We kind of hit that. I think the peak, Chris, was, we say, Q3 of 2020 is where we kind of peaked out. And then we saw things really fall off as our lead times extended and now we’ve been in that recovery mode. The good news is, we’re seeing that recovery. I do think kind of pursuant to my answer to the previous question, about — or the additional color from the previous question about we’ve got more people coming into the sales funnel that maybe aren’t experiencing outages, but they’re concerned about outages and they’re hearing more about it. Either because of media reports or other things or maybe notifications from their local utility that they could be at risk of an outage with cold temperatures if there — if they don’t immediately turn off or reduce their power consumption.
Those are scary things. When you’re a homeowner and you get that text message, and it’s zero degrees outside, you need to reduce your energy consumption immediately or you could be facing blackouts. I mean that’s — those things send people on a hunt for solutions. And that’s when we see and we are seeing evidence that people are coming into the sales funnel. I will say that, it’s going to be a longer conversion cycle for those homeowners if they haven’t experienced an outage. So we’re aware of that. And we think that, that could lead to some — could take a little bit longer than for close rates to really truly recover to that level as a result of just more people coming into the sales funnel and investigating the category. We don’t necessarily think that’s a bad thing.
We just think that it means that it’s even more important that our nurturing efforts and our efforts to continue to engage homeowners who have interest in the product category that we remain very diligent in our efforts there. So again, close rates, the assumption, kind of a modest improvement over the course of 2024.
Operator: Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Jerry Revich: Yes. Hi. Good morning, everyone. Arne, can you just talk about the margin outlook. So you had 20% margins in the fourth quarter. And seasonally, that’s a 19% annual equivalent rate and we’re looking at guidance of 17%. So what’s the 200 basis point margin degradation beyond normal seasonality that you folks are guiding to R&D or other areas? Can you just expand on the drivers compared to the — ?
York Ragen: Yeah, in the prepared — I did talk about our operating expense investments. So we are expecting those as a percentage of sales to go up as we as we add the resources necessary to continue to drive our growth. At our Investor Day, last September, we talked about a lot of significant long-term growth opportunities. We want to add those resources here in 2024 to go after those opportunities. So that — you had that before the revenue is incurred, and that’s really across all of our business, not just — it’s — it’s our consumer power business, our industrial business, our Energy Technologies products. And you need to add those costs before the revenue and that will increase our OpEx as a percentage of sales, we believe in 2024 relative to 2023. And maybe that’s probably the — just to square that up with maybe the math that you’re looking at.
Aaron Jagdfeld: Yes. I think, Jerry, just — just one last comment on that. We have been investing heavily for the future here. We think those investments are both necessary and I think improve our odds of being successful as the market continues to change. There is just a ream of evidence around the fact that the grid is changing. I talked about it in my prepared remarks. We talked to a lot of utility and grid operators. They are — there is a significant challenge ahead, as we continue to retire traditional thermal assets on the supply side in favor of renewables, which is — I think we all agree, we want to decarbonize the grid as much as we can. The challenge, of course, is those renewables are intermittent in nature. And storage costs are still high.
And large-format utility storage is difficult to balance out with the cost of building those renewable plants. You couple that with this — what we’re now seeing, which is an increase on the demand side, which we haven’t seen in decades. The demand side has been relatively muted. Retail electric sales have been relatively muted over the last couple of decades as maybe some of the growth has been offset, some of the either population growth or just growth in some of the power usage devices has been offset by efficiency gains, but that’s changing. And we’re seeing the electrification trends again, around cooking around cleaning around heating and cooling, certainly around transportation, super early innings there. But it’s creating these incredible opportunities for mismatch of supply and demand.
And in particular, as more severe weather and volatile weather patterns pick up, that is putting dramatic stress on the grid. And so I don’t — again, we couldn’t be in a better place at a better time with the products and solutions that we’ve assembled here. We have a lot of work to do, obviously, to deploy those to great effect, to build out these ecosystems for homeowners and business owners. We’re working very hard on that. And the work is the investment level we’re talking about here, and that is what York was referring to, certainly in the — throughout the year, 350 to 400 basis points dilution to EBITDA margin.
York Ragen: For Energy Technologies.
Aaron Jagdfeld: For Energy Technologies.
York Ragen: Having said all that, we start expecting to increase our EBITDA margins from 2023 to 2024.
Aaron Jagdfeld: Yes. Good point.
Operator: One moment for our next question. Our next question comes from Stephen Gengaro with Stifel. Your line is open.
Stephen Gengaro: Thanks. Good morning gentlemen.
Aaron Jagdfeld: Good morning.
Stephen Gengaro: So two things for me. The first — and I’m not sure if you’re able to comment, but when you talk about that margin drag from the new energy technology side, and you sort of painted this picture at your Analyst Day, but should we expect that to start to dissipate in 2025?
Aaron Jagdfeld: Yes, absolutely. And then the idea, as we laid out — and we’re still on our path here. But the idea, as we laid out in September at the Investor Day is that we would be at breakeven. We would start to achieve breakeven levels in that business in 2026. So you will start to see an abatement of that dilution impact. It’s just not going to happen this year. So it really starts in 2025 and it accelerates.
York Ragen: 2026 is what we would.
Aaron Jagdfeld: Cut in half by 2026, right? Exactly.
Operator: One moment for our next question. The next question comes from Mark Strouse with JPMorgan. Your line is open.
Mark Strouse: Yes. Good morning. Thanks very much for taking our questions. I wanted to start with the gross margin guide for 2024, 37%. That would be the highest since 2020. I assume a good part of that is driven by mix. Can you talk about your expectations for pricing that are embedded in that? And then just a quick clarification question, if I could. Residential revenue in 4Q grew 1%. I think you said that home standby grew maybe upwards of 10% and the Energy Tech business grew as well. If that’s true, what was the offset to get to 1% growth?
Aaron Jagdfeld: Yes. So, let me unpack that. So it was mostly portable gens in Q4, again, with a really soft power outage environment and no major events.
York Ragen: And a tough comp last year.
Aaron Jagdfeld: And a tough comp last year.
York Ragen: Here and in Europe.
Aaron Jagdfeld: Correct. Yes. And the European side of that as well, to York’s point, the Russia-Ukraine war, they just they haven’t really — some of the energy concerns, security concerns haven’t come to a pass there. And as a result, we saw — we’ve seen portable gens really come off and also tour products were soft. We said — we called this out throughout the year last year, we had a tough year with our tour products business. So, that was also soft. But that was offset by 10% growth in HSP and some growth also in the clean energy business. On the margin question, I’ll just — I’ll touch on the price piece of that real quick, and then York can kind of round out the discussion. But it’s small. I mean we got a little bit of price in there this year, just to cover some of the additional costs that we’ve seen around the investments that we’ve had to make as we scale the business, but they were quite modest, I would say, in terms of price.
There’s no big price. So the rest of it–
York Ragen: I’d say half of that gross margin increase that you referred to is, in fact, mix, obviously, as resi and home standby grow faster than our C&I business, that will be a tailwind to gross margin growth. The other half is really cost continuing to abate the realization of the cost that we’re experiencing were, I’d say, in the beginning of 2023, we were still feeling the supply chain pressures that spilled over from 2022 into 2023, those are largely — we won’t see that in 2024 here. Logistics costs, I think we were as those costs build over from 2022 into our inventory as we sell through that inventory, that headwind that won’t be a headwind. As we ramp up our production in our plants, we’ll have obviously favorable overhead absorption, lower warehousing and storage costs as we bring our inventory levels down, that’s sort of behind the scenes, there’s a lot of — we don’t need as much warehousing space to store the inventory anymore.
So, that builder costs will come down. Just general plant efficiencies. And then we always have our profitability enhancement program that is — it’s sort of part of our DNA now that we cascade cost reduction initiatives across the company throughout the company. And we have goals for those initiatives and projects that we believe we’ll realize in the second half of the year. So, the cost side of it is an important side of it as well in terms of the gross margin improvement.
Operator: Our next question comes from Donovan Schafer with Northland Capital Markets. Your line is open.
Donovan Schafer: Hey guys. Thanks for taking the questions. So, I want to ask for some of the softness on the C&I side of the business. In the release, you mentioned it also applies — of course, there’s telecom and the rental accounts is kind of what comes first in the order of significance, it seems like. But the beyond has become increasingly interesting. And I believe in chance at rock has been an important part of that. I believe it goes into that bucket. Correct me if I’m wrong on that. And so I’m curious if you can comment on what you’re seeing in the beyond standby and kind of the weakness there? If it is tied to enchanted rock kind of when that agreement ends? I believe it was either expiring this in 2023 or 2024. If you expect that to be renewed, and if you can comment at all on potential for data center demand being helpful.
I know you have — I believe you have the largest natural gas generator for data center back up. So any color on those would be appreciated. Thank you.
Aaron Jagdfeld: Yes. Thanks, Donovan. So yes, I think it would be good to maybe spend a few minutes on the C&I side. We — that business has been on an absolute tear over the last three years, CAGR close to 30%. It’s a $1.5 billion asset for us today globally. It is a truly global business. And in fact, we have a lot of long-term conviction there. As evidenced by we broke ground on a new plant here in Wisconsin just here in the fourth quarter because we see the long-term need for additional capacity as the market grows. Specifically, we have always seen certain cycles in the C&I markets. We’ve been serving the — I’ll start with telecom kind of work my way through the walk here on kind of the three different areas we called out specifically in the prepared remarks.
