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 two or three 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.
Operator: Thank you. [Operator Instructions] And our next question comes from the line of Jerry Revich from Goldman Sachs. Your question, please.
Jerry Revich: Yes. Hi. Good morning, everyone.
Aaron Jagdfeld: Hi, Jerry.
Jerry Revich: Hi. 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?
York Ragen: 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 came in ahead of sooner than expected. So we got the beat in Q1. And then I guess what that does is just derisk 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.
Operator: Thank you. [Operator Instructions] And our next question comes from the line of Stephen Gengaro from Stifel. Your question, please.
Stephen Gengaro: Thanks. Good morning, everybody.
Aaron Jagdfeld: Good morning.
Stephen Gengaro: 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 imagine 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?
Aaron Jagdfeld: 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, it’s a very strong margin product for us. And so the margin mix to that point would be favorable.
York Ragen: I mean gross margins were up 5% year-over-year in Q1. I’d say half of that was a better mix as standby grew mid-teens.
Aaron Jagdfeld: 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 it would be interesting to see how that 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 or private equity owned back in 2006 timeframe, 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%, 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.
Operator: Thank you. [Operator Instructions] And our next question comes from the line of Donovan Schafer from Northland Capital Markets. Your question, please.
Donovan Schafer: Hey, guys. Thanks for taking my question.
Aaron Jagdfeld: Hey, Donovan.
Donovan Schafer: Hey. I want to dig in and kind of unpacking 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. And Aaron, you provided some good information about like this is something you guys have kind of been building for the 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 and some things. So 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 shifts to 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?
Aaron Jagdfeld: 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. 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 spent 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 have – 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 to go after larger opportunities in the C&I space and natural gas, in particular, and some of the things that we’ve been talking about with natural gas beyond standby kind of market opportunities. Even though that’s cooled off here recently in the higher interest rate environment, we do think that, that’s really important. And I would say this, one of the things that maybe the unsung hero of our success when the markets around telecom in particular, when they cycle on, one of the reasons that we’ve done well there is because we can provide kind of coast-to-coast coverage with our distribution to provide the kind of service and support that those large accounts demand for their fleets. And that’s kind of a really important aspect of our industrial distributor channel.
Again, the sales don’t flow through there, but the service and support is a part of what they provide for us. So the two are kind of interrelated in terms of telecom and the – we call it our IDC channel, our Industrial Distributor Channel. The products that go through IDC are very bespoke, highly customized. No two buildings in terms of their electrical requirements are the same. So we produce – it’s basically a configure-to-order business with a long sales cycle, with quoting and then it turns into an order, and then you’ve got lead time for these products that can be anywhere from as short as 8 to 10 weeks and as long in some cases, is out to 52 weeks depending on the size of the products and the type of products. So there’s a lot of influencers in the process from specifying engineers to even the architects that work on these projects and certainly, the owner operators, the electrical contractors, the general contractors, everybody plays a role in selecting the solution that is needed for a particular application.
So over the last decade, on top of building out that industrial distributor channel, the actual distributors themselves and strengthening that channel we’ve been focused on engaging with all of those decision-makers up and down the value chain there. And I think that’s really helped us quite a bit in terms of getting Generac specifically named in a specification. That’s really important. If you’re not specifically named, that becomes challenging for somebody to find your product or even your distribution on a particular bid project. So those are the things that I think engaging with those specifying engineers in that community and spreading the word about, in particular, the importance and the advantages of natural gas over diesel, which we’re the largest natural gas genset provider for backup power in the world.
And we hold an advantage there over others that we like to talk to distribution about. So I think that is part of – again, part of this story overall is natural gas backup power is growing more quickly than diesel backup power outside of the large data center market. I have to qualify that now, and that’s not a part of the market we play in. So in the served market where we play, we’re seeing gas growth rates exceeding diesel growth rates. And that’s been the same for some time and we’re a beneficiary of that, and so is our distribution. So you’re seeing all of that play out in that – in the strength that we’re talking about here on the industrial distributor channel.
