Operator: Alright. [Operator Instructions] Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.
Aaron Jagdfeld: Epic fail going here on the Q&A.
Operator: Alright. Next question comes from the line of Mark Strouse with JPMorgan. Your line is now open.
Mark Strouse: Hey, guys. Good morning. Can you hear me?
Aaron Jagdfeld: We can hear you, Mark. Thankfully.
Mark Strouse: Great. Thanks for taking the questions. York, you touched on this a bit, but I’m curious on the gross margin upside that was a bit higher than what you were guiding on the last call. Can you just quantify how much of that was driven by mix? I mean it’s encouraging to see that higher despite the higher mix of C&I. But is there something about kind of the mix within the mix versus just kind of something more structural with your cost savings or pricing initiatives?
York Ragen: Yes. No, I mean I think in terms of year-over-year improvement, there price cost has been very nice tailwind really all throughout the year. And I guess the beginning part of the year, we were having, I guess, pretty, pretty significant mix headwinds at the beginning – in the first part of the year that was offsetting that. I think what we’re seeing now in the third quarter is those mix headwinds now are starting to subside as we’re starting to get closer to comping prior year. So the positive price cost that we’ve been recognizing – the vast majority of the gross margin increase is price cost with only a modest I’d say slight impact on mix year-over-year. So I think we’re pleased to see some of those mix headwinds start to subside.
And then when you flash forward to Q4 then, we will obviously expect gross margins to continue to improve as we sequentially increase those home standby shipments then we will get mix positive there, and we will see significant year-over-year improvements in gross margin at that point because then you’ll get the benefit of price cost and favorable mix. So we’re pleased with the trajectory of where margins are headed and just like we had guided earlier in the year.
Operator: [Operator Instructions] And the next question comes from the line of Brian Drab with William Blair. Your line is now open. Brian, you line is now open.
Brian Drab: Can you hear me?
Aaron Jagdfeld: Yes, got it, Brian.
Brian Drab: Okay. Well, it’s not on our end, I guess, because you couldn’t hear me at first. Okay. So I have a bunch of questions. Just, I guess, California. I’m curious, we haven’t been talking as much about California lately, but what are you seeing in terms of the longer-term opportunity there? I didn’t feel like the utilities were shutting down power as much lately. What’s the penetration rate penetration level in California today? And what’s the latest thinking on – there is a lot of rumblings around natural gas bands in different cities and counties and how has that affected demand?
Aaron Jagdfeld: Yes, Brian, California was always a small-ish market for us in terms of home standby. It grew during the well-publicized power safety shutoff events of a couple of years ago. But the penetration rate is around 2% now, so still quite underpenetrated relative to the – I think, the full average was somewhere like 5.75% across the U.S. So, slightly below that for California, a little less than 2%. So it still represents an area of potential growth. I think those gas bands are pretty localized. And in fact, some of them have actually been overturned in courts of law. So I don’t know where that’s going to ultimately go. We need natural gas as a bridge fuel to get to the other side of the full transition to renewables, gas is going to play.
And that gas is a great way to get there in terms of just the cleanliness of that fuel source and the plentiful nature of it to help us to make the transition, the energy transition. So I think it would be very shortsighted to band that gas, but that’s – I know that, that varies location to location. So but still opportunities there. You’re right, though, I would say, in recent quarters, for sure, you haven’t seen the high-profile nature of power safety shutoffs as you maybe saw them a few years ago. We did see some outage activity coming out of the kind of spring storms, winter storms of last year and IHCs were pretty robust in California. So we continue to see growth there. And again, it was a lot less than 1% before, so it’s less than 2% now, so still growing and represents obviously a huge market just in terms of the opportunity in terms of the number of homes in that state.
Operator: [Operator Instructions] And the next question comes from the line of George Gianarikas with Canaccord Genuity. Your line is now open.
George Gianarikas: Hey, guys. Can you hear me?
Aaron Jagdfeld: Yes, we can, George. I guess, George Gianarikas is always powered on, so – good to hear you, George.
George Gianarikas: Quick question on clean energy. Curious as to whether the upheaval in the market there with some of your competitors either accelerates or maybe delay some of the strategy points you talked about at your Analyst Day. Do you see more of an opportunity here near-term? Or does this give you kind of comfort that you have your products coming out in the second half of next year? Thank you.
Aaron Jagdfeld: Yes. Thanks, George. It is interesting. I mean, with the – and we said it this morning in the prepared remarks, we’re seeing softness in that solar plus storage, the residential solar plus storage market. Actually, ecobees continue to just – they are posting record quarter after record quarter here, which is pretty amazing. I think new products coming out and they are killing it actually. We’re doing really well with that business, and there is a lot of great things around that. But when it comes to the storage side of the market, which we’re still bullish on long-term, given the structural nature of the grid transition and the policy tailwinds that should be there, we feel like the current environment, while negative, is kind of a, I think, more temporary than permanent.
And so – but the good news for us is we have a lot of new product coming next year. So I don’t feel like we’re missing out on maybe what’s going on in the market today by having – our product offering is fine today, but our next-generation product offering is going to – is really going to be – I think set us apart from the competition. I think it’s going to establish us as the leader, we think we can be in that marketplace going forward or a leader. I think we all know we struggled with our – the acquired products initially. And I think we’ve worked very hard and will be working very hard over the next 12 months to bring the new products we have to market. We’ve got a huge team working on that. It’s why the level of investment, as we said at our Investor Day, is so heavy.
And we do believe in it long-term. So I don’t think to answer your question directly, I don’t think it changes the trajectory necessarily of anything we’re doing there. But I think it probably does soften maybe the fear of missing out, if you will, the FOMO around maybe not having leading products there today. And we just getting a pause in the market here maybe is just the timing is just good for us. But we expect to be in the market in a big way later next year with our new products, and we’re pretty excited about where we’re going with that.
Operator: [Operator Instructions] The next one comes from the line Donovan Schafer with Northland Capital Markets. Your line is now open.
Donovan Schafer: Hey, guys. Thanks for taking the questions. I want to follow-up on the – on close rates. So one of the things that came across talking to some dealers is with the kind of revamped the marketing campaign you guys launched or talked about at Investor Day and how you’re trying to increase product category awareness among the next generation people, maybe in the 30s to 40s, kind of in the middle of family formation right now. The dealers were saying they are getting more IHCs that they used to – like they used to get IHC before COVID, they get an IHC that go out there, and it was almost always someone 60-year-old or who has retired. It was really easy to schedule because the person didn’t have a day job and this retired individual would have tons of peers who have backup generators.
