Thank you for standing by, and welcome to the Generac Holdings First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Kris Rosemann, Senior Manager, Corporate Development and Investor Relations. Please go ahead.

Good morning, and welcome to our first quarter 2024 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 or 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 and SEC filings. I will now turn the call over to Aaron.

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our first quarter results were ahead of our prior expectations due to higher-than-expected C&I shipments, favorable input costs and strong operational execution. We are reiterating our overall 2024 outlook this morning for net sales, adjusted EBITDA margin and free cash flow conversion, which York will discuss more in detail later in the call. Year-over-year, overall net sales increased slightly to $889 million. Residential product sales increased 2% as compared to the prior year quarter as strong growth in home standby generator shipments was partially offset by a decline in certain other residential product sales. Global C&I product sales decreased 2% from a strong prior year period as a robust increase in shipments to our industrial distributor customers, mostly offset weakness in the domestic rental and telecom markets. Significant year-over-year margin expansion and disciplined working capital management helped drive a substantial improvement in free cash flow generation from the prior year, while we continue to invest in our strategic initiatives. Home standby shipments were in line with our prior expectations during the quarter, increasing at a mid-teens rate from the softer prior year period that included a meaningful headwind from excess field inventory levels. As expected, shipments and activations were aligned exiting the first quarter, signaling that field inventory levels are reaching more normalized levels. The removal of the excess field inventory headwind is expected to support strong year-over-year growth in home standby generator sales in the coming quarters. Power outage activity in the U.S. during the first quarter was approximately in line with the longer-term baseline average as higher outages in January were offset by lower outage activity in the months of February and March. Activations, which are a proxy for installs, declined modestly from the prior year…

Thanks, Aaron. Looking at first quarter 2024 results in more detail. Net sales increased to $889 million during the first quarter of 2024 as compared to $888 million in the prior year first quarter. The combination of contributions from acquisitions and the favorable impact from foreign currency had an approximate 1% positive impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the first quarter by product class. Residential product sales increased 2% to $429 million as compared to $419 million in the prior year. Growth in residential product sales was primarily driven by a mid-teens increase in shipments of home standby generators. This was partially offset by a large decrease in portable generator shipments in the U.S. and Europe given a strong prior year comparison, ongoing softness in the domestic solar plus storage market and lower chore product sales. Commercial & Industrial product sales for the first quarter of 2024 decreased 2% to $354 million as compared to $363 million in the prior year quarter. Foreign currency and acquisitions contributed approximately 2% growth in the quarter. The core sales decline was due to the expected weakness in sales to our domestic telecom and national equipment rental customers. This performance was largely offset by a robust increase in C&I product shipments through our domestic industrial distributor channel, and growth in certain international markets, including Latin America. Net sales for other products and services increased slightly to $106 million, including approximately 1% contribution from favorable foreign currency. Gross profit margin was 35.6% compared to 30.7% in the prior year first quarter due to a favorable sales mix, given stronger home standby shipments, improved production efficiencies, lower input costs and higher pricing as compared to the prior year. First quarter gross margins exceeded our prior expectations as a…

[Operator Instructions] And our first question comes from the line of Tommy Moll from Stephens Inc.

Aaron, starting off on home standby, wanted to see if you could reconcile for us. I think I heard you say shipments are up mid-teens year-over-year, activations are down year-over-year. Can you just help us understand the two of those in context?

Yes. So it's a great question, Tommy. I mean activations have been a little slower this year relative to -- if you look at the outage environment most recently in the last couple of quarters, that outage environment has been weaker than kind of the trend over the last, I would say, a couple of years. So Q1 was actually in line with the long-term average since we've been tracking outages. But again, you look kind of trend-wise, it was a quiet relatively quiet quarters. You get past January, things really slowed down in February and March. And then Q4, as we discussed previously, was a really light quarter relative to kind of historical trends. So...

And Q1 over the last year...

Yes, Q1 last year was -- '23 was really strong for Q1. So kind of a tough comp that way. So activations were a little bit down. But yes, shipments are up because, again, the field inventory headwind is largely gone now, right? So we exited the quarter and really kind of February, March run rates, activations and shipments were in line with each other. So we think that's a really good sign that we're kind of at a point of stasis with field inventories in terms of them returning to normal, which has been the primary headwind here. So as that abates, that helps us in terms of comping more strongly on shipments, but yet the activation has been a little bit softer as a result, I think, of the most recent outage periods.

The field inventory drag was a bigger drag last year than it was this year's...

Exactly.

Quarter, and that allowed for the year-over-year increase in shipments.

Exactly.

And our next question comes from the line of George Gianarikas from Canaccord Genuity.

I was wondering, you talked about the tangential impacts of the surge and data center power demand. I was wondering if you could discuss maybe a little bit more in detail your strategy there? And any incremental you've seen direct demand directly from the needs of AI data centers?

Yes. Thanks, George. So our product range is typically underneath the range of products that are being used for -- purely for backup for the data center market. And that's a market that, they use very large blocks of power, and that's dominated on a direct basis by the large diesel engine manufacturers that are out there. There's a handful of them in the world, and they sell all the major data centers on a direct basis. So we don't have a product like that, and we don't have any plans to develop an engine range. Those are engines that get used in tug boats and mine haul trucks and trains and things like that. So much different applications than what you'd see just outside of power generation. That said, we do serve some of the edge data centers where the power needs for backup are not as great. And we also have seen some opportunities come across relative to natural gas backup. So today, the backup generator market for data centers is almost entirely diesel, again, driven by these large diesel engine players. But we are seeing issues around siting and permitting with certain large concentrations of diesel engines. So in Virginia, as an example. There's some high-profile areas where permitting has been challenging to obtain for the kinds of -- the raw numbers of diesel engines that have to be cited and permitted to operate for backup. So some of these data center EPCs and owners have turned to natural gas as a potential option. Now the blocks of power are smaller because natural gas doesn't have the density in terms of energy, as you see in diesel fuel. But nonetheless, the emissions are quite a bit cleaner, the emissions profile of those products. So that could be…

And our next question comes from the line of Mike Halloran from Baird.

So just digging a little deeper on the C&I side of things. It sounds like a pretty similar outlook for the rental and telecom channels. Maybe talk to 2 things here. One, how you're thinking about the seasonality for the businesses in the areas where the outlook has improved? And then also the confidence in the sustainability of the run rate. And so more of the distribution side, some of the other areas? And any kind of evidence you would point to for the sustainability piece and why you think that might have some nice legs here relative to what you were thinking a couple of months back?

Yes. Thanks, Mike. So our C&I business has continued to perform quite well in the face of -- as you noted and as we've been noting for quite some time now, in the slowdown, the cyclical slowdown that we're experiencing in the rental markets as well as the telecom markets, which, again, guidance for rental and telecom are largely unchanged for the year. Really, the change has come from our industrial distribution channel, which is, again, they're serving businesses. They're serving the infrastructure like wastewater treatment plants and school districts and other types of applications, a very wide range of applications, health care, manufacturing plants, even data centers, as I mentioned before, data and telco, outside of the strict telecom market that we talk about oftentimes on a direct basis. But that industrial distributor channel for us has been a growing channel for really the greater part of the last decade. We've invested heavily in it. We've done some acquisitions along the way where we've been able to attack some of the markets where we felt we were underrepresented from a market share standpoint around the U.S. We've infilled that with owned distribution, if you will. And that has -- that playbook has worked out quite well for us. And we've been able to pick up share is really kind of flat out, the answer. So it's coming in stronger. It's been very resilient, right? We haven't necessarily seen the breakdown there. I think that's representative of the broader power quality discussions that we've been having here and have had for some time, right? Whether you're talking about the supply demand imbalance that I just prattle on about or just the continued challenges with reliable supply and also just the deeper electrification within businesses, right? I mean businesses today without power, you just -- you can't operate. And we used to point to certain markets or certain applications that were "critical" for backup power. I would say almost every business today would say they critically rely on a continuous source of power. So without that, whether it's inventory spoilage or whether that's an interruption of revenues, significant disruption to their businesses exist when you get these outages, and outages over time have been on the rise. And I think you're just seeing that manifest itself in a broader penetration rate for backup power in these buildings that represent the C&I market in North America. And we've been very pleased with the resiliency there. And so that's largely offsetting the weakness -- the cyclical weakness that we were forecasting here for rental and telecom. And we're saying, hey, look, we like the trends for that industrial distributor channel continue to be pretty solid...

Quoting is hanging in there...

Quoting is hanging in there. The quote-to-sale conversion process has continued to hang in there. And we continue to invest in it. And I think all of those things when you line them up are really what are helping us offset the broader weakness in those other markets.

And our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

So just back on residential One, maybe just speak to destocking and whether you think it's done, if not how much left? And then it just seems like IHC activation trends were kind of still pretty weak. And so just want to come back to like, I know it was kind of in line in the quarter, but what gives you confidence, an unchanged view and kind of the ramp into the second half outside of just seasonality?

Yes. Yes. Thanks, Jeff. So yes, from a destocking perspective, again, we exited the quarter, February and March, activations and shipments were pretty much in line. So we felt like -- and again, based on all the data we have and based on the extended period here of destocking that we've been experiencing really since the third quarter of 2022, we feel like we're finally through that. And so that's in line with our prior expectations. And that largely is behind, I think, the -- again, as we -- as I mentioned previously, the ability to kind of post those mid-teens increases year-over-year in home standby shipments. So we don't have that field inventory headwind now that that's primarily gone. In terms of the weaker trends recently here, activations in IHCs, maybe a little bit underneath what we were anticipating, but not dramatically off the pace. So we feel pretty good about seasonally -- frankly, January was a solid month with outages, February, March, not so good. In fact, they were -- February and March were really quiet. April, on the other hand, came back strong. And so you kind of get into the seasonal time frame here for these types of products, and we're seeing the kinds of upticks that you would expect to see in these key metrics that we track, both leading and lagging indicators. So we feel pretty good about that guide and hanging on to that guide for the year. I think that, again, we've said this that the category itself is less sensitive to some of the interest rate movements and things that you might see in other typical, what you might call, consumer discretionary types of categories. Power outages create, I think, a different -- they elicit a different response, right? I mean it's just -- it's an emotional category a lot of times. Also the demographic that's traditionally buying these products. These are -- they skew older. It's older Americans with their homeowners, the aging in place trends that we've talked about previously are very much intact. And I think that these are homeowners that are just less sensitive to movements in interest rates. It doesn't mean around the edges that we won't see decreases, market demand decreases. And I think that's largely played out here in the back half of last year. I mean interest rates have been high now for a while. It's not -- this isn't a new phenomenon. So I think whatever impact that higher interest rates may have had on the margins, on the edges of the market, we think that's largely baked in at this point. I do think that, again, just thinking forward, to the balance of the year, I'll just also point out that the Colorado State University, hurricane forecast was, I think it was -- what was it? The most active, York, forecast ever?

Ever.

So I mean we don't...

Preseason forecast.

Personally, we don't tend to put a lot of stock in those forecasts because they -- I have a hard time believing that if you can't tell me what the weather is going to be next Saturday, how can you tell me what it's going to be in September. But again, I think we're looking at longer-term trends around air temperatures, water temperatures, the relaxing of the El Nino events. I think those are things that are important to how forecasters think about the long-term, the bigger cycles around things like hurricanes. So that's coming as well.

But our guidance assumes baseline outage activity, doesn't assume any majors.

Yes.

And I think it's important also to mention like the category is seasonal. So second half is always stronger than the first half.

Definitely.

You would -- if you're assuming baseline level of outage activity, you would expect a nice sequential increase from first half to second half in that home standby business to support our guidance.

And our next question comes from the line of Brian Drab from William Blair.

I was wondering if we could just focus in on energy technology for a minute. And I'm looking at the slide from the investor event last year and about 40% of the incremental revenue between 2023 and 2026 and the bridge here is from incremental revenue from energy technology, and C&I, and residential. Can you just give us an update on how you feel about capturing that $700 million incremental revenue? And what's the updated outlook, C&I and resi?

Yes. Thanks, Brian. So I mean, obviously, we gave those guidance points last fall. And we're not in a position today to update the next couple of years. But I -- we can talk specifically to Energy Tech and how we're thinking about that. Obviously, the market for solar plus storage, the market for EV charging, the market for some of the products that are within that complex. I would say are weaker today. The near-term market dynamics are clearly more negative coming off of, the pull ahead from NEM 3.0 in California and then just higher interest rates. I think the impact of that's having on those markets and the demand for those products. So that's the negative news. The good news is we're still out in the market with our new products. We're on target for our launch plans later this year. And I think we're optimistic that as we turn the corner into 2025, look, interest rates are not going to remain high forever. And so I think -- and the NEM 3.0 pull ahead, pull in, I think it's pretty well documented that, that seems like the market is finally kind of emptying itself of some of the inventory challenges that the OEMs that are providers to that market today have experienced here over the last several quarters. I think that's starting to abate. I think it's perfect timing by the time we get into the market, I think the market is going to be where we need it to be so that we can start to see success. So I wouldn't say we're in a position today to think differently, other than near term, right? And so near term, this year, we're probably going to be a little bit on the low end of our range. Again, it's not a big part of our business today. So a small move, and that's part of the residential, the other residential products being softer that we talked about in our prepared remarks. Some of that is the solar plus storage and EV charging just being probably a little bit more muted here in terms of market demand in the short term. But again, if you're talking about over the next -- through 2026, for the next 2 or 3 years, we're just -- we don't think that that's probably going to change dramatically because I think the market is going to come back by the time we're in a position to participate in that.

And our next question comes from the line of Jerry Revich from Goldman Sachs.

Aaron, can you just expand on your comments around gross margins in the quarter? We were pleasantly surprised. It sounds like the cost came in better than you expected as well. So what's the magnitude of improvement that you're seeing from supply chain normalization and going back to normal efficiency levels, freight normalization? And to what extent can that continue? Can you flesh out that part of the gross margin performance in the quarter and opportunity from it?

Yes. Absolutely, yes. No, we were pleased with the gross margin performance that did beat expectation. It was well over 1% increase there versus expectation. And the reality is we guided that input costs would improve throughout the year in 2024. The reality is we just saw the realization of that improvement sooner than we expected here in Q1. So that's great. So the fact that, that came in ahead of sooner than expected. So we got to beat in Q1. And then I guess what that does is just derisks that assumption in the second half, that gross margin improvement that we expect in -- from first half to second half, we're seeing it now. So it derisks that assumption. So that's what's going on behind the gross margin beat.

And our next question comes from the line of Stephen Gengaro from Stifel.

So my question, I guess, it's two parts. And one is, has there been any change to the competitive landscape given that I think your biggest competitor has kind of been taken private? And then maybe if you can kind of blend into that answer, just sort of the margin mix question. I imagined the strength in home standby relative to other residential products is a margin positive for the balance of this year? And any way to sort of quantify or think about that?

Yes. I mean, definitely, that is the case, right? I mean the margin profile of the standby products for residential is greater than every product we offer here in the company, frankly. So it's a very strong margin product for us. And so the margin mix to that point would be favorable.

I mean gross margins were up 5% year-over-year in Q1. I'd say half of that was a better mix as home standby grew mid-teens.

Yes. So that's played out. In terms of the competitive landscape, yes, there have been -- there's a couple of kind of developments in the competitive landscape. As you mentioned, one of our competitors here was -- is in the process, I think, of being taken private. They haven't -- are being taken through private equity, and we're a private company already but being acquired by private equity as a carve-out of the bigger enterprise there. We don't believe that's closed yet or haven't been told it's been a closed transaction yet. But, I mean it's interesting to see how it plays out. I mean, take private like that with kind of the -- there's a debt load. We went through that. We went from privately owned to private equity owned back in 2006 time frame, and it's different to operate a company with a high degree of leverage and a large amount of debt. So I think that, if I were in somebody's shoes there, that's something that is an adjustment period and takes time to kind of work through. It's also a complicated carve-out of a 150-plus year-old company. So that may be a complexity as well. I don't know that it will impact the competitive landscape that much. I think where that company -- where they compete quite well with us is on the C&I side of the business. And they've got quite a nice C&I business, good competitor there. On the residential side, they're quite a bit smaller. They may see opportunities there. But I think this is a place where we've done well, I think, to use our scale to our advantage. And that's, I think, largely why, as we've said in our prepared remarks this morning, we actually think we've improved our share position here over the last several quarters. So we continue to spend heavily on driving leads for the category, driving awareness for the category, investing in our distribution, investing in our sales processes and all of those things continue to provide nice returns for us in the way of continued gains in share and again, a market opportunity that still remains really, I think, pretty huge. I think we've been doing this with home standby for a long time, but penetration rates are still only, what, 6.5%?

6.25%.

6.25% [ Kris ]. So I think there are -- for us, when you think of every 1% of penetration being kind of a $2.5 billion to $3 billion market opportunity, there's a ton of runway left here, and it's worth the -- it's worth being, I think, being a net investor here, if you will, in the category.

And our next question comes from the line of Donovan Schafer from Northland Capital Markets.

I want to dig in and kind of unpack in industrial distributor channel a little bit because that was a positive development this quarter offsetting some of the other C&I kind of subsectors or channels or however you want to call it. So -- and Aaron, you provided some good information about like this is something you guys have kind of been building for better part of the last decade. But it doesn't get a lot of discussion in terms of like the mechanics and the kind of, I don't know, origin story or whatever. And so it'd be good -- I want to try and get a handle on kind of significance in some things. Like the first thing would just be, can you give us a general sense of like what portion of C&I revenue that can make up? And then what portion of that would be distributors that you actually own? And some of this is also getting at the issue of like -- is this a case where stuff could get shipped to distributors but doesn't necessarily have an end user and so you can have like a channel buildup here? Or do the dynamics not work like that? So any time something ships through a distributor and you recognize revenue, there's a project or an end user that's going to be taking delivery. Just how that works in its size and significance?

Yes. I mean that's a significant portion of our total domestic C&I sales. So again, it's -- I think when you kind of step back, it's close to 70% of the total for domestic C&I. So it's 70%, 75% of the total, with the balance being, again, the mobile products and telecom products, and again, those are down largely here. So as we documented, they go in cycles. We're a big player in those markets in rental and in telecom. But when those large customers are not spending CapEx there. They -- that disproportionately impacts us because we supply a lot of equipment into those areas. So to have the industrial distribution channel grow as it has been, is a really important, I would call counterweight, if you will, to some of those larger customers or larger concentrations of product and customers in rental and telecom. You're right, we don't talk a lot about the industrial distributor business, mainly because we spend an inordinate amount of time talking about residential, our consumer power businesses and the residential standby and Energy Tech. And -- but underneath the covers here, this has been, I think, a really nice success story. We've got a great team there that executes well. You may recall, Donovan, we announced that we're building a new factory here in Wisconsin, in Beaver Dam because we believe in the growth of those products and the importance of that to our business overall and it's an area where we needed some capacity. We've been building bigger and bigger products. We also did a pretty massive investment in our R&D space here in Waukesha, Wisconsin. This is our technical headquarters, specifically go after larger opportunities in the C&I space and natural gas, in particular, and some of the things we've been…

And our next question comes from the line of Kashy Harrison from Piper Sandler.

So Aaron, I think you indicated that HSB activations were down modestly year-over-year. Can you just help us quantify that? What does modestly mean? And then you also indicated HSB shipments and activations were aligned in February and March. And so I was just wondering if, York, you could just help us think through 2Q residential revenues. I'm just trying to understand how we get from being up 2% in 1Q to being up low double digits for the full year.

Yes, Kash. So the -- from an activation standpoint, I mean, modestly, it's kind of at mid-single-digit range, which is, again, not too far off of our expectations in terms of year-over-year. We just -- we kind of expected it to be a little bit softer coming out of the -- we had IHCs in Q4 were lower as a result of the weaker power outage environment, frankly, Q3, we really didn't have much of a season last year in terms of the outage environment. So kind of the back half of last year maybe wasn't -- didn't play out as strongly as it might have historically. And as a result, it just -- you see that play out in fewer installs here year-over-year in the quarter. But again, not dramatically so, which I think is good. And I think when you look historically, the category is still up, it's up dramatically from where it was kind of, you go to 2019 ranges, those levels of activations and we're up significantly from that area. So the category is quite a bit bigger today than it was then. But I think just a little bit off near term here from the weaker power outage environment in the last couple of quarters.

Yes. And then your comment about like as residential paces from Q1 to Q2, we did -- in Q1, we still did undership the market. We are still bringing field inventory down and again, by the tail end of the quarter, as we get into Q2, we feel like we're back to normal for the most part. So we still did undership the market. If you recall, we undershipped 2023 by around $300 million. I guess, I would say, 1/4 of that probably a little less than 1/4 of that was what we undershipped the market in Q1 here. So we got back to normal. So you won't have that in Q2, that undershipping. And then just the seasonality of the business picks up from Q1 to Q2 in that category. So that's again, that's -- you got to look back at what historical seasonality looks like in that, again, supports the guide for residential products in the future.

One moment for our next question. And our next question comes from the line of Jon Windham from UBS.

I'll keep it quick as we're running a bit long. Just any sort of comments around you mentioned some weakness in the non HSB residential market. But one of the really strong markets right now is storage deployments. Residential storage deployments are up 200% year-on-year in California. Just some comments about the competitive landscape and your ability to compete in that market. I appreciate all the insights to that.

Yes. Thanks. Yes. So storage attach rates are up dramatically. Solar plus storage install rates, as we understand them are -- certainly, new solar projects are down significantly. 50%, 60% year-over-year in California. And so you are seeing greater attachment rates because of the NEM 3.0 position. And that's where storage I think you're seeing just the absolute numbers are probably up because of that higher attach rate. California for us, that's a market largely dominated by Tesla. It's not a market that we've historically been strong in. So we're just -- we're really not participating dramatically in that. I will say, I mean, our storage business is up year-over-year. So it's not double. It's not 200%. But that's an area that we are seeing some growth off of a pretty hard bottom as we've described over the last several years. But actually, as we also called out, I think the bigger challenge in the other residential products, actually, it's portable generators. We haven't talked a ton about that. I mentioned in our prepared remarks that both domestically because of the softer outage environment here over the last several quarters. And then internationally, international portable gen sales were down hard Q1 year-over-year. There was a lot of power security concerns in the year ago quarter in Europe, largely related to the Russia-Ukraine war. And that's abated somewhat. And so we've seen the portable gen demand come off hard in the international markets for us, which is specifically kind of the European markets. And then our chore business, which we don't talk about a ton, but that suffered from -- that's really suffered last year. The longer-term trends there coming out of the pandemic, there's a lot of kind of buy ahead on equipment, both at the end market level as well as the distribution level. And you can see all the public comps out there that are involved in this space on the residential chore product space. And it's been a pretty brutal market over the last -- really the last 1.5 years. And we were hoping that, if we got a little bit of a spring weather here, that was kind of built into the forecast, that, that would be helpful. But what we found is distribution partners, they didn't sell through their snow season. It was a weak snow season, which with high snow inventories, they were reticent to invest in spring chore products. So that's been delayed a bit. Now thankfully, weather is picking up here, trends more near term or a little more positive with chore products, but it's still been -- it's been a rough go. So it's really chore and then those energy tech markets that have been softer and then the portable generator pullback that we talked about, which were kind of headwinds for us in the quarter.

And our next question comes from the line of Jordan Levy from Truist.

Appreciate all the comments on gross margins here. And I just wanted to see on the cost side, if you could give us some more specifics around what the input cost reductions were that you're realizing in the first quarter? And as a quick second part of that question, just curious on the sensitivity of costs overall to copper prices, specifically given what that commodity has done over the last month or 1.5 months?

Yes. No, I think it's a number of things in terms of -- well, steel is probably our largest input and we've really -- those steel costs, I guess, over the longer term have come down. And as we've been turning through our higher cost inventory, we're just seeing those lower steel costs come through, again, maybe a little bit faster than we originally anticipated. So steel is an important factor. Obviously, logistics, freight costs, while those came down throughout last year and again, we're starting to turn through that inventory and the realization of those lower freight costs, we're starting to see, that's part of the improvement, just better plant efficiencies. I think that's better plant absorption. We're seeing that as well in terms of strong execution there. So I would say those are probably the biggest factors on sort of how we were able to realize the better gross margin faster than we originally anticipated. In copper, I guess, copper, it does have an impact, but I would say it's lesser so than..

And there's lags. I mean...

If you add to the steel side, yes. So copper has gone up. But that, I would say, is in terms of lower impact relative to steel.

And our next question comes from the line of Vikram Bagri from Citi.

I wanted to ask about R&D expense, which increased noticeably in the quarter. I was wondering if you can share where your R&D dollars are being spent; in your previous question -- answer to your previous question, you had mentioned that there are no plans of launching products that directly target the data center market. So I imagine R&D is being largely focused on energy technology. If you can share the progress of next-gen MLPE storage products, is the target to compete in that market at a lower price point with lower failure rates or an ease of installation or there are new features or USPs, we should keep in mind that give you an edge against the competition in that market? And then lastly, you had mentioned OpEx will be roughly 23% of sales last quarter, but wasn't mentioned today, I wanted to make sure the guidance has not changed, given the R&D spending update and on your comments on lead generation spending this quarter?

Yes. This is -- on the last part on the OpEx guidance, I did -- in our prepared comments, we did mention that the outperformance in Q1 on the gross margin would get roughly offset by a little bit higher OpEx, again, as we continue to invest in those strategic initiatives. It's early. So we basically held the EBITDA margin guide where we had it from last quarter with the offset -- the gross margin outperformance slightly offset by the OpEx side.

Yes. And then on the -- Vikram, on the R&D side, yes, we're spending very heavily largely a lot of those R&D dollars. I mean it's across the board on all of our products, but obviously, the energy tech products. We are knee-deep in our next-generation storage devices, in the residential side that we'll be bringing to market here later this year. And then, of course, our rooftop solar products, power generation products, inverter products that we continue to invest in. We have our next generation, those products coming to market in early '25. So there's a tremendous amount of effort right now. We've been building teams. You may have seen our announcement. We opened a tech center in Reno, Nevada. We've been filling that with people. We've got tech offices in Portland, Maine. We've got tech offices in Vancouver. We've got tech offices in Bend, Oregon, in L.A., in Denver. And so we've really cast a pretty wide net here as we build out, the talent level needed to compete with obviously some very formidable companies there that supply not only storage but also on the inverter side. So from a USP standpoint, again, we'll talk more about these product launches as we get closer, but we believe we've got some novel approaches to certain elements of the tech -- but we also think that there's the integration of all of these products together more seamlessly. Today, if you want to put together a solar system with a storage device, with an EV charger, with thermostatic controls, with even a generator for longer-term backup, load management, all of these different devices, that's 3, 4, 5 different apps you've got in your hand. We're working on a project that is unifying all of these technologies on a single platform, really…

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Kris Rosemann for any further remarks.

We want to thank everyone for joining us this morning. We look forward to discussing our second quarter 2024 earnings results with you in late July. Thank you again, and goodbye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.