity; an advanced engineering and product design Company focused on developing energy technology solutions. The team at Apricity brings expertise in designing and prototyping energy-related products to increase reliability, add functionality, and improve performance.

The Company has also developed a unique smart water heater controller that is used as a grid edge device by utilities in demand response and other energy conservation programs. Bringing this talented group on board will accelerate our efforts in expanding our clean energy offerings, and increase our speed-to-market for key clean energy and grid services products and solutions.

To further build upon Generac 's evolution into an energy technology solutions Company, yesterday we announced an exciting agreement to acquire Ecobee, which accelerates our capability to provide a home energy ecosystem with a dual value proposition for both homeowners and grid operators. Ecobee is a pioneer in the smart thermostat market, and offers a full line of intelligent thermostats and home monitoring products that delivers significant energy savings, security, and peace of mind and enable the monitoring and control of a significant portion of the home's electrical load, residential HVAC systems represent the single largest energy consuming device in the home today.

And Ecobee has created an intelligent system using smart thermostats and sensors to effectively balanced comfort and conservation with over 5 million connected devices in more than 2 million homes, Ecobee customers in North America have saved more than 20 terawatts of energy, which is the equivalent of saving enough energy to take all the homes in Los Angeles off the grid for an entire year. Importantly, Ecobee adds to Generac 's growing suite of residential power generation, energy storage, and energy management solutions that we believe will play a pivotal role in helping to solve the challenges of the growing supply and demand imbalances of today's electrical grid.

Smart thermostat controls represent one of the largest opportunities within the grid services addressable market involving the connection of grid edge devices to a grid services platform like our Concerto software platform, thereby enabling participation in grid services programs. Adding Ecobee 's devices to our product portfolio considerably expands our served market opportunity and increases our capabilities, provide end-to-end solutions for Turnkey Virtual Power Plant Projects. Adding Ecobee 's, innovative team of over 500 employees, gives us the ability to further advance the development of an intelligent and intuitive user interface platform.

That would integrate and synchronize our generation and storage equipment, and our existing grid edge devices. Providing seamless access and control for homeowners through a smartphone, tablet, or PC. We believe this approach will create one of the broadest home energy ecosystems available on the market today and allow for easy connection to our Concerto platform, empowering homeowners to make smarter energy production, storage, and consumption decisions, while providing grid operators more efficient access to the home in aggregate or at the device level for grid support programs. I'd also like to provide a brief update on Generac grid services.

A new group within Generac that was formed in the third quarter that builds upon our October 2020 acquisition of Enbala Power Networks. Generac grid services was established to directly engage and serve utilities, energy retailers, and grid operators to provide an array of solutions, and enable entirely new value streams that leverage a range of products from our portfolio.

We took another major step toward unlocking significant value in the grid services space in the third quarter with the formal announcement of Smart Grid Ready capabilities across our home standby generators, our C&I natural gas generators, and our PWRcell Energy Storage Systems.

In addition to the peace of mind that they're receiving from Generac products, customers now have the opportunity to also obtain additional return on investment by leveraging their products to support grid reliability, resiliency, and sustainability. Within the expanding grid services marketplace, we believe Generac grid services is a unique and differentiated market leader due to our comprehensive set of hardware plus software plus services offerings, including,

through our smart grid ready capabilities for legacy products, our recent acquisition of Apricity smart water heater controllers, and our pending acquisition of Ecobee and its home energy management solutions. Our increasing integration of hardware with grid software and services is leading to a number of contracts wins, along with a significant increase in proposal requests and an overall expanding sales pipeline.

These include several examples of the new revenue streams within our grid services model as we layer on higher-value turnkey virtual power-plant programs, utilizing Generac hardware and performance contracts on top of the Concerto software-as-a-service platform. We are in the very early innings of the evolution of the power grid, but as consumer awareness grows, and demand from utilities and grid operators materializes, we remain incredibly excited about the potential long-term growth trajectory of Generac grid services.

The excitement around our expanding energy technology solution capabilities extends into the C&I product range as well. Where offerings such as energy-as-a-service, microgrid Solutions, and Mobile energy storage systems, are helping drive the long-term growth trajectory and an increasing mix of energy technology revenues.

Our core C&I business experienced strong momentum in the third quarter as a number of end markets and geographies continue to recover strongly off the COVID weakened prior-year quarter. Specifically, C&I product sales grew 47% as compared to the prior year, and 31% on a core basis. We also have a considerable backlog that is growing for C&I products that provides good visibility for meaningful growth heading into 2022.

In addition to strong quoting and order activity in our North American distributor channel, shipments to telecom national account customers increased dramatically again during the quarter as compared to the prior year, as capital spending by several of our larger telecom customers continued at elevated levels and have led to further increase in project shipments during the current year.

The catalyst for the additional spending on backup power in this important vertical continues to be driven by an elevated power outage environment over the last several years, the power security mandate in California requiring a minimum of 72 hours of backup power at all tower locations, and the build-out of wireless carriers 5G networks.

The long-term demand outlook for Telecom backup power remains very compelling driven by the increasingly critical nature of wireless communications. We also experienced very strong growth within our national accounts -- national rental account customers as shipments of mobile products continue to recover at a significant rate of the COVID-driven lows of 2022 -- 2020, excuse me, 2020.

We still expect shipments of mobile products to improve dramatically for the full-year 2021 as the prior year, as national rental account customers invest heavily in fleet equipment, with utilization and rental rates continuing to improve. We remain optimistic about the long-term demand outlook for mobile products, given the important megatrend around the critical need for infrastructure improvements, which could benefit from the potential economic stimulus plans being pursued through the federal infrastructure spending bill. Additionally, we continue to build great momentum with our C&I beyond standby initiatives.

We are experiencing ongoing strength in project quoting for our natural gas generators using applications beyond traditional emergency standby power generation. Such as their use in energy-as-a-service, microgrid solutions, and other distributed generation applications. During the third quarter, we announced a five-year agreement with Enchanted Rock to build and supply the advanced natural gas generators and control systems that are used in ultra-low emission, dual purpose microgrid that Enchanted Rock designs and operates.

These solutions provide commercial industrial, and governmental customers with affordable and reliable backup power, and supply electric grid operators with critical grid stability services that accelerate the adoption of wind and solar without sacrificing overall grid reliability. The microgrid solutions are based on Generac's rich burn gaseous engine technology and our newly acquired Deep Sea Electronics control systems, which provides Quick Start, utility grade backup power in a much cleaner format when compared to traditional diesel generator solutions.

We remain very optimistic regarding customer and grid operator interest and beyond standby applications of our C&I natural gas generators. It's being driven by the need for enhanced grid stability and real -- and resiliency that these large blocks of power can offer, as well as the tangible and meaningful return on the investment opportunity for asset owners. Our international business continues to see strong momentum as well, with net sales growth of 61% on a year-over-year basis during the third quarter, and 32% core net sales growth, when excluding the benefit of the deep sea and off-grid energy acquisitions and the impact of favorable foreign currency.

The core sales growth was driven by strength across all major regions that continued to experience a sharp increase in demand off the prior-year COVID lows, and have also recovered well above 2019 levels.

Larger project floating and overall order activity continue to recover at a strong pace in key international markets, which drove growth in our international backlog during the third quarter, with the order strength continuing thus far in the fourth quarter. In addition, the segment's third quarter EBITDA margin expanded to 14.1%. From 7.9% in the year-ago period due to the higher margin profile impact from the deep sea and off-grid energy acquisitions and improved operating leverage in the base business on higher sales volumes.

With regards to off-grid energy, this acquisition closed on September 1 and brings a diverse range of energy storage solutions that provide cleaner and more flexible energy for industrial and mobile applications. Off-grid provides us an entry point into the rapidly growing market for industrial great energy storage systems and accelerates our hybrid generator and C&I Energy storage product roadmap.

Off Grid continues to see robust demand for its products in its core European markets and working -- and we're working to bring you solutions for the rest of our geographic footprint given our strong global relationships with rental equipment customers. Our integration efforts are off to a strong start with some legacy customers across Europe having already placed orders for Off Grid products highlighting early momentum in the sales synergies that we expect to realize. In closing today, we have tremendous momentum in our business as we close off the current year and head into 2022 with incredible home standby demand, and expanding energy technology solutions portfolio, a growing grid services sales pipeline, and strong global demand for our C&I products.

This provides support for yet another year of significant revenue growth with recent pricing and cost initiatives driving an improving margin profile. Day-to-day execution and navigation and the supply chain challenges clearly remains a near-term priority for our teams. But we're also keeping a clear focus on our new long-term powering a smarter world strategy with our ultimate purpose to lead the evolution to a more resilient, efficient, and sustainable energy solutions.

Through the combination of aggressive organic investment and a series of strategic acquisitions over the past 3 years, Generac is uniquely positioned with our products, our services, our distribution, our brand, and importantly, our expertise to deliver the solutions necessary to facilitate the transition to the next-generation electrical grid. Importantly we retained significant financial flexibility to further invest and expand our capabilities and continue to advance our evolution into an Energy Technology Solutions Company. I'd now like to turn the call over to York to provide further details on Third Quarter results and our updated outlook. York?

[York Ragen, CFO]

Thanks, Aaron. Looking at third quarter 2021 results in more detail, net sales increased 34% to $942.7 million during the third quarter of 2021, an all-time record, as compared to $701.4 million in the prior-year third quarter.

The combination of contributions from [Indiscernible] Enbala, Deep Sea, Chilicon and Off Grid acquisitions, and the favorable impact from foreign currency had an approximate 4% impact on revenue growth during the quarter.

Briefly looking at consolidated net sales for the third quarter by product class, residential product sales grew 6 -- grew to $608.8 million as compared to $458.9 million in the prior year, representing a 33% increase despite a strong prior-year comparable. As Aaron already discussed in detail, home standby generator sales continued to experience robust year-over-year growth, advancing by 50% during the third quarter as we made further progress, increasing production levels for these products, despite challenging supply chain headwinds.

Shipments of PWRcell Energy storage systems grew at a significant rate as compared to the prior year. As storage attachment rates and market share gains continued to drive growth of Generac's clean energy solutions. This growth was partially offset by a decline in shipments of portable generators, which faced a strong prior year comparison from a record level of shipments to the hurricane in the prior year. Commercial and industrial product net sales for the third quarter of 2021 increased 47% to $258.3 million as compared to $176.2 million in the prior-year quarter.

There was an approximate 15% benefit to net sales during the quarter from the impact of the Deep Sea and Off Grid acquisitions along with the favorable foreign currency. The very strong core revenue growth was in part aided by the soft prior-year comparison due to COVID-19 pandemic. However, C&I revenue also grew approximately 7% on a core basis as compared to 2019 levels.

The strength in core sales was driven by growth across a number of end markets and geographies as demand is recovering at a strong rate, both domestically and internationally in the following areas. Domestically, the growth was driven by a substantial increase in shipments to Telecom national account customers due to much higher capital spending levels from these customers as they continue to harden their wireless networks and prepare for 5G rollouts. Also contributing to the increase was strong growth from mobile products to our rental channel customers, as they are investing heavily in their fleets due to higher utilization and rental rates.

We also experienced higher shipments of natural gas generators used in beyond standby applications. Internationally, the increase in C&I products was broad-based from a geographic standpoint, most notably in Europe and Latin America. As these markets continue to experience a sharp increase in demand of the prior-year COVID laws and have recovered well above 2019 levels. Net sales for the other products and services category, primarily made up of aftermarket service parts, product accessories, extended warranty revenue, remote monitoring and grid services subscription revenue, and other service offerings increased 14% to $75.6 million as compared to $66.3 million in the third quarter of 2020.

There was an approximate 4% benefit in net sales during the quarter from the impact of acquisitions and favorable foreign currency. Heightened power outage activity over the past several quarters continue to drive strong growth in aftermarket service parts. A larger and growing install base of our products and higher levels of extended warranty revenue also contributed to the increase versus prior year.

Gross profit margin was 35.6%, compared to 39.4% in the prior year third quarter, as higher input costs had a significant unfavorable impact during the quarter. Specifically, rising commodity prices, labor rates, and logistics costs along with the Trenton plant start-up, all pressured margins in the current year quarter. The early impact of pricing actions partially offset these margin pressures with the full impact expected to be realized throughout 2022, as these price increases worked through our backlog.

Operating expenses increased $41.9 million or 34.8% as compared to the third quarter of 2020, but declined 13 basis points as a percentage of revenue, excluding intangible [Indiscernible] due to the substantially higher sale volumes on the current year quarter. The increase in OpEx dollars was primarily driven by additional variable expenses from a significant increase in sales volume, higher employee cost and marketing spend, and the impact of acquisitions. Specifically, recurring OpEx from the Mean Green, Enbala, Deep Sea, Chilicon, Apricity, and [Indiscernible] acquisitions, related hiring amortization expense, and incremental transaction costs during the current year quarter.

As a result, adjusted EBITDA before deducting [Indiscernible] non-controlling interest as defined in our earnings release, was $209.2 million or 22.2% of net sales, as compared to $178.8 million or 25.5% of Net sales in the prior year. This EBITDA margin decrease was largely driven by the aforementioned decline in gross margin.

I will now briefly discuss financial results for our 2 reportable segments. Domestic segment sales increased 30% to $791 million, as compared to $607 million in the prior year quarter, with the impact of acquisitions contributing approximately 1% of the revenue growth for the quarter. Adjusted EBITDA for the segment was $187.7 million, representing a 23.7% margin, as compared to $171.4 million in the prior year for 28.2% of net sales. International segment sales increased 61%, to $152 million as compared to $94 million in the prior-year quarter.

Core sales, which excludes the favorable impact of acquisitions and currency, increased approximately 32% compared to the prior year. Adjusted EBITDA for the segment, before deducting for non-controlling interest, was $21.5 million, or 14.1% of Net sales, as compared to $7.4 million or 7.9% of Net sales in the prior year. The strong growth in international EBITDA margins was primarily due to the favorable impact of the Deep Sea and Off Grid Energy acquisitions and incremental operating leverage on the higher sales volumes.

Now switching back to our financial performance for the third quarter of 2021 on a consolidated basis as disclosed in our earnings release, GAAP Net Income attributable to the Company in the quarter was $131.6 million as compared to $115 million for the third quarter of 2020. GAAP income taxes during the current year quarter -- third quarter were 32.6 million or an effective tax rate of 19.7% as compared to 32.1 million or an effective tax rate of 21.8% for the prior year.

The decline in effective tax rate was primarily due to a discrete tax item resulting from a higher stock compensation deduction during the current year. Diluted net income per share for the Company on a GAAP basis was $1.93 for the third quarter of 2021 compared to $1.82 for the prior year. Adjusted net income for the Company, as defined in our earnings release, was $151.1 million in the current year quarter, or $2.35 per share. This compares to adjusted net income of $132.9 million in the prior year, or $2.08 per share.

Cash income taxes for the third quarter of 2021 were $31.3 million as compared to $23.6 million in the prior-year quarter. The current year now reflects an expected cash income tax rate of approximately 20% to 20.5% for the full year 2021, compared to our previous expectation of approximately 21% to 21.5%. The decrease primarily driven by a higher-than-expected level of stock compensation deduction. This expected full-year cash tax rate compares to the prior-year rate of 16%, that was anticipated after the third quarter of the prior year. The increase in the current year cash tax rate versus prior year is primarily due to a significant increase in domestic pre -tax income, which is taxed at a higher statutory rate.

Cash flow from operations was $74 million as compared to $155 million in the prior-year third quarter. And free cash flow, as defined in our earnings release was $42 million as compared to $148 million in the same quarter last year. The decline of free cash flow was primarily due to a higher working capital investment in the current year quarter and higher capital expenditures, partially offset by an increase in operating earnings versus prior year.

The higher working capital investment was driven by elevated inventory at the end of the current year quarter, resulting from extended logistics in transit timing, continued supply chain constraints, ramping production rates, and the startup of our new Trenton, South Carolina facility. Updating our liquidity position as of September 30th, 2021, we had $873 million of liquidity, comprised of $424 million of cash on-hand and $449 million of availability on our ABL revolving credit facility.

Also, total debt outstanding at the end of the third quarter was $910 million, net of unamortized original issue discount and deferred financing costs. Our gross debt leverage ratio at the end of the third quarter was only 1.1 times on an as-reported basis. Further enhancing this attractive capital structure is our strong cash flow profile, with free cash flow over the last 12 months of $455 million.

I would now like to provide some additional details on our outlook for full-year 2021. As mentioned in our press release earlier this morning, we are maintaining our full-year 2021 Net sales growth guidance range of approximately 47% to 50% compared with prior year, which includes approximately 5% of favorable impact from acquisitions and foreign currency. The expected benefit from acquisitions is moderately higher than previously anticipated due to the impact of the Off Grid Energy, Tank Utility and Ecobee acquisitions not included in our previous guidance. Updating our margin outlook for the full year 2021.

As we've discussed, we are continued experience significant supply chain challenges, logistics delays, and rising commodity prices which are resulting in higher input costs relative to our previous guidance. As a result of these factors, we're -- we now expect gross margin for the full year '21 to decline approximately 150 basis points as compared to the prior year which compares to the previous expectation of approximately flat versus the prior year.

Due to the reduced gross margin outlook, adjusted EBITDA margins, before deducting for non-controlling interest, are now expected to be approximately 23.5%, which compares to the previous guidance of 24.5% to 25%. As a result, we expect to maintain EBITDA margins compared to the prior year, despite the significant margin headwinds and acquisitions executed during the current year.

Providing some quick comments regarding our initial thoughts looking into 2022, the Company's consolidated backlog has increased considerably since reporting our second quarter results. Most notably for home standby generators, but also across a broad range of other residential and C&I product categories. For example, and as Aaron mentioned, our home standby backlog alone is projected to be well over $1 billion entering the new year.

The substantial overall backlog expected at the end of this year provides support for another year of projected significant revenue growth in 2022 with an improving margin profile as we begin to realize the full impact of various pricing actions and cost reduction initiatives. Throughout 2021, we have implemented multiple rounds of price increases across all product categories with differing realization legs depending on lead times.

We expect increasing realization of all 2021 pricing actions throughout the first half of 2022 with the full benefit realized by the second half of 2022. We also are pursuing certain cost reduction initiatives to combat the significant increase in input costs, including important projects focused on profitability enhancement, and continuous improvement activities. We will now provide additional guidance details to assist with modeling adjusted earnings per share and free cash flow for 2021. As mentioned previously, our cash income tax rate is now expected to be between 20% to 20.5%, which compares to prior guidance of 21% to 21.5%.

GAAP intangible amortization expense for 2021 is now forecasted to be approximately $45 to $47 million, as compared to the previous guidance of approximately $49 million, with the decrease primarily due to updated purchase accounting adjustments related to recent acquisitions. Stock compensation expense is now expected to be approximately $26 million to $27 million, as compared to previous guidance of $24 million primarily due to the impact of additional acquisitions since our second quarter update. Our GAAP effective tax rate is now expected to be between 22% to 22.5% for the full-year, compared to the previous guidance range of 22.5% to 23.5%. The decline is primarily due to a higher level of stock compensation deduction during the current year.

Our fourth-quarter weighted average diluted share count is now expected to be approximately 64.5 million shares, assuming in December 1 closing of the Ecobee transaction. This concludes our prepared remarks at this time, we'd like to open up the call for questions.

[Operator]

Thank you. At this time, we would like to take any questions you might have for us today, [Operator Instructions]. Please note that analysts are allowed one question and one follow-up question only. Thank you. Please stand by while we compile the Q&A roster. This will only take a few moments. We have our first question, comes from the line of Tommy Moll from Stephens. Your line is open, please go ahead.

[Tommy Moll, Stephens]

Good morning and thanks for taking my questions.

[Aaron Jagdfeld, CEO]

Hey, Tommy.

[Tommy Moll, Stephens]

Aaron, I wanted to start on Ecobee, specifically on the go to market there, how do they go to market or how have they gone to market historically? How is that change when you took it as into your portfolio? And when you think about the edge that Generac will bring as the owner of this business going forward where there's some fairly stiff competition, how would you frame that for us?

[Aaron Jagdfeld, CEO]

Yeah, thanks for the question on that, Tommy. Ecobee is going to be -- I think we'll look back a couple of years from now and that's going to be a really critical turning point for us as we continue on this journey. as -- the evolution we talked about anyway, of becoming an energy technology Company. Specifically on your question on distribution, what we really like about them is that they refer to their go-to-market or their distribution strategy as omnichannel, which is exactly what -- how we would refer to our own. They sell through retailers, big-box retailers, they sell online those platforms, they sell through dealers.

They have over 40,000 HVAC contractors that represent them in the marketplace so really a pretty wide net in terms of just the way they go to market. They sell to distributors, HVAC distributors, so it's really, truly omnichannel. We like that, it fits well. We think there's going to be a lot of interesting synergies there. our electrical channel can certainly install a thermostat, and conversely their trades can install some of our other products as well. So, we think there's a really good fit there.

The thermostat market, if you just look at thermostats, the definition, you're right, it's a pretty big market. This is truly, I would say beyond that though. This is about the intelligent thermostat platform and the smart thermostat platform. And there are only a handful of true competitors to what Ecobee does. Ecobee created this category.

Basically, Stuart Lombard, the person who runs that business up there, great entrepreneur, began that business in 2007, and by 2009 they'd introduced the market's first true smart thermostat. And others have joined. You're right. But I think what -- when we think about our differentiation going forward, the combination of the smart thermostat as just 1 of the elements of -- as what we keep referring to as a home energy ecosystem, right?

This is more than just the thermostat. It's more than just a water heater controller. It's more than just a single storage device or solar on the roof top or a generator, or a load management device. This is about the integration of all of those things. And what we really like about Ecobee is it gives us a platform, and it gives us a team of over 500 people up in Toronto that are steeped in user interfaces and user experience, that is what we need to bring all of these assets together to combine them in a single pane of glass for view and control by the consumer and then for easy attachment to grid programs through our Concerto platform.

We think that this is the middle layer that is, it's much more than just a thermostat. It's the middle layer that we need going forward to bring all of this stuff to bear as the grid continues to change and as the home energy ecosystem continues to develop. We're -- I'm just really excited about this. It is a cool product. If you've ever look at the product itself and just the quality of it, the premium look and fit and finish to the product itself and the platform, if you've ever used the Ecobee platform, it's definitely, I think going to be a really cool platform to put all of our devices into.

[Tommy Moll, Stephens]

Thank you, Aaron. That's very helpful. As a follow-up, I wanted to talk to your HSB business, where recently at the Investor Day, you gave some directional insight on really favorable cost per lead trends. So you're still supply constrained there, notwithstanding some major efforts to alleviate that bottleneck. But if you weren't supply-constrained in this environment, Aaron, how many more sales and marketing dollars could you deploy efficiently into that customer acquisition funnel? We talking 25% more dollars, 50%?

[Aaron Jagdfeld, CEO]

I think what's interesting Tommy, is we really haven't backed off on deploying the dollars even though we are supply constrained. And this is maybe why the lead times continue to grow, which is not what we want to see for our customers. But I think we've got our arms around some really good longer-term plans here to continue to expand capacity. All the things that were -- that we have been working on, that will come online next year and then -- we made some pretty big commitments here in the third quarter very recently.

Around not only the expansion on the trend facility, which I think is an important commitment, but commitments towards additional automated manufacturing equipment to help us scale even further there. But your question is a good one, I would tell you that our marketing team watches the statistics very closely. And if they were to see the cost per lead starting to change right around where we're spending and where we're deploying dollars, they would throttle back the spending, and so far that really hasn't been the case.

So I think what people sometimes don't realize is a home standby generator project was already a long term -- a longer, I would say project timeline for most people, because there's permitting involved, there's contractors involved, you have the work itself, you have inspectors. Clearly, it wasn't seven months before, but it generally was two or three months. And I think if people realize in today's environment that we are supply constrained in a lot of things, not just home standby generators, appliances, vehicles, you name it and it's tough to find things today.

So I think there's -- call it an acceptance level, I don't know what it is, but I think people are somewhat accepting the fact that they have to wait. And I also think it also speaks to just how in tune people are with the importance of having backup power. The outages have been increasing, they've been lasting longer. I think people are spending a ton more time in their homes and they realize just how vulnerable they are and what that means to, you know, the ability to work from home, their kid's ability to learn from home.

All the things that we need to do from home only happen with a continuous source of power. So I think a generator is just going to be -- it's going to be an appliance that we all have here going forward. We're going to need that as the grid continues to change and that's why we're committed to expanding our capacity. We've got a lot of confidence in where this is going longer-term. And I think that, as it relates to marketing dollars, we're going to continue to spend there too as long as it makes sense financially.

[Tommy Moll, Stephens]

Thanks, Aaron. I appreciate the insight and I'll turn it back.

[Operator]

Our next question comes from the line of Ross Gilardi from Bank of America. Your line is open. Please go ahead.

[Ross Gilardi, Bank of America]

Hey, good morning. Thanks, guys.

[Aaron Jagdfeld, CEO]

Hey, Ross.

[Ross Gilardi, Bank of America]

I just had some questions on some of York's preliminary comments on the 2022 revenue growth. Just want to see if I'm thinking about it right. But it would seem that if you deliver the backlog alone, and I think in critical planning assumption that you had the Investor Day was to work that backlog down to essentially 0 by the end of 2022, $1 billion plus backlog. That alone is close to 30% revenue growth next year. Am I thinking about that correctly? And from the installer and distribution perspective, are you confident that you've got enough distributors and installers on the ground right now that could get those all installed, or do they just end up sitting in limbo for a period of time?

[Aaron Jagdfeld, CEO]

Yeah. Hey, Ross, this is Aaron. I'll take some of those questions and I'll kick it to York here too, if he wants to jump in. Maybe just on the backlog, I think directionally you're thinking about it, right? We've got -- clearly we're going to have a bigger backlog coming into '22 than we originally thought because demand has just been stronger. It's outstripping supply. We're hitting record output levels on HSP. We could go higher if not for some of the -- a lot of our constraints here are pure logistics related, just the nuttiness of getting components from Point A to Point B right now.

Just the amount of dwell time that's going on with components in the ports and trying to find trucks, everything else you've heard about from every single Company in America. We're no different and that is -- that's kind of holding us back a bit, but we think that's temporary, that will resolve. We're confident that we'll get our feet under us as a country here around getting our supply chains repaired.

But directionally, you're right, I think the real question is, we talked about this double-double in terms of our capacity, that's theoretical capacity. If the supply chain constraints persist into the first half of next year, that could obviously create some headwinds, right to what we originally thought of, in terms of ultimate theoretical capacity. So that's something we've got to watch. Longer-term, again we feel like we've got a good plan to go even higher, to go even further with home standby capacity, we've got the confidence to do that.

I think you may have hit on something though it's really important here, is in the distribution network in terms of installation. We have 8100 dealers today. We're growing that number. We've grown to 1100 dealers over the last 12 months. The most in any last 12-month period we've ever grown and we're going to need to grow a lot more.

The reality of it is we're going to have to pick up the pace of installations so that we can keep pace as we deliver more products going into next year. Now remember that dealers aren't the only people who do installations. Installations are also done generally by contractors. There's over 70,000 electrical contractors out there, and there's over a 100,000 HVAC contractors. And both of those trades do HSB installation. So it's beyond just our dealers.

They do the lion's share, but it's also other trades that are involved who may not be dealers for us. So we have a pretty wide availability of contractors, but we really need to do a lot more training, We need to find more dealers and we've got, I would say an outside effort and outside focus on that for next year. I don't know, York, if there's any additional comments you want make?

[York Ragen, CFO]

[Indiscernible] what if the supply chain environment next year and will we catch backlog next year, I think it's all a function of what the supply chain look like and what the outage environment look like. So I think that would be my [Indiscernible]

[Aaron Jagdfeld, CEO]

It's setting up to be a monster year just based on the backlog we've got alone.

[Ross Gilardi, Bank of America]

Okay. Great. Can I ask a follow-up question?

[York Ragen, CFO]

Yeah.

[Aaron Jagdfeld, CEO]

Yeah.

[Ross Gilardi, Bank of America]

The original plan -- well, I did say original, at least last quarter, was to get EBITDA margin back to Q1 '21 levels in the fourth quarter, and obviously that's changed as it reflect in your guidance, but do you get back there in the first half of '22, and can you give us sense of where the run rate pricing contribution to revenue growth entering next year?

[York Ragen, CFO]

I think, as I mentioned, we've had multiple rounds of pricing across all categories, I mean, with home standby, there was roughly 4 that went in place earlier in the year, call it December, January, and another may call it May, June, another one September, another one we're contemplating recently. When you think about how all the -- those are going to pace into next year, the May increase, well, we'll start seeing that probably the beginning of 2022.

The September increase we'll actually see because that was on shipments will start -- we'll see that here in Q4, that was a smaller one. The one coming up here that probably won't realize until let's say July given our lead times. I think -- and then you look at other products were also we've rolled out pricing as well. I think -- I would say by the end of the first half of 2022, we'll get full realization of all of our pricing, that should get us to gross margins that where -- at least look more similar to where they were in the beginning of the year, we're putting our budgets together as we speak, so not giving clear guidance as to what that looks like, but --

[Aaron Jagdfeld, CEO]

It's definitely going to improve.

[York Ragen, CFO]

-- it will definitely improve.

[Aaron Jagdfeld, CEO]

And will do that sequentially throughout next year. I would say, Ross, it's interesting, as we unpack this, the way that the costs rose so rapidly, in particular around logistics. I mean, that was -- and steel, certain commodity costs that are heavy in our products. Two things happened: 1. We got -- we had this -- we've just got long lead times on the products. So getting pricing to realize we were somewhat constrained there just because of the outside demands for HSB in particular.

But then also I would say our cost lags if you will, have shortened because we're burning through material so much quicker, the pace of production is increasing at such a volatile pace where I think lags of increases in the past with commodities and other things might have taken us a while longer to get through and start to show and read through in the EBITDA margins or even the gross margins. They're reading through quicker right now. So temporary, we got a good plan to get ahead of it. I'm feeling really good about where we are going to be next year.

[Operator]

Our next question comes from the line of Philip Shen from ROTH Capital. Your line is open, please go ahead.

[Philip Shen, ROTH Capital]

Hey, guys. Thanks for taking my questions. The 1st one --

[York Ragen, CFO]

Hey, Phil.

[Philip Shen, ROTH Capital]

Hey. Thanks again. The first one's around capacity. You announced that expansion in Trenton yesterday. Just want to check to see if that was a part of the double by 2020 to Q2'22. And then you mentioned Aaron, that you've secured equipment for 2023. So I was wondering if you could expand on whether or not you've made the decision on capacity expansion beyond the Q2'22 double? Have you guys locked in supply chain agreements which I believe are critical And have you made any commitments there? And then finally, the Jefferson facility, I think you guys have converted that to being permanent. Is that key for reaching that Q2 '22 to double as well? Thanks, guys.

[Aaron Jagdfeld, CEO]

Got it. Thanks, Phil. Yeah. Capacity in HSB, let's just run through a couple of things in your question. The expansion at Trenton first. That expansion add 200,000 square feet to that facility, that is really about warehousing and distribution. I wouldn't say it would impact our double-double at all. What it is representative above is our confidence that we are going to be able to run at an elevated rate down there for an extended period of time. We would have had to do the adds warehousing and distribution, and to that with 3PLs, by bringing it in-house, we just -- we get a nice payback on that project pretty quickly; so that just made a lot of sense, and I think it's indicative of the longer-term feelings that we have about, not only Trenton.

We like the facility, we like the labor pool, but also just the category, home standby in general. Now, on the additional capacity that we talked about on our prepared remarks with the long lead time automated manufacturing equipment, really what's going on there is we've talked, Phil, we have some internal components we manufacture, of which the tooling to make that equipment has just gotten crazy long. I mean, we're talking 60 to 70 weeks long in terms of ordering them the equipment and getting it delivered and starting to run it off.

So what we're doing there is, we're basically saying, "Look, we have confidence in the category. We have confidence in the demand we're seeing. Let's get our tooling on order. " We don't even know where we're going to put the tooling, right? We're not exactly sure if it's going to go in maybe another expansion of Trenton, or maybe we squeezing into Whitewater, or maybe we put it in Jefferson, and I'll address that here in the second, or maybe it's a whole another facility, we don't really know yet. What we do know is it will allow us to go further than the Double-Double that we talked about. So it gets us set up to do that.

So now, we start the rest of the ground game that has to get done there around supply chain, around all the other elements that have to fall into place. And we'll be able to provide more color on that as we get closer to it. But we just -- we felt like we had to take the first step here. Given the lead times on that equipment, we just wanted to get -- make sure that we got ahead of it. And we didn't want to get in a situation where we couldn't react. So we're putting our markers down for the future there. And then on Jefferson, you're right.

We took a facility where we're making portable generators, power washers, chore products. And we've added capacity four HSB. We added another production line there. We're recently in the third quarter. so we're producing more out of Jefferson and we anticipate producing more as we end the year here. If you recall, we mentioned that we're going to the outside for some key components that we normally manufacture so we spooled up some components on the outside. Those are going to start to be delivered here in the back half of the fourth quarter and they're going to go to Jefferson where they're going to help us increase capacity there.

Whether or not we continue to do that long-term, I think we're going to continue it for the foreseeable future for certain night the next 12 months. I think all of '22 we'll be producing HSB in Jefferson and likely into 2023 depending on what kind of backlog if we're able to knock the backlog out next year, which is looking less than less likely just given where the demand is. It just keeps coming every day. It's amazing, And so where that demand ends up, where we may end up for the year in 2022, will dictate how we feel about '23. And then some of that will be about where we put that new tooling as well, so more to come on that. But definitely taking the next steps that we think we need to be able to go far beyond that existing double-double that we've talked about for capacity on HSB.

[Philip Shen, ROTH Capital]

Great. Thank you for that. As it relates to Ecobee, based on our industry checks last night, we're guesstimating that the revenue run rate is call it $30 million to $50 million, and the Company's probably running up break even. Are we in the right ballpark here? And if so, what kind of [Indiscernible] growth could you see for Ecobee in 2022? And finally, how are they managing through the chip shortage? I'm guessing they're having some issues there as well. Perhaps that's a near-term challenge, but something that they worked through overtime. Thanks.

[Aaron Jagdfeld, CEO]

Yeah -- no -- that's a -- good questions, Phil, and again, we're really excited about this one. Now, Ecobee is quite a bit bigger than that. So they're about probably close to a 125 million in reps and that's supply chain constrained. Your point on chips, they could be going higher than that, but they do have, as you would imagine, some supply chain constraints, so they are working through those like we all are. And we're adding additional chip capacity across that product line. Stuart and his team are doing a nice job in navigating that. Their growth rate is going to be about 3x.

The Generac growth rate as we laid it out in the LRP model for the Investor Day. So we've got a lot of aggressive growth on the table. That's not only devices, but it's also services. So pretty exciting. That's a lot of growth coming out of the services piece going forward. But no, it's actually -- I call it a startup that's getting to scale. They've been around 14 years and they've spent a lot of time getting to this point and they've really started to see an inflection here in the last couple of years. They are still in investment mode.

They're generating operating losses today and we will continue to do so. We're going to continue that investment cycle over the next couple of years. It's probably going be a couple of years before they break even, so -- but that doesn't worry us. We think it's an important investment to continue to make, not only around their existing platforms, around the home energy monitoring, but also again around integration and synchronization of all of our assets that are part of our home energy ecosystem going forward.

[Operator]

Our next question comes from the line of Brian Drab from William Blair. Your line is open. Please go ahead.

[Brian Drab, William Blair]

Hey, good morning. First, can you just talk about the supply chain issues that you might be facing or could face as you try to ramp capacity additionally, setting up the new distribution warehouse, any of the equipment that you need. We're talking a lot about supply chain issues with as it relates to building generators, but just getting the equipment that you need into these facilities, how is that going?

[Aaron Jagdfeld, CEO]

Yeah, Brian. That's great question. We're still -- we're actually pacing pretty well with the existing equipment that's been on order. The new equipment that we've ordered here recently and committed to, part of the reason why that equipment is out longer on lead times is due to some component shortages. There's -- these are automated systems, so there's a lot of logic and a lot of chips and they're struggling with that.

But the existing systems that we're bringing on here at Q1 and Q2 of next year are still holding in there in terms of the timeline. We feel good about that. No material delays there. The rest of the supply chain challenges, whether it be building out that -- the Trenton facility or some of the other things that we're trying to do here, I think we've effectively -- we've built that into our assumptions around the timing of when those things will become meaningful to us or when they'll become -- when they'll come online.

It's really the near-term true component supply chain that's been -- that really deteriorate in the third quarter. When we sat there, even when we talk to everybody at our Investor Day. I mean, just what it did from the end of -- the middle to the end of September, to the end of October was disappointing, right? Just the bound of ships at anchor on the West Coast, just the trucking challenges, the rail challenges, the port challenges. the amount of additional time it's taking to get things here.

Forget about the cost to get it here, which is mind-numbing as well. But the time, it's really the time factor to get it here. I'm really hopeful that that's going to start to turn around here over the next 60 days, I'm hoping are going to be better. We're hearing indications that perhaps, things have bottomed on that side in terms of just where they've been and hopefully that'll improve on a go-forward basis. But every day it seems to be something different than we're fighting a fire on.

[Brian Drab, William Blair]

Thanks. And then as a follow-up, the mind-numbing costs. Can you -- maybe this is for York, but can you quantify what you expect the excess transportation costs to be in 2021? And if we move into a world in 2022, where that starts to subside, I'm just trying to get a sense for how helpful that could be to your financial model for next year.

[York Ragen, CFO]

Just looking at the gross margin reduction here in Q3 -- gross margins reduced over 3%. That was predominantly all price cost as a headwind. And then just looking forward into Q4, that's another something similar, almost 4% price costs that are impacting us in Q4 of year-over-year. So, if that moderates, and coupled with pricing actions on top of it, that could have a pretty quick snap back in terms of profitability.

[Brian Drab, William Blair]

Okay. Thank you.

[Operator]

Our next question comes from the line of Joseph Osha from Guggenheim Partners. Your line is open, please go ahead.

[Joseph Osha, Guggenheim Partners]

Hi, guys. Thank you for taking the question. We haven't talked about Chilicon much today. I'm wondering if you think about that launch and all of the things we've been talking about here in terms of the availability of components in price, how that's working right now?

[Aaron Jagdfeld, CEO]

Yeah, it's great point, Joe and I'm glad you asked the question. Because we haven't talked a lot about Chilicon and it probably, out of all the acquisitions we've done and Ecobee represents a pretty nice sized TAM as well but the TAM available to us through Chilicon, through those micro inverters is big. And the team is making really good progress on the launch of those products in Q2 of next year. Still hanging in there with our commitment to do that. We're watching availability of components. We're working to scale the contract manufacturer that they -- that Chilicon was using and then we're adding other contract manufacturing resources.

We're going to broaden that supply chain out, so that we believe we've got enough supply to get going on that next year. But as we start to take a look to our plan for next year, we're sitting there, stepping back, and saying, "Look, there's a lot of people that have interest in these products ", and we're setting up to have a pretty healthy position on supply. We got to put all that together when we put our 2022 guidance together formally, but I would say the initial receptivity continues to be strong. Our project remains online and on target and the internal excitement here around what we can do with that product line is -- if you talk to Ross Minick (ph) and his team, he's incredibly bullish on what we're going to be able to do with that longer-term.

[Joseph Osha, Guggenheim Partners]

Excellent. Thanks. And then a follow-up on the Ecobee as you point out, there's a lot of people who tried -- not been terribly successful in that market. One of the things people talk a lot about is fully integrated homeward management. Which you guys are coming to potential way from a different -- a different spot, especially as you ramp storage and then [Indiscernible] I'm wondering, when you have Chilicon and you have storage, and you can offer that as part of a complete package. Might you also go to customers and saying, "Hey, we can put in with this technology, our complete homework management [Indiscernible], is that going to be part of what you tried to do?

[Aaron Jagdfeld, CEO]

Absolutely. It is interesting. I think people are just -- you hear that Generac acquired Ecobee, and somebody says, "Why get into the thermostat business". I think that's a pretty, frankly myopic view of what we are getting into. What we're getting into is the home energy ecosystem and if that -- look, HVAC represents the largest energy load in the home today. That may change in the future with electrification of our transportation, but today, it's the largest electrical load and the largest energy load in the home.

You combine that with our generation capabilities, whether it be PV Generation, or whether it's using a natural gas generator, with storage, with our load managements, with thermostatic control, water heater control. A water heater is another massive load in the home. You start looking across that spectrum, you could see very quickly, Joe, where it makes a ton of sense for us to include Ecobee thermostats or other grid edge devices with somebody who might be looking at a storage system or Solar Plus storage, because when you think about it in the context of the total amount of money they are going to spend on that system, frankly, the grid edge devices being thermostats, and water heater controllers, and load management controls, they are relatively small.

But they add a tremendous amount of value and rounding out the value proposition, not only for the home owner, but also again for the grid operator. I think that's where it gets really interesting. Is what we can do with that through our Concerto platform. So anyway, we're taking a really long view at this, but it's an exciting view of the world, in the future grid 2.0 context, that I think you've got to step back and you've got to see where the puck is going here, and that's kind of what we're doing with this acquisition.

[Joseph Osha, Guggenheim Partners]

Got it. Thank you so much.

[Aaron Jagdfeld, CEO]

You bet.

[Operator]

Our next question comes from the line of Mark Strouse from J.P. Morgan. Your line is open. Please go ahead.

[Mark Strouse, J.P. Morgan]

Yeah. Good morning. Thanks for taking our questions. Aaron, I wanted to go back to a comment you made at the Analyst Day where you thought that you'd be able to get backlog back to a quote unquote, "normalized level by the end of 2022". And even back then, you said there's a lot of factors that go into that. But just curious, over the past month since you made that statement, are you more optimistic, less optimistic on that ability?

[Aaron Jagdfeld, CEO]

Yeah. It's a great question Mark and one that we're talking about here as we put together our kind of formal guidance for 2022. I would say informally though, what our comment -- just answering your question directly about how I feel about it today versus maybe how I felt about it four or six weeks ago, when we put together the IR materials -- the IR day materials. I would say I'm less optimistic that we're going to be able to catch the full backlog next year as we exit the year. The demand has outstripped here over the last -- the most -- more recent period here as we ended Q3 and as we have come into Q4. It's just, it's odd to me. And we really had had -- October for the most part was a pretty quiet month on outages but the demand has been continuing just to be off the charts.

There's really no two way to say it. Everything from our leading indicators like ICs to our logging indicators like activations and then, obviously, the incoming orders that are outstripping our record production levels here. It's just the setup there is -- and it's clear to us as we continue to peel back the onion of why that is, that the home is a sanctuary trend, the electrification of everything, the concern about just power security, power reliability, these things are real.

These things are driving people to solutions like home standby generators and clean energy storage devices. And we're coming to a point of realization, I think that -- and it's why we made the comments about our commitments through the longer-term home standby capacity increases because we just feel like this is -- we're maybe at a tipping point here with this category, where we're just shy of, what, 6% penetration. I think, today, and it's -- the acceleration on that is phenomenal. We could be entering a period here where this is something that we think about as a -- that every home has to have. And there's a lot in between 6% and saying something that every home as to have, remember every 1% is $2.5 billion, so every 1% penetration is $2.5 billion of market.

And we're over 75% share in the space. So it's good math, right? I mean, it's a great setup, but we've got to be prepared for it. Everything from the ability to produce these products, to the ability to install and service the products. There's going to be a tremendous amount of focus -- there has been a tremendous amount of focus so far. but there needs to be a lot more focus by us going forward on all those areas, so that we're ready for this, so that we can enable this. Because the secular things that we're seeing out here causing it, we don't see changing anytime soon. So we've just got to be ready for it.

[Mark Strouse, J.P. Morgan]

Thanks, Aaron. And then just a follow-up question on Phil 's question. Just about Ecobee. I appreciate it's kind of the near-term outlook. What do you think the longer-term margin contribution is from that business [Indiscernible] is what do you think the -- like what are -- I guess what are the clean power margins, generally speaking today?

[York Ragen, CFO]

Yes, so I guess when you think about Ecobee and you look at as we ramp that up and they grow, their margin profile in the out years looks very similar to our clean energy business. We've talked about how that will probably be in the -- the mid to high teens EBITDA margins from a gross margin standpoint, closer to that mid-30% range. So you know that -- we would expect Ecobee, again, in the out-years to look similar to that overall Clean Energy business in the out years. Today, Clean Energy, just thinking, storage, that is a profitable business today. We haven't quoted exactly what margin profile it is, it's profitable today, but over time, over the next call it a few years, that will also grow into that high -- mid-to-high teens EBITDA margins as well, so we've got a roadmap and a path to get there.

[Operator]

Our next question comes from the line of Jed Dorsheimer from Canaccord Genuity. Your line is open. Please go ahead.

[Jed Dorsheimer, Canaccord Genuity]

Hey. Thanks, guys and congrats with Ecobee. I've had the pleasure of working with Stuart and I think he will definitely be a great fit to the Generac family there.

[Aaron Jagdfeld, CEO]

And we're excited about it, Jed, thanks.

[Jed Dorsheimer, Canaccord Genuity]

I just -- Aaron, I guess first question, grid services. You were a bit more vocal than I've heard you in terms of some of the value proposition or unlocking the value proposition, I guess, with the installed base. And so I was wondering if you might be able to unpack that a little bit more. And so, if I look out it installed capacity that's underutilized out in the field of generators, it looks like well over 20 gigawatts of generating capacity. So now that you're going to be adding in the intelligence with Ecobee, how do you -- how do you get me if I have a 24 kilowatt generator to sign up for being able to access my generator when I don't need that through the Concerto or for example? And where are you in that process with utilities? Does that have to go through [Indiscernible] case or how do you -- how does that evolve to unlocking that 20-plus gigawatts?

[Aaron Jagdfeld, CEO]

Yes. Thanks for the question, Jed. And grid services, you're right. We were a little bit more vocal on at this time because we continue to gain confidence based on honestly, just the sheer number of proposals in our pipeline. It changed dramatically in the 1 year that we've owned Enbala. The Concerto platform, they just did their latest release of the platform that adds additional functionality, that adds, again, the smart grid ready capability to our products. We've added here initially, the home standby generators, C&I gas generators, our PWRcell systems, even our Power Manager, the load management device, we're making all of those smart grid ready.

And as we see more proposals coming in, it gets us more and more excited about the opportunity to connect those assets through Concerto, to those smart grids these grid operators to be able to participate in these programs. I will tell you that there is still this, I don't want to say it's a missing link, but there's the connection process of the marketing process, right? Of going out to a utilities rate payers and saying, "Okay, we can walk in today. We've got this, we demonstrated it here at the Investor Day. " You guys may have remembered back in our labs here we showed our map, if you will, of the U.S., and where we can zoom in on all of the assets we have on the ground.

These distributed energy resources, be they generators, be they Storage Systems, or load management devices. And now going forward, be they Ecobee products, like thermostats and sensors, we're going to put all of that into the map. But we can go to a local utility, and we can have a conversation with them that's much more than just, hey, tell us about your needs. We can go in there and we can say, hey, did you know that you have this many, hundreds of megawatts available to you in your market. That could be connected -- it's on-the-ground today. These assets are there. That's just -- it's stunning.

The amount of information that provides to these utilities, --they had no idea. They have no idea that this exists today. It's not something they have to do in the future, it's something they have today. The next question is, okay, how do we connect it? How do we reach those consumers that own those assets and enroll them into the platform and then get them on these programs. If each utility is a little different as you know, some utilities move a little faster than others.

Today, we're in pilot on a number of programs with some utilities around taking existing generator owners, or existing PWRcell owners or new PWRcell owners, and marketing to them the opportunity to enroll that asset, if they've already got it installed, great; if they don't, they can buy one, get it installed, and get it enrolled. We're going through pilot on a number of these programs, and we're already exercising control.

We're giving the utilities control over these pilot programs and they're very excited about what they think they can do and what they think it means to the way they operate their grids in the future. Look, they have their backs against the wall, right? They are being mandated to -- and we all want to do this. We want to de -carbonize our energy use, and that de - carbonization is going to come from putting more renewables on the supply side.

But with that comes more instability, right? So you talked about the change in the Grid. There's the 3 Ds, right? De - carbonization, digitization and decentralization. That's what the new grid's going to look like. The pace that we're going to get there though, creates a fourth D, creates some destabilization potentially, so some instability around these renewables that are online, that maybe are not as predictable for base load usage. What we have to do is we got to give new tools to grid operators to solve for this challenge.

A grid operator's entire day is consumed by figuring out how to keep supply and demand in balance and that's exactly what the Concerto platform does. That's why we continue to add more grid assets like Ecobee into our mix, because we think that the more assets we can deliver to these grid operators and utilities, the more value as a partner we're going to bring and certainly, more value we're going to bring to the homeowner in terms of them being able to control and optimize their energy consumption. Really exciting future around that, but it's really all about grid services down the line and that's why we talk more about it today.

[Jed Dorsheimer, Canaccord Genuity]

That's great, and great explanation. Just as my follow-up, I want to shift gears a little bit. Aaron, just ask you about Europe. It's rare that you see a setup that seems this obvious. So if you look at the -- many of the misguided policies that Europe's pursuing, and how that sets up for an opportunity to capture the lack of resilience that's going into this winter. How are you thinking about positioning the business? I mean, I know your supply constrained right now and you're trying to do what you can in Trenton. But it seems like demand could just explode out to Europe, and I'm wondering how you're thinking about that in terms of being able to capture that value?

[Aaron Jagdfeld, CEO]

Scenario in the world that as you said, it's kind of an obvious one in terms of just the challenges and the challenging setup. You're going in the winter months for the Europeans in the way that they're -- in some cases there are dangerous energy situation there. And our products can help. I mean, the interest level in particular, at Home Standby, which picked up. We saw that very broadly as well with Home as a Sanctuary last year, we saw interest outside the U.S. pickup, far beyond anything we had seen previously for the category.

And so -- but you're right, we are supply constrained. That's the unfortunate side of things. But we're still getting product over there. We're up dramatically and what we're delivering to Europe, it's still very small as a base. But it's growing very quickly. A storage is another area, we think that we have an opportunity there. That's probably a little bit further out as we deliver on some modifications to our existing PWRcell system, we'll have a new system coming out in 2023. And that system is probably going to be a little bit better fit for some of the European applications. But we are looking at how we might go after that market more aggressively here. Because it's going to take some time to get our distribution and our go-to-market approach under us there.

So working on that, I will point out the Off Grid acquisition that we did is all about what's going on in Europe, with storage in general on the C&I side, we're seeing a lot of opportunities there, certainly in the rental markets to provide storage for the different applications there, whether it'd be entertainment applications or construction applications or things like that where clearly the high cost, the diesel fuel and even the availability in some cases of fuel in general is causing challenges.

So we're seeing storage systems like the Off Grid systems become a lot more popular. [Indiscernible] is in the short period of time, we've owned it just the So, order book there is has been really fun to watch that grow as those products get introduced. We introduce them to our legacy channel partners there. But Europe represents a huge market opportunity. We're going to stay focused on it, but I'd love to say that we're going to be able to do something more there next year. But we got a tiger by the tail here in North America as well.

[Operator]

[Operator Instructions] And at this time, we will limit to one question only per analyst to address others questions. Our next question will be from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open. Please go ahead.

[David Tarantino, KeyBanc Capital Markets]

Good morning. This is David Tarantino on for Jeff.

[York Ragen, CFO]

Hi, David.

[Aaron Jagdfeld, CEO]

David.

[David Tarantino, KeyBanc Capital Markets]

Just attacking these supply chain headwinds from a different angle. Could you just provide some color on how the extended lead times to 30 weeks balances out between supply shortages and just the underlying demand strength?

[Aaron Jagdfeld, CEO]

Yeah, it's really more the -- I would say the underlying demand strength because we are just -- the order book has continued to be very, very strong. There's certainly some components, as I said, our ability to ramp to the theoretical capacity numbers we talked about for next year -- mid-year next year, maybe somewhat constrained by supply chain in the short-term. We still think that's probably maybe a first-half '22 story and then should abate.

But I would say we are more constrained right now just based on the inability to just go beyond what -- as we get the up the learning curve here in Trenton and as we put a second-line on in Jefferson, and then as we go into next year with the new tooling that's going to get delivered there. That's just kind of pacing of getting to those levels that we've talked about. And certainly some supply chain constraints today causing that.

But I would say it's more just demand outstripping. Even if we were able to produce at max capacity today, I fear that demand would be outstripping that, given where we're at. So I think it's more that than it is supply chain constraints.

[Operator]

Next question comes from the line of Pearce Hammond from Piper Sandler. Your line is open, please go ahead.

[Pearce Hammond, Piper Sandler]

Good morning and thanks for taking my question. Specifically related to acquisitions, you've made a number of acquisitions here recently. Just curious if you're going to pause to try to digest some of these and integrate? And then, if you are looking for future acquisitions, what white space is still available within this energy technology solutions kind of mandate?

[Aaron Jagdfeld, CEO]

That's a great question, Pearce. We have done a lot of acquisitions this year. We've done six of them. The Ecobee acquisition was number six this year, that's a lot for us. And I don't think we started the year -- we didn't set out the year to do six. Acquisition timing -- what we've learned over the years of doing, that we've done something like 23 or 24 deals now. That -- the timing of those deals, we generally don't dictate that. They're generally dedicated by sellers or dictated by market processes, things like that.

It just happened at this year, we got six that came to us, we have a really strong team here. And thankfully the acquisitions have actually been spread out nicely across our C&I business, across our residential business, across our clean energy businesses. So the teams have been able to absorb them. I think they have all been in one particular part of our business, which I think is good. In fact, some of them were international. Like the Off Grid acquisition.

[York Ragen, CFO]

Deep Sea.

[Aaron Jagdfeld, CEO]

--so the -- and Deep Sea, those acquisitions are being handled by the international teams. I don't think that we'll sit here and say, okay, let's stop and not do any more acquisitions because we need to absorb these. I think what we'll say is how do we go find the resources to do the integration needed so that we can continue to accelerate our strategy. That's what acquisition -- we use acquisitions to accelerate strategy.

Some people have this narrative out there that we're -- that acquisitions are there, we're buying revenue, we're trying to obfuscate certain things. I have no idea what that's about. Look at our strategy, look at the acquisitions we've done this year, and it's a spot on fit for everything we're doing with strategy. Wherever we think we can accelerate strategy, we're going to use acquisitions.

As far as white space is concerned, there are still some areas out there that when you look at the residential space, continue to look at heavy amperage loads in the home, I think there's some spaces there, where whether it's -- it could be in EV charging, it could be in other types of appliances that might have -- where control of those things might be important, although I will say we've taken a big step forward with Ecobee.

But on the C&I side, we still have some other areas; the Off Grid acquisition while giving us a nice head-start on energy storage for C&I is still -- it's really more aimed at the mobile applications or rental applications. So I think there's some things there that we'd like to round out, but we've made some significant progress towards this effort of building the home energy ecosystem this year and also getting going on our C&I storage.

[Operator]

Our next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open, please go ahead.

[Unidentified Analyst, Goldman Sachs]

Hi, this is [Indiscernible] on for Jerry Revich. In terms of the cost headwinds in the fourth quarter, can you describe how much is expected to be transient versus permanent?

[York Ragen, CFO]

I guess if you look at the impacts of commodities --

[Aaron Jagdfeld, CEO]

Is kind of dependent [Indiscernible] on commodity cost.

[York Ragen, CFO]

When we say logistics too, there's expediting costs because when there's supply chain constraints, you're expediting more so it's not just the cost of a container. You're doing some things, maybe artificially to get it here faster.

I guess -- what is your view on steel, copper, and aluminum? I guess that's one answer to your question. Logistics, as long as things are busy and demand is strong. there's going to be supply chain constraints for a while, at least it's well-documented that way. But at some point, things will normalize here with the supply chain and logistics. Then things -- costs should normalize at that point. I guess all of this is transient if you have a little bit of a longer term view. But what I will say is the impact of the costs, higher input cost is going to be transient as we roll in our pricing actions and other cost reduction initiatives. So the impact of them will be transient. Okay, thank you.

[Operator]

Our next question comes from the line of Maheep Mandloi from Credit Suisse. Your line is open. Please go ahead.

[Maheep Mandloi, Credit Suisse]

Thanks, [Indiscernible] your questions. Just a quick one on the working capital as we look into the next two quarters. Should we expect similar working capital increase for Q4 and Q1 because of the inventory challenges here? Thanks.

[York Ragen, CFO]

I think there -- I highlighted 4 things that are causing elevated inventory just it's taking longer for things to get here so the transit times are extended. The supply chain constraints are -- cause -- when certain components don't arrive to the line and everything else does, you get a little bit of backup in inventory. We are ramping production so to the extent we're wrapping production, that should continue.

And we're -- we're basically -- and once we get Trenton up and running too, that's going to be increasing as well as we go into Q1 next year. So, I'd probably say relative to the ramping part of the discussion, that will continue into Q1. But I think with regards to the longer in transit times, and just supply chain constraints, I think that probably has worked its way through and hopefully should level off in the next year.

[Operator]

There are no further questions at this time. Michael, please continue.

[Michael Harris, Vice President, Investor Relations]

We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter 2021 earnings results with you in mid-February. Thank you again and goodbye.

[Operator]

This concludes our conference for today. Thank you all for participating. You may now disconnect. Have a great day.