Generac Holdlings Inc.

Hello, and thank you for standing by. Welcome to Generac Holdings, Inc. fourth quarter and full year 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question only. I will now like to hand the conference over to Chris Roseman. You may begin.

Good morning and welcome to our fourth quarter and full year 2025 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jogfeld, President and Chief Executive Officer, and York Reagan, 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 a reconciliation to comparable US GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, Chris. Good morning, everyone, and thank you for joining us today. Our fourth quarter results reflect a 10% increase in global CNI product sales year over year, led by higher revenue from products sold to data center customers. However, this was more than offset by continued soft power outage environment that impacted home standby and portable generator shipments during the quarter. As a result, fourth quarter overall net sales decreased 12% versus the prior year to $1.1 billion. Fourth quarter adjusted EBITDA margins of 17%. We're in line, however, with our expectations despite the weaker outage environment and unfavorable mix shift. We made significant progress with our efforts in the data center market as momentum accelerated during the fourth quarter and into early 2026. We further developed partnerships in the quarter with multiple hyperscalers, including progressing to the pilot phases of our relationships with two specific customers as we prepare for potential significant volumes in 2027 and 2028. These developments provide incremental visibility and support for our continued investments in ramping our manufacturing capacity for large megawatt generators as we position ourselves to be a key supplier for this rapidly growing end market. Additionally, we are making progress with other data center co-locators and developers as our existing backlog has increased to approximately $400 million as a result of additional orders from these customers. We expect our order intake will accelerate over the next several quarters as we continue to progress through the qualification and contract stages with various data center customers, providing a path to doubling our CNI product sales in the years ahead. To ensure that we can serve this accelerating growth in demand, we have made significant investments that further improve our positioning as an important supplier to the data center market, including the purchase of an additional manufacturing facility in Wisconsin in December, as well as ongoing investments in our existing CNI facilities globally. As a result of these investments, we expect that our domestic manufacturing capacity for large megawatt generators will surpass $1 billion by the fourth quarter of this year. And we will continue to evaluate additional capacity across our entire global CNI production footprint. 2025 was an important year of innovation for Generac as we introduced a number of significant new products across our portfolio. In addition to launching our new large megawatt generators, our next generation home standby generators began shipping in the second half of the year, including the market's first 28 kilowatt air cooled unit and other important feature upgrades. We also introduced our updated energy storage system, Power Cell 2, as well as our first Generac-branded microinverter, Power Micro, that allows us to better serve the residential solar market. We also continue to develop our enhanced home energy management capabilities through our Ecobee Smart Thermostat platform, helping to strengthen our home energy ecosystem through deep integrations with all of our residential products. These solutions are specifically designed to help our end customers solve the energy challenges presented by the megatrends of lower power quality and higher power prices. In addition to the well-established impact on power quality from severe and volatile weather, significant load growth is expected to further drive grid instability and raise power prices well into the future, as power demand accelerates as a result of massive CapEx investments being made for the build-out of data centers. According to the North American Electric Reliability Corporation's 2025 Long-Term Reliability Assessment, nearly half of the U.S. population lives in a region that is at a high risk of seeing its power supplies fall short of established reliability criteria in the next five years. NERC attributes this expected instability to the combination of escalating demand growth with the peak demand growth rate nearly doubling as compared to the prior year's projection, an increase in intermittent generation sources which carry lower reliability factors, and the uncertain pace of grid infrastructure development. Most regions within NERC's high-risk category are expected to also see a substantial increase in data center investment in the coming years. Significant load growth is contributing to power demand shortfalls, with third-party estimates suggesting that supply and transmission capacity investment growth rates would need to increase six-fold as compared to the rate seen over the last five years to match the anticipated higher demand. The investments required are likely to further increase the prices for electricity, adding to the affordability challenges that U.S. residential electricity customers already are experiencing, as average power prices have increased nearly 40% over the last five years. And expectations for power prices are to double again in the next decade, and these continued increases underpin the need for energy technology solutions as home and business owners look for ways to reduce their increasingly higher energy costs. At the same time, the continuing trends around lower power quality highlight the long runway of growth that we anticipate will exist for our core backup power products and solutions, given that the home standby category is only 6.75% penetrated at the end of 2025, with each incremental 1% of penetration representing an approximately $4.5 billion market opportunity. As a result of our continued innovation and investments in product development, We believe Generac is uniquely positioned to help our customers solve the energy challenges they are facing with increasing power outages and rising energy costs. At the same time, we believe we are well positioned to capitalize on the massive growth opportunity presented by the supply shortage of mission-critical backup power generators for the data center market. Now, discussing our fourth quarter results in more detail. Global CNI product sales grew 10% year-over-year in the quarter, primarily due to revenue from products sold to data center customers. including continued shipments internationally and our initial large megawatt generator sales in the domestic market, as well as an increase in global shipments for our controls products and solutions. Project quoting activity and orders in our domestic industrial distributor channel continued to grow during the quarter as end market activity remained robust. However, as expected, shipments to this channel declined in the quarter from a strong prior year comparison, resulting from the reduction of lead times in the prior year fourth quarter. Throughout 2025, as we further increase production rates across our existing facilities and with our new plant in Beaver Dam, Wisconsin, coming online in the second quarter of 2025, we continue to bring down lead times for products sold to this channel down to more historically normal levels. Shipments to our national telecom customers improved dramatically for the full year of 2025, increasing approximately 27%. However, shipments declined modestly in the current quarter from the prior year as increased production rates also allowed us to bring lead times for these products down to more historically normal levels. We expect sales growth to this important end market to continue in 2026 as our customers further invest in hardening their networks. The growing dependence on wireless communication and increasing global tower and network hub count continues to provide a solid backdrop for future growth in sales of CNI products to our telecom customers. Shipments to our national and independent rental customers grew in the fourth quarter compared to the prior year, which we view as the start of a cyclical recovery in this market. As a result, we anticipate further organic growth throughout 2026 and believe that we are well positioned for long-term success given the secular need for global infrastructure related investments that require the use of our broad portfolio of mobile products and solutions. In addition, on January 5th, we further strengthened our position in the market for mobile products with the acquisition of Almond, a market-leading mobile power equipment manufacturer located in Nebraska. In addition to broadening our customer base and increasing our exposure to the growing market for these products, this acquisition provides additional capacity and flexibility within our domestic manufacturing footprint as we continue to invest in doubling our C&I product sales in the years ahead. International core total sales, which excludes the benefit from foreign currency, increased 5% during the fourth quarter, primarily due to revenue from products sold to data center customers and higher global shipments of our controls, products, and solutions. Favorable sales mix and improved price-cost realization resulted in significant adjusted EBITDA margin expansion to 16.1% total sales, an all-time record level for our international segment adjusted EBITDA margin. As previously discussed, we have made important investments that further strengthen our position as a key global supplier of backup power for the data center market, And our current backlog for these products has now grown to $400 million, giving us improved visibility for the current year as the majority of this backlog is expected to ship in 2026. We expect 2026 will be an inflection point for Generac in this end market as we anticipate the addition of significant volumes to our backlog over the next several quarters from a number of hyperscaler and co-locator customers. We believe that our strong reputation as an engineering-driven organization with a unique focus on backup power, a customer-centric market, a customer-centric approach, and global production capabilities will allow us to become an important supplier to the data center market. Additionally, these large megawatt solutions will help expand our reach into our traditional end markets, as they have significantly expanded our served addressable market to include applications that have higher backup power requirements. Now I want to switch gears and discuss our residential product category in more detail. Fourth quarter home standby shipments decreased 25% compared to a strong prior year period, which benefited from multiple major landed hurricanes. Home consultations also declined year over year as power outages in the second half of 2025 marked the lowest level of total outage hours in a decade. Activations or installations during the quarter also decreased from the elevated prior year period. While key market indicators such as home consultations, activations, and close rates remained resilient despite the continued softness in outage activity, channel partner sentiment was negatively impacted by the week's second half outage activity and the transition to our next generation home standby platform. which resulted in lower than expected shipments during the quarter. However, we believe the home standby category is well positioned for healthy growth in 2026 as outages return to more normal levels and as the market fully transitions to our next generation product line. Our residential dealer network grew modestly during the fourth quarter and now includes over 9,400 dealers, an increase of nearly 300 dealers from the prior year. Our aligned contractor program, which leverages our strong positioning with wholesale distributors to provide tighter relationships with contractors that purchase our products through this channel, has continued to grow as well, providing important additional capacity and territorial coverage for sales, installation, and service of home standby generators. In January, although not a major event for the industry, the impact of winter storm Fern resulted in elevated and extended power outage activity across a number of regions in the US. As a result, we saw increased demand for portable generators and we experienced year over year growth in home consultations across every region, excluding the West. Importantly, the storm afforded us our first opportunity to assess our new lead distribution system in an elevated demand environment and generated promising returns, promising results as a wider base of dealers were able to more quickly connect with a greater number of potential customers than in previous periods of increased category awareness. As a reminder, This new approach allows for a broader base of dealers and aligned contractors with higher close rates to select the sales leads from a pool of home consultations they believe they have the capacity to address. The remaining leads are then distributed to other dealers to ensure customers are contacted more quickly after requesting a home consultation. We believe data-driven process enhancements such as this will continue to support improvements in dealer close rates and customer acquisition costs over time. Given the improved home consultation performance in January and assumed return to more normal outage levels for the second half of the year, together with higher price realization for the category year over year, we expect full year 2026 home standby generator sales to increase at a mid-teens rate over 2025. Helping to offset the softness in the fourth quarter for our home standby and portable generator products, we saw strong sales of our energy storage products year over year, alongside continued robust shipments of our Ecobee products and solutions in the quarter. Net sales for Ecobee grew at a mid-teens rate and hit a new all-time record for the full year, with significant gross margin expansion driving continued improvement in profitability as we finished 2025 with positive EBITDA contribution from Ecobee's products and solutions. We expect profitability of these solutions to further improve in the future alongside continued strong sales growth. Ecobee's connected home count grew to approximately 5 million residences in the quarter, with increased energy services and subscription sales supporting a growing high margin recurring revenue stream. Ecobee's solutions remain central to our developing residential energy ecosystem with our Power Cell 2, Power Micro, and Next Generation Home Standby products all deeply integrated into the Ecobee platform, thereby creating a differentiated feature set and user experience focused on resiliency and the improved efficiency of power use in the home. Additionally, Our teams continue to execute extremely well alongside our partners in Puerto Rico to drive shipments of energy storage systems over the last several quarters as part of the Department of Energy program that supported this strong performance throughout 2025. As the DOE program winds down in early 2026, we expect shipments of energy storage systems to decrease for the year, while strong growth in Ecobee and the initial sales ramp of Power Micro are expected to contribute to overall residential product sales growth for the full year. As we've previously discussed, we remain focused on continuing to improve profitability for our residential energy technology products and solutions as we continue to recalibrate the level of investment in this part of our business, given the expected challenging near-term market conditions resulting from reduced federal incentives for the residential solar and energy storage market. In closing this morning, As we look to the full year 2026, we believe the return to more normalized power outage levels and higher price realization will present strong growth opportunities for our residential products, particularly in the back half of the year. Additionally, we are growing ever more confident in the progress we've made in the data center market, and we expect 2026 to be an important inflection point on our path to doubling our CNI product sales in the coming years, as we work to capitalize on the generational growth opportunity presented by the massive data center CapEx investment cycle. I'll now turn the call over to York to provide further details on the fourth quarter as well as full year 2025 results and our outlook for 2026. York?