Generac Holdlings Inc.

Hello, and welcome to Generac Holdings' third quarter 2026 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 would now like to turn the call over to Kris Rosemann, Senior Director, Corporate Finance and Investor Relations. You may begin.

Good morning and welcome to our third quarter 2026 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 that 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 filing. I'll now turn the call over to Aaron.

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our third quarter results reflect continued momentum in our commercial and industrial segment, with revenue from products sold into the data center market leading to a 28% increase in CNI segment net sales on a year-over-year basis. Additionally, in the quarter, our residential segment returned to strong growth, with net sales increasing 9% from the prior year, driven by the lower power quality megatrends that continue to support sustained demand for backup power solutions. Overall net sales increased 16% during the quarter to an all-time high record for Generac, and robust margin expansion helped deliver a 33% increase in adjusted EBITDA compared with the third quarter of 2025, exceeding our prior expectations and resulting in the increase in our adjusted EBITDA margin guidance for full year 2026. The third quarter also marked a tremendous step forward in solidifying our position as a leading supplier to the data center market as we entered a long-term supply agreement with Amazon for data center backup power generators. Initial deliveries in this agreement are expected to be a combined $2.4 billion in 2027 and 2028, driving the increase in our backlog for products sold to the data center market to approximately $4.5 billion, nearly tripling from just 90 days ago. The agreement with Amazon provides for up to approximately 1.7 million common warrant shares, with future vesting of the warrants linked to a total of $8 billion in backup generator purchases over the seven-year term of the deal. This warrant structure provides for incremental strategic alignment, as well as creating a material incentive for Amazon to continue leveraging Generac as a supplier well beyond the initial deliveries expected in 2027 and 2028. We believe this long-term strategic collaboration validates our status as a top-tier supplier of CNI backup power generators and provides continued confidence in the durability of demand for our products in the data center market. In addition to the significant demand from our hyperscale customers, our updated backlog also reflects continued momentum with both new and existing non-hyperscale customers, which continues to expand geographically as well, with new orders across multiple continents. We believe this growing customer base across an expanded geographical footprint helps to create an increasingly diversified business as the global data center investment cycle matures. Additionally, our previously announced capacity expansion plans remain on track and will allow us to serve this accelerating demand with our new large megawatt generator production facility in Sussex, Wisconsin as initial production began at the end of the third quarter and build rates are expected to ramp significantly in the fourth quarter. This ramp is expected to support strong sequential revenue growth in the fourth quarter of 2026, resulting in full-year 2026 data center revenue of nearly $500 million, an increase from the approximately $450 million previously expected. As we look toward a year of dramatic growth ahead for data center-related revenue in 2027, we continue to invest in our large megawatt production facilities and are working towards tripling our global production capacity. We expect to achieve significantly higher levels of output from our existing facilities through added production lines and an increase in manufacturing staffing levels. The relatively small incremental investment needed to ramp capacity further highlights the capital-light nature of our business and the incredibly strong ROI that we expect to realize from these investments. We also continue to invest in deeper vertical integration across our CNI product portfolio, highlighted by the outfitting of our new packaging facility in Belvedere, Illinois. which is expected to come online in early 2027. We view this additional packaging capacity as a key strategic advantage to protect our highly competitive lead times as end market demand surges while also expanding our share of value added content and improving overall profit margins for large megawatt generators. We believe that the vertical integration of highly customized packaging solutions is an important and unique factor in our ability to continue to win in the data center market. Internationally, we are also investing in additional manufacturing capacity for large megawatt generators as data center demand continues to grow rapidly around the world. This includes expansions in Europe, Asia, and Latin America to help serve demand we have secured from these customers in those regions. In addition to manufacturing capacity, we are also increasing our service and support footprint in these local markets where these new projects will be sited. As a result of our recent wins, current backlog, capacity expansion efforts, and our track record of strong execution, we believe we have excellent visibility to dramatic growth in the data center market in the years ahead. Specifically for 2027, we now expect revenue from products sold to the data center market to well exceed $2 billion. Now looking at our overall CNI segment results for the quarter, net sales growth remained robust, led by more than $100 million of revenue from products sold to the data center market. This significant sales increase versus the prior year period supported strong adjusted EBITDA margin expansion in the quarter, a trend that we expect to continue into 2027 as CNI segment growth dramatically accelerates further. Mobile product sales to national and independent rental equipment customers also grew again during the third quarter as compared to the prior year. Recall that in January we announced the acquisition of Almond, a mobile products company based in Nebraska, that we've now fully integrated into our existing mobile equipment offering. The resulting combined scale we now have in mobile products has allowed us to increase our market share with our rental customers. Specifically, the Allman business has outperformed our prior expectations for both sales and profitability. And, as we continue to see healthy rental fleet demand driven by a significant pipeline of large construction projects, we anticipate continued strong growth in 2027 for our mobile products. Shipments to our domestic industrial distributor channel grew sequentially in the quarter, but declined versus the third quarter of 2025 as the prior year included a tougher comparison related to our drawdown of backlog. In addition, lead times for products shipped to these customers grew longer in the quarter, driven primarily by the execution of the final phase of our project to relocate manufacturing of these products to our new facility in Beaverdam, Wisconsin. We expect lead times to return to more normal levels in the first quarter of 2027 as production ramps at Beaverdam. Order rates from our domestic industrial distributors remained robust, with the third quarter marking another record from industrial distributor customers and positioning this channel for continued growth in 2027. We also continue to see healthy quoting activity for our large megawatt generators in the non-data center applications through this channel, providing an incremental and diversified source of demand for these products. Shipments to our telecom channels slowed during the quarter, primarily due to certain customers working to reduce their backlog of site deployments. Although demand for backup power for telecom customers can be variable from quarter to quarter, we continue to view the telecom channel as an attractive long-term opportunity supported by ongoing network hardening investments and growing interest in data center adjacent applications from our telecom operators. International CNINet sales, excluding shipments to data center customers, increased during the third quarter when compared to the prior year as a result of broad-based regional growth. The European region, our largest international market, experienced solid sales growth from the prior year, while sales to emerging markets such as Latin American and the Middle East returned to strong growth in the quarter. This diversified geographic growth is encouraging considering the current geopolitical environment, and we continue to evaluate opportunities to expand our presence in other regions to serve more local markets around the world. Additionally, global shipments of our control solutions increased at a robust rate during the quarter, providing further evidence of the stronger conditions in the global power generation market. Looking ahead, we expect overall CNI segment net sales to increase in the low 30% range for the full year 2026. And as we look to full year 2027, we have visibility to a dramatic increase in revenue from products sold to the global data center market. When combined with our expectations for continued growth in our rental, Industrial Distributor Channels, and International Markets, we now believe we have a path to double our commercial and industrial reporting segment in 2027. Now looking at our residential segment results in more detail. As expected, residential segment net sales returned to strong growth during the quarter, increasing 9% from the prior year. Home standby and portable generator sales both grew at a much faster rate than the overall segment, partially offset by an expected decline in shipments of energy storage systems. Segment adjusted EBITDA margins expanded by more than 350 basis points from the prior year due to favorable price cost impacts, strong operating leverage, and the continued recalibration of our energy technology related operating expense investments. Home standby generator shipments increased at a mid-teens rate during the quarter as compared to the prior year period, as the power outage environment returned to more normalized levels after several quarters of well below average outage activity. While Atlantic hurricane activity remained historically quiet during the period, everyday severe weather across the country supported baseline outage activity with particular strength in the late summer months in the Midwest and the Northeast. In-home consultations also increased sharply as compared to the prior year as a result of the higher power outage activity and our well-established demand creation efforts. Most regions across North America saw higher IHC activity with significant strength in the Midwest and Northeast as homeowners experiencing power outages continue to seek out resiliency solutions. We believe that grid reliability challenges continue to grow, driven by the risks associated with increasingly severe and volatile weather patterns, an aging infrastructure, and a dramatic increase in the demand for power, with all of these factors supporting our belief in the continued demand for the home standby generator category well into the future. Home Standby Activations or Installations returned to growth in the month of September for the first time since the second quarter of 2025. For the quarter, activations were nearly flat year over year as declines in state that saw prior year activations benefit from the afterglow of an active 2024 hurricane season were offset by strong growth in the Midwest and Northeast regions during the quarter. This return to growth in activations is further supported by the continued expansion of our residential dealer count, which grew again during the quarter to nearly 9900 dealers. Portable generator shipments were also very strong in the quarter as the product category benefited from the more active outage environment and our team continued to win new retail shelf space for these products. As a pioneer in the portable generator category, we believe we have once again regained our position as the number one market share participant in the U.S. The portable generator business remains an important part of our retail channel strategy and allows more budget conscious consumers to experience Generac branded product options to protect their home and their family. Importantly, our customer demographic data shows that more than 50% of the purchasers of home standby generators either previously or currently owned a portable generator, making the trade-up experience from a portable to a standby product an important one for our residential business. In addition to strong performance in the home standby and portable generator categories, Our Ecobee team continued to perform well during the third quarter. Sales of Ecobee solutions increased again from the prior year, and their connected home count now sits at approximately 5.5 million homes. Ecobee's services attach rate and recurring revenue continue to increase faster than their overall growth. And disciplined operating expense management helped to deliver another quarter of growing profitability for Ecobee solutions. Furthermore, we continue to expand the Ecobee user interface and experience to our larger customer base across our residential products as we recently rolled out a unified software platform to further drive adoption of the home energy ecosystem by our customers. As expected, sales of our residential energy storage systems were lower in the quarter as compared to a strong third quarter of 2025 that included the benefit of our DOE program in Puerto Rico, which was completed at the end of 2025. Higher interest rates and a more challenging policy environment continue to weigh on overall demand for solar and storage products. And as a result, we continue to recalibrate our investments in this market. Overall, we remain on track with our projection for residential segment net sales growth for the full year 2026 to be in the high single-digit range, led by mid-teens growth in the home standby category. Driven by our record net sales volume for the total company, we delivered consolidated gross margin of nearly 40%, and even Don Margin of nearly 20% as well as generating over $130 million of free cash flow for the quarter. These metrics all represent a significant increase as compared to the prior year as we continue to see favorable price-cost dynamics, leverage our fixed operating expenses as we rapidly grow, further recalibrate our energy technology op expense lower and tightly manage the working capital requirements for our business. In closing this morning, our third quarter performance, including tremendous momentum in the rapidly growing data center market, highlighted by our agreement with Amazon, alongside a return to strong growth for residential segment sales, demonstrates the strength and earnings potential of our more diversified business. Furthermore, our strong earnings and free cash flow enable us to continue to make opportunistic investments, allowing us to lean into the unprecedented data center market growth opportunity. As a result of this unique combination, Together with the mega trends around AI infrastructure, lower power quality, and higher power prices, we believe we are extremely well positioned for success as we look into the future. With that, I'll now turn the call over to York to walk through our third quarter financial results and our updated outlook in more detail.