Generac Holdings Inc. Aktie

Good day, and thank you for standing by. Welcome to the First Quarter 2026 Generac Holdings Inc. Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Kris Rosemann, Director, Corporate Finance and Investor Relations. Please go ahead, sir.

Good morning, and welcome to our first 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 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 reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings.

I will now turn the call over to Aaron.

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our first quarter results reflect a return to strong growth as net sales increased 12% year-over-year with healthy gross margin performance and robust operating leverage.

Growth during the quarter was led by a 28% increase in our Commercial and Industrial segment sales primarily driven by continued momentum in the data center end market and the almond acquisition. First quarter adjusted EBITDA margin of 18.3% expanded significantly from the prior year and was stronger than anticipated, driven by strong execution, favorable sales mix and lower-than-expected input costs and operating expenses.

Given our first quarter outperformance, the continued strength in our C&I segment, including an increase in projected global data center revenue, and the expected contribution from the acquisition of Enercon, we are raising our full year net sales and adjusted EBITDA margin outlook this morning.

Now discussing our performance by segment in more detail. We're continuing to progress through the final stages of vendor approval with 2 hyperscale data center customers, and we are very confident that we'll be able to secure meaningful future volume commitments from these accounts.

As previously disclosed, we received a nonbinding notice to proceed for approximately $600 million in 2027 deliveries with a certain hyperscale customer, and we have begun discussing site level specifications for these projects as we prepare to ramp our supply chain and production to meet this accelerating demand.

We believe the successful navigation of these rigorous approval processes will solidify Generac as a top-tier global supplier of large megawatt diesel backup power generators in the years ahead.

Importantly, we have also realized significant order activity from both new and existing data center customers, increasing our current backlog to more than $700 million, which does not include the anticipated impact of the notice of reset opportunity mentioned above and represents an increase of approximately $300 million since our fourth quarter update in mid-February.

This backlog growth provides visibility through 2027 even before considering the significant expected contribution from other hyperscale related opportunities and ongoing momentum with nonhyperscale customers. As we prepare for meaningful growth in large megawatt generator shipments in the coming quarters, our new facility in Sussex, Wisconsin, remains on track to begin production in the second half of this year, supporting the expected increase in our domestic generator manufacturing and assembly capacity for these products to more than $1 billion by the fourth quarter.

We believe this expanded footprint will allow us to capture an increasing share of the rapidly growing demand for backup power solutions from large data center customers. And together with our international C&I production base, provides us with unique global flexibility and scale to serve this market.

Additionally, on April 1, we completed the previously announced acquisition of Enercon, a leading designer and manufacturer of generator enclosures and switchgear, -- this acquisition enhances our competitive positioning for large megawatt generators by giving us direct access to the design and manufacturing processes that are an important element of the bespoke content included with large megawatt generators.

Additionally, our ability to invest in additional capacity for these highly customized genset packages will allow us to solve for a growing industry bottleneck and enable us to better control overall customer lead times for our products. By bringing these packaging capabilities in-house, we expect to expand our margin profile, further improving the profitability for products sold into the markets for these products, including data center applications.

In addition, Enercon's expertise in other product categories such as switchgear and packaged electronics controls also enables our participation in interesting adjacent market opportunities, which we are currently evaluating as we fully integrate this business into our C&I segment.

During the first quarter, shipments to our domestic industrial distributor channel increased from the prior year and project quoting activity remains solid to start the year. While product lead times for this channel have continued to normalize over the last several quarters, we expect modest growth for the full year, supported by stable near-term end market demand as well as our continuing investments in distribution that are helping to drive market share gains.

Order rates from domestic telecom customers improved sequentially during the quarter, providing visibility to better than previously expected growth for the remainder of the year. Our telecom customers continue to invest in further hardening of their networks, as dependence on wireless communications increases and global tower and network hub counts are expected to continue to grow well into the future.

Additionally, the evolving telecom and digital infrastructure landscape is expanding our opportunity set with new and existing customers. We are working to leverage our track record of highly engineered solutions, market expertise and customer relationships in traditional telecom applications to capitalize on these opportunities, including data center adjacent applications.

Domestic mobile product shipments to both national and independent rental equipment customers exceeded our expectations during the quarter and increased at a strong rate from the prior year. The acquisition of Allmand in January contributed to the strong year-over-year growth and outperformed our prior expectations with respect to both sales and adjusted EBITDA contribution.

Many of our rental customers have begun to invest in new equipment as part of a refleeting cycle, and this timely acquisition has both broadened our customer base for mobile products and provided us with additional capacity and flexibility within our domestic manufacturing footprint. Additionally, robust order rates from our existing national rental customers are contributing to our increased overall net sales outlook for 2026.

International shipments also increased at a strong rate year-over-year, driven primarily by revenue from products sold to the data center end market, global shipments of our controlled solutions and the favorable impact from foreign currency. Sales increased across most regions, partially offset by softness in the Middle East and Latin American regions, resulting from geopolitical instability and trade policy uncertainty.

With the strong start to the year, we are increasing our full year 2026 C&I segment net sales guidance as a result of the increased expectations across our data center, telecom and rental markets as well as contributions from the Enercon acquisition. This is partially offset by softness in certain international regions as previously mentioned.

We now expect C&I segment net sales to increase in the mid- to high 20s percent range, which represents an increase from our prior guidance for growth in the low to mid-20s percent range for this segment. And now I'd like to provide an update on our residential segment for both the quarter and the year.

At our Investor Day in March, we introduced Generac Home a new organizational structure within our residential segment that brings together our home standby, portable generator and energy technology teams into a single group.

As our residential backup power and energy technology solutions are increasingly integrated, this combination enables us to better leverage synergies across our product development, supply chain, operations, sales and marketing and customer service capabilities.

The unification of these teams will allow us to further streamline our software platforms to better serve our customers as well as accelerate the development of products and solutions to help homeowners solve for the increasingly -- increasing power reliance, resiliency and cost challenges they are facing.

Importantly, the efficiencies resulting from this new structure reflect the continued recalibration of our clean energy operating expenses and are expected to enable cost savings that support our projected residential segment adjusted EBITDA margin expansion in the coming years. We've already begun to realize these benefits, as evidenced by the expansion of our residential segment EBITDA margins by nearly 500 basis points as compared to the prior year first quarter, driven largely by lower operating expenses in the current quarter.

Looking at our first quarter residential segment results in more detail, home standby generator sales were approximately flat from the prior year with higher pricing offsetting lower volumes as compared to a strong prior year period that included the benefit from an active 2024 hurricane season. The current quarter's performance was slightly ahead of our expectations as we experienced stronger-than-anticipated demand following winter storm firm. This event and the related media coverage preceding it helped drive awareness for our products, resulting in strong year-over-year growth in home consultations for home standby generators and higher shipments of portable generators. However, despite the elevated outage activity from winter storm firm, overall power outage activity for the first quarter was approximately in line with the long-term baseline average.

Activations or installations of home standby generators declined as expected from the first quarter of 2025, primarily driven by markets that were impacted by elevated hurricane activity in the second half of 2024. We expect activations will return to growth in the second half of this year, underpinned by our assumption for a return to a more normal baseline average power outage environment as compared to the exceptionally soft outage environment experienced in the second half of 2025.

Our residential dealer network expanded further during the quarter and now includes more than 9,500 dealers, representing an increase of approximately 300 from the prior year. Continuing interest in the home standby category from these partners provides us with further confidence in the significant growth opportunity that remains for home standby generators as contractors continue to see value with their involvement in the category.

Additionally, as we continue to integrate the teams within our new Generac home organization, we intend to also unify our distribution networks with the goal of providing homeowners and channel partners greater access to a wider range of home energy solutions with enhanced service and support capabilities.

First quarter sales of our residential solar and storage solutions decreased from the prior year as expected following the successful completion of our Department of Energy program in Puerto Rico. Throughout the quarter, we continued to execute against our plan of ramping production of Power Micro, the first Generac branded microinverter product with a contract manufacturing partner here in the U.S.

The Power Micro product offering is expected to deliver strong gross margin contribution as sales increase throughout the second half of 2026 and into 2027. The attractive margin profile for these products, together with our ongoing focus on operational efficiencies and within the new Generac home structure are expected to contribute to our longer-term residential segment margin expansion.

A significant focus for the Generac home business is to market and sell our differentiated residential energy ecosystem with ecobee positioned as the energy management hub of the home. An important metric, Ecobee's connected home count grew to -- continued to grow in the quarter to more than 5 million homes with service attach rates further increasing and providing us with a growing high-margin recurring revenue stream to complement Ecobee's expanding hardware market share.

Profitability continued to improve as well with Ecobee delivering its first positive adjusted EBITDA during the first quarter, which is normally a seasonally softer quarter for these products. We are expecting continued strong growth in Ecobee shipments for the full year 2026 and as a result, we believe the benefits of a scaling top line, together with a strong gross margin profile and disciplined operating expense investment will support continued improvement in profitability into the future.

In closing this morning, our first quarter results and increased 2026 outlook provide an early look at the significant earnings growth potential of our business given the dramatic sales increase in our C&I segment, healthy gross margin performance and realization of strong operating leverage.

Based on our continued progress in porting multiple hyperscale data center customers, combined with the improved competitive positioning and profitability resulting from the recent Enercon acquisition, our confidence in capturing a growing share of the generational growth opportunity in the data center market has only increased.

Additionally, the megatrends of lower power quality and higher power prices remain firmly intact and continue to support long-term growth expectations for our Residential segment, highlighted by the $50-plus billion penetration opportunity that we believe exists for home standby generators.

We remain guided by our powering a Smarter World enterprise strategy, and we believe that we are on the cusp of a special moment in the history of Generac as a result of the more balanced growth drivers we're experiencing across our entire business.

With that, I'd now like to turn the call over to York to walk through some of the first quarter financial results. and our updated outlook in some more detail. York?

Thanks, Aaron. Looking at first quarter 2026 results in more detail. Overall, consolidated net sales during the quarter increased 12% to $1.06 billion as compared to $942 million in the prior year first quarter. The net effect of acquisitions, divestitures and foreign currency an approximate 4% favorable impact on revenue growth during the quarter.

Residential segment total sales increased approximately 1% to $552 million as compared to $549 million in the prior year. This sales increase was primarily driven by higher portable generator shipments due to winter storm Fern in January 2026. And partially offset by a decline in energy storage system sales due to the completion of our DOE Puerto Rico program. Home standby generator sales were approximately flat versus prior year as higher pricing was offset by lower volumes due to a strong prior year period that included the benefit from a substantial 2024 hurricane season.

Commercial and Industrial segment total sales increased approximately 28% to $510 million from $399 million in the prior year quarter, including an approximate 10% net favorable impact from the combination of acquisitions, divestitures and foreign currency. Favorable FX and the Allmand, C&I mobile products acquisition contributed to this inorganic growth, partially offset by 2 small divestitures that closed during the quarter.

The core total sales growth for the segment was primarily driven by revenue from products sold to global data center customers. In addition, increased shipments to our domestic industrial distributor and rental channels and higher sales of our control solutions to the global power generation market also contributed modestly to the C&I segment sales growth during the quarter.

Consolidated gross profit margin was 38.7% compared to 39.5% in the prior year first quarter. The 0.8% decrease in gross margin was primarily driven by the higher mix of C&I sales in the quarter, partially offset by favorable price/cost realization. As compared to our prior expectations, we experienced better-than-expected sales of our higher margin home standby generators following winter storm Fern. This favorable sales mix, together with strong execution and lower-than-expected input costs, supported our first quarter gross margin outperformance relative to our previous guidance.

Operating expenses increased $4.6 million or 2% compared to the first quarter of 2025. The increase was primarily driven by higher intangible amortization from the Allmand acquisition. Importantly, we were able to realize strong operating leverage on higher shipment volumes while also capitalizing on operational efficiencies by recalibrating our clean energy spending as part of our Generac Home reorganization.

To that end, OpEx as a percent of sales, excluding intangible amortization expense, improved from 27.9% in Q1 of 2025 to 24.8% in Q1 of 2026. Overall adjusted EBITDA before deducting for noncontrolling interest, as defined in our earnings release, was $193 million or 18.3% of net sales in the first quarter as compared to $150 million or 15.9% of net sales in the prior year.

As just discussed, the improved operating leverage on higher sales volumes coupled with reduced residential OpEx drove the significant increase in adjusted EBITDA margins versus prior year.

Importantly, this represents strong outperformance compared to our prior expectations helping to contribute to our higher full year 2026 guidance that I will discuss shortly. Adjusted EBITDA for the Residential segment was $139 million or 25.1% of total residential sales as compared to $112 million in the prior year or 20.3%. This significant margin increase versus prior year was primarily driven by favorable price realization and operational efficiencies from the reorganization of Generac Home resulting in lower operating expenses, partially offset by higher costs from tariffs and commodity prices.

Adjusted EBITDA for the Commercial and Industrial segment, before deducting for noncontrolling interest was $67 million or 13.0% of C&I total sales as compared to $45 million or 11.4% of total sales in the prior year. This margin increase was primarily driven by improved price cost realization, the favorable impact of the Allmand acquisition, and operating leverage on higher shipment volumes.

Now switching back to our overall financial performance for the first quarter of 2016 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $73 million as compared to $44 million in the first quarter of '25. The current year includes a modest noncash loss from the net impact of 2 small divestitures that closed during the quarter as we continue to trend the portfolio of noncore assets.

The prior year included a $10 million noncash loss to reflect the change in fair value of our Wallbox investment. GAAP income taxes during the current year first quarter were $23.6 million, or an effective tax rate of 24.4% as compared to $14.2 million or an effective tax rate of 24.3% for the prior year.

Diluted net income per share for the company on a GAAP basis was $1.24 in the first quarter of 26% compared to $0.73 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $106 million in the current year quarter or $1.80 per share. This compares to adjusted net income of $75 million in the prior year or $1.26 per share.

Cash flow from operations was $119 million in the current year quarter as compared to $58 million in the prior year first quarter. And free cash flow, as defined in our earnings release, was $90 million as compared to $27 million in the same quarter last year.

The strong increase in free cash flow was primarily driven by higher operating earnings and a lower use of cash for working capital as compared to the prior year. From a use of cash standpoint, we closed the Allmand acquisition in January 2026 by funding the $123 million purchase price in cash. Subsequent to March 31 quarter end, we closed the Enercon acquisition on April 1. We funded the $122 million initial purchase price with $77 million in cash and $45 million in stock.

Total debt outstanding at the end of the quarter was $1.32 billion, resulting in a gross debt leverage ratio at the end of the first quarter of 1.7x on an as-reported basis, which is within our target gross debt leverage range of 1 to 2x adjusted EBITDA.

With that, I will now provide further comments on our updated outlook for 2026. As disclosed in our earnings release this morning, we are raising our full year 2026 outlook for net sales and adjusted EBITDA given further momentum across certain C&I end markets, the acquisition of Enercon and our first quarter outperformance.

As a result of these factors, we now expect consolidated net sales for the full year to increase at a mid- to high teens rate as compared to the prior year, which includes an approximate 2% favorable impact from the net effect of foreign currency, acquisitions and divestitures. This net sales update compares to our previous guidance of growth in the mid-teens percent range over the prior year.

This increased net sales growth expectation is driven entirely by the C&I segment with net sales for this segment now projected to increase in the mid- to high 20% range compared to 2025, an increase from our previous range of low to mid-20% growth as disclosed at our Investor Day in March.

Incremental sales from additional data center projects, higher shipments into our rental and telecom channels and the Enercon acquisition are all contributing to this updated guidance for C&I segment net sales. For the full year, significantly higher data center revenue is expected to be the main contributor to our C&I segment organic growth, while the net effect of foreign currency, the Allmand and Entercon acquisitions, and 2 small divestitures that closed in the first quarter of 2026, are anticipated to have an approximate 5% favorable impact versus prior year.

Our Residential segment net sales guidance remains consistent and is still expected to increase in the 10% range compared to the prior year. Growth in home standby generators is expected to be the primary contributor to this net sales growth during the year, in particular in the second half of 2026 and given a relatively easier prior year comparison that included a very low power outage environment.

Consistent with our historical approach, this guidance assumes a level of power outage in with the longer-term baseline average for the remainder of the year and does not assume the benefit of a major power outage event during the year.

From a seasonal pacing perspective, we now expect first half sales to be approximately 45% weighted and sales in the second half approximately 55% weighted, resulting in second quarter consolidated net sales growth in the approximate 9% to 10% range, driven entirely by the C&I segment.

Year-over-year net sales growth is expected to accelerate in the second half of the year, given expected continued data center strength and an easier prior year comparison for the residential segment that included very low power outage activity.

Looking at our updated gross margin expectations for the full year 2026. We now expect gross margin percent to increase approximately 50 basis points from our previous expectations, resulting in full year 2026 gross margins in the 38.5% to 39.5% range. This improved gross margin outlook is driven primarily by our first quarter outperformance and and the margin accretive impact of the new Enercon acquisition.

From a seasonality perspective, we now expect gross margins to be more level loaded throughout 2026. Importantly, this updated guidance excludes the future impact of any potential tariff recovery as a result of the recent Supreme Court ruling related to EPA tariffs. Additionally, our outlook assumes that the removal of the EPA tariffs will get fully offset by a new tariff framework made up of incremental section 122, 232 and 301 tariffs.

As a result, and given that the trade policy landscape remains dynamic, our assumptions around overall tariff rates remain consistent with our prior guidance. Given the factors outlined in our net sales and gross margin update, we are increasing our guidance range for adjusted EBITDA margins to 18.5% to 19.5%. This compares to our previous guidance range of 18.0% to 19.0%.

We expect second quarter adjusted EBITDA margins to increase modestly relative to second quarter 2025 levels in the 18% range before improving sequentially in the back half of the year, reaching approximately 20% in the fourth quarter of 2026. This sequential second half adjusted EBITDA margin improvement is projected to be driven primarily by stronger operating expense leverage on seasonally higher sales volumes in the second half of the year.

As is our normal practice, we will also provide, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2020. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add back items, add back items should be reflected net of tax using our expected effective tax rate.

For full year 2026, our GAAP effective tax rate is expected to be between 24.5% to 25.0%. We now expect interest expense to be approximately $65 million for full year '26 down from $65 million to $69 million previously expected, assuming no additional term loan principal prepayments during the year.

Lower borrowings during the year are the primary driver for this reduction in interest expense guidance. Our capital expenditures are still projected to be approximately 3.5% of our forecasted net sales for the year, slightly elevated from historical levels as we continue to invest in incremental capacity and execute other projects to support future growth expectations, particularly for C&I data center products.

Depreciation expense is now forecast to be approximately $108 million to $112 million in 2026, an increase from $104 million to $108 million previously expected, primarily due to slightly higher CapEx guidance and recently closed acquisitions. GAAP intangible amortization expenses in 2026 is now expected to be approximately $112 million to $116 million during the year, up from $108 million to $112 million previously expected primarily due to updated assumptions around recently closed acquisitions.

Stock compensation expense is still expected to be between $54 million to $58 million for the year. Consistent with prior guidance, operating and free cash flow generation is expected to be weighted toward the second half of the year in 2026, resulting in projected free cash flow generation of approximately $350 million for the full year 2026.

Our full year weighted average diluted share count is still expected to be between 59.5 million and 60 million shares in 2026. And finally, this 2026 outlook does not reflect potential additional acquisitions, divestitures or share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks.

At this time, we'd like to open up the call for questions.

[Operator Instructions]. Our first question comes from the line of Tommy Moll with Stephens.

Aaron, you referenced the $600 million nonbonding notice to proceed, which was also discussed at the Investor Day. I'm just curious if you can share anything about how the product testing and pilots are going there.

And then related, the accompanying service capabilities don't get a ton of air time. but you did mention it at the Investor Day. And I'm just curious, is that also potentially a gating factor here? Do you need to staff up a lot with Generac folks to enable those capabilities.

Yes. Thanks, Tommy. So yes, the notice to proceed that we talked about at Investor Day and we mentioned again this morning, that's from one of the hyperscale customers that we continue to negotiate with and I would -- maybe the best way to characterize it, Tommy, is if this was a 100-yard dash.

We're like 99 yards of the way done with the race. We've got one yard left. We're in the final stages with the final agreement. There's a process, it's a gauntlet. I mean, there's literally a hurdle for every step along the way here. But all of the everything from product quality to supply chain visits, our factory visits, the audits that they put us through internal and external.

We continue to march through the process and we're passing all of those gates as we go. And we really are at the very last yard of this race, this 100-yard race. So we feel really good about it. And as such, we're into -- we mentioned this in the prepared remarks, we're into discussions about the specifics around certain sites, which sites would we see next year as part of that MTP, the notice to proceed, and we're preparing accordingly.

On that point, maybe transition to the second part of your question was service. This is obviously an area that as we deploy equipment to these large project areas, we need to make sure we're appropriately staffed. I think one of the great things about our industrial distribution network is over the last 5 or 6 years, we've been in -- we've talked about the investments we've made there.

Some of those investments have come in the form of acquisitions. And today, we own about 30% to 35% of of our industrial distribution network here in the U.S. And we continue to work with our partners on staffing to appropriate levels. to serve the market. I mean, obviously, the ability to react to any kind of service situation is critical.

And again, I think we're -- we feel like we're in a really good spot there. given our own ownership and our appetite to continue to invest and hire people as needed as the sites get deployed.

Our next question comes from the line of George Gianarikas with CGF.

As you look to scale hyperscale demand, I mean, how are you derisking your engine supply chain. And what sort of multiyear capacity guarantees have you secured? And maybe more specifically, any exclusivity frameworks you have to ensure that the supply remains an advantage to Generac?

Yes. Thanks, George. Obviously, an important question in this whole effort around data centers is supply chain based, right? And it's not just the engine, although the engine, of course, is is critical, but it's alternator supply, it's cooling package supply. It's the end packaging of the product, which we're -- with our Enercon acquisition that we closed on April 1, we're taking a big step forward there trying to solve for what is becoming a fast becoming a bottleneck in the industry around finished packaging.

Even if we can get great lead times on the unpackaged product, it doesn't help us if the packaging phase is constrained. So that was a big part of the thesis, our calculus in acquiring Enercon, and we look to expand that operation as well pretty aggressively here so that we can control those lead times.

With respect to engines, maybe directly to your question there, we have a multiyear agreement in place with our current engine supplier, our large diesel engine supplier. That agreement allows us to have exclusivity. Here in the U.S., there are a couple of small exceptions to some legacy customers there, but nothing that I would say any of those small customers are going to be able to get through the gauntlet, at least with hyperscale customers, we don't foresee that at all.

Engine supply, we feel really good about our engine suppliers capacity and their ability to not only produce at the kind of scale that is going to be needed with the volumes that we're talking about with these hyperscale customers and non-hyperscale customers, but also their appetite to continue to invest and the footprint that they have, the global footprint they have and the ability to expand that footprint as needed.

So we're talking to this -- the engine partner about potential production of these engines right here in the U.S. at this point. So it might even be something cohabitated with us on some kind of joint investment. We're not exactly sure at this stage.

Right now, there's plenty of capacity in place. So we feel really good about that. And we're really working to solve kind of the next level of capacity constraints in supply chain around alternators, cooling packages. We're multi-sourcing those critical components as well. And we feel like the supply chain for those other critical components, if they don't already have the capacity added, they have really good plans to add it as we enter 2027 and beyond.

So at this stage of the game, we feel like we're in pretty good shape. But it's -- supply chain is something that's not 100% inside of our control. So obviously, that's something we have to keep a close eye on. I'm very pleased, though, with our team's engagement there. It's an area of strength for Generac historically, just working with supply chain, developing deep partnerships focusing on capacity adds where needed and getting ahead of it. We don't wait to react. We try to be proactive.

And so I feel like those -- we're covering those bases as well as we can today. And we're basically kind of coiling the spring here as we get ready to get into the fourth quarter, back half of this year and really into 2027 really driving to the next level with the data center products.

Our next question comes from the line of Mike Halloran with Baird.

So on the non-data center side of the C&I piece, maybe just talk us to what you're seeing from a sequential and then how the rest of the year should play out on the kind of core rental telecom and then traditional C&I type categories.

And then related layer in how the new product categories from a power range that you're bringing to bear, how those are early receptivity of those products into those markets?

Yes. Thanks, Mike. Yes, the balance of our -- the amazing thing is the balance of our C&I business is also -- it's -- as we indicated, over the last couple of quarters, we were starting to see signs of nice recovery or growth in telecom as an example, which really began in kind of in earnest in the fourth quarter of last year and has continued to pick up steam here in early 2026, really kind of outpacing expectations on order volume giving us good confidence as part of the guidance raise here for the balance of 2026 and the C&I segment is coming from telecom.

The other area is rental. It's interesting, I kind of had an epiphany, it's probably not in the [ Pifany,] it's probably too strong I'm overstating. But driving by one of these data center construction sites, there's actually one going up right next door to our Beaver Dam, our new Beaver Dam manufacturing plant. And when I was kind of taking a drive through that last year, and it's right next door, I was struck by just how much of our mobile equipment and the type of equipment that we build is on that site in light towers, mobile generators, for temporary power, temporary lighting and temporary heat even in the cold Wisconsin winters to keep construction going and construction does go, it goes 24/7 on these sites.

And so it's really no surprise that what we're seeing and hearing from our rental customers, starting with our national rental customers is that the refleeting cycle really has begun. And we've been waiting on it to begin about 18 months here. It's been -- we've kind of been on the backside of that, and it's starting to kick up. And fortuitously, we had been negotiating for the Allmand acquisition and we closed that deal on January 1 as we announced, and it's just the timing couldn't have been better.

We've seen just a really nice response there. That business has outperformed on top line and bottom line. And the combination of that business, our business historically was focused on national rental account customers, which typically have a little bit lower gross margin profile because they're buying in bulk, whereas the almond business was really focused on the independent rental channel, so it was a great complementary fit for us from a distribution standpoint, and it also gave us some much needed capacity. They have a nice big factory in Nebraska. And so the combination of our factory here in Wisconsin and that factory in Nebraska give us some great capacity for serving what is a growing market.

Our core C&I business, the industrial distributor business has been good. Our quote rates remain pretty strong. I would tell you, I'll remind you that as we've talked over the last really 4 or 5 quarters, we've been working down our backlog there and shortening up our lead times, and we've kind of caught those now, continue to grow, albeit not at the same rate we were growing previously for those core markets.

And then I think maybe the last point of your question, Mike, was around these larger machines kind of taking those to market through our traditional channels, that's been very well received. The sales cycles are very long, especially in the traditional market. So we've only started to realize the first couple of orders coming through the pipeline here. But just this week, we had an engineering symposium conference in [indiscernible] with over 200 -- I think it was like 220 engineering firms represented and it's an opportunity for us to talk about the expanded product line.

One of the shortcomings of Generac historically in the C&I markets, has been our product line stopped at 2 megawatts. So now having a product line that goes to 3.2, 3.25 megawatt and then we've got an expansion of that even further to 4-megawatt on the drawing board makes us a full-line provider and it really takes away any final excuses that specifying engineering firms may have had not to specify us by name, either because they were concerned that they couldn't just it have to put us on certain specs and not on all specs because we didn't have a full product range, that's been completely eliminated now.

So really good receptivity there, and we're expecting big things out of that product range in our traditional markets in the years ahead.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

This is David Tarantino on for Jeff. Maybe switching to residential. Could you give us some color on the strength in margins here? It sounds like there was some favorable mix here. But could you parse out anything unique to this quarter? And maybe how sustainable this level of margin is moving forward?

Yes. Maybe I'll start and then maybe York can chime in, too. The margin improvement there was pretty dramatic. It was 500 basis points of EBITDA margin expansion over the prior year. And a combination of 2 things. I mean, it was primarily driven, as we said in the prepared remarks, though, by just better cost control, I would say, as we have brought together our teams there under the Generac Home the on residential, on home business that we've referred to. It's really helped us leverage our team members more efficiently across that business.

We built a world-class team in our Energy Technology business. And look, the market has shifted, right? It's -- it's moved based on policy, based on continued high -- persistently high interest rates and some other things that have been presented headwinds to that market.

We believe that, that long term is still a good business opportunity as retail energy prices continue to rise. I mean there's no question that self-generation, self-storage, that cost containment for homeowners and businesses around electricity rates in particular, is that's going to become a headline story here. It's already moving into the headlines. So we like that business. But the reality of it is it's softer right now because of where the market's at.

And so being able to leverage that team, this world-class team that we've built and moved that into our traditional residential business or what we refer to as consumer power around portable generators and home standby. It's been a great move. We've been able to get a lot out of that team -- we've been able to get some early wins here on cost containment. That's really the primary driver for a big chunk of that improvement in EBITDA margin, and you should expect to see that going forward, Dave. We also had some gross margin improvement there as well. And maybe I'll let York just maybe chime in a little bit around that.

Yes. No, like you said, probably about 3% of that 5% improvement was the OpEx side that Aaron just talked about, the remainder is the gross margin improvement that we saw with residential. We still continue -- will -- we did -- our home standby shipments. We did see strong demand following winter storm Fern, a little bit of favorable mix there relative to prior year, but we still are seeing positive price cost here in the quarter for the residential segment. If you recall, so we rolled out pricing probably in more Q2 of last year as a result of higher input costs and tariffs.

And then as we rolled out our next-gen home standby in the second half of last year, -- we -- with the added features to that product offering, we did roll out additional price with that new product offering as well. So the combination of the higher input costs and the rollout of the new model allowed us to roll out additional price. And we saw that reading through here probably more than the cost is coming up. So still favorable price cost on the residential side that we're pleased with.

Our next question will come from the line of Brian Drab with William Blair.

I just wanted to ask about the standby business at the moment. I think I gathered that you said it was flat in the first quarter. And then I heard a comment that the second quarter growth would be driven entirely by C&I, but I think you're still modeling for the year. I don't know if you restated it today, but you're thinking like mid-teens growth for the standby business for the full year in '26. Is there a significant ramp in the second half that you're expecting? I know there's easy comps with the weather. But can you just talk about if there is a ramp and what drives that?

I guess, things, sorry, Aaron, I'll start and then you can maybe follow, but the Winterstorm firm Fern did help some of the residential side in Q1, we're not modeling any -- I guess, we're just modeling baseline weather for Q2. But yes, normal seasonality would have the second half sequentially increasing first half, second half. That's just normal seasonality.

And then when you're looking at year-over-year growth in the second half, there should be -- you should see significant home standby growth because we just didn't have a season in '25, second half '25. So basically, the 15% home standby growth that you're referring to or overall 10% for the residential segment will come in the second half for the most part.

And a good chunk of that is there's price as well, but half the growth in 2026, Brian, is price. With the new product line we introduced the higher price there. So that's part of the equation. But as York said, that return to base that assumption that we returned to baseline normal outage kind of long-term outage environment is a big assumption for the second half.

But we start off the year well. Winter storm Fern was a nice kick. We had a lot of -- we saw a lot of interest in terms of sales leads in Q1. We'll see what conversion looks like here as we get into Q2. It's kind of the first real test for us of our new pool our lead pool system. So we're modeling Q2 off of our historical close rates when we get an influx like that. So we'll see if that holds or if it's better, maybe it will be better. We're not sure yet at this point.

We've got to watch the read through. But it's a good start to the year. And as York said, we feel like with the easy comps in the back half, that we're going to see growth. We see really nice growth in the second half with Home Standby particular.

Our next question comes from the line of Stephen Gengaro with Stifel.

Two kind of connected topics for me. The first is, how should we -- and I know you kind of gave the full year guide for the company. How should we think about sort of the C&I margin progression, given obviously the strong growth that we're seeing.

And maybe attached to that. I know it's early, but based on what you're seeing in order fall and you talked about the nonbinding notice, do you think growth rates in that business can remain in the teens plus into '27?

Yes, thanks, Stephen. Maybe I'll take the first -- or the second part of the question I let York kind of tackle the margin progression because there's some there's a lot of moving pieces in that, but a lot of that is coming from leverage that we're going to get on the OpEx line.

But in terms of the -- just the growth rates there, obviously, we put some aggressive targets out there and long-term growth rates at the Investor Day, but -- and the growth rates here near term are even better just given the the incremental nature, right, like we're going from almost from 0 to the kind of the $700-plus million backlog that we've talked about, right, in converting that backlog over the course of this year and next, in particular, and then the hyperscale opportunities that haven't been reflected in that backlog.

And the notice to proceed of $600 million is a good representation I think, of the kind of volumes that are -- the potential that's there in terms of growth rates. I think the answer to your question, Stephen, though, is somewhat highly linked though to the CapEx spending assumptions for for data center buildout. And so it really depends on where you kind of land on the spectrum here.

And I will say this, and I think it's easy -- and you got to be really careful in situations like this because it's easy to talk yourself into all kinds of things. But every single conversation we have, and it's up and down the line, it's not just the data center customers themselves, but it's the developers, the other component suppliers that are feeding this. Obviously, here in Wisconsin, we have the benefit of having a few other companies that are also feeding the data center market with products as OEMs and so just kind of comparing notes, right, just sharing notes.

It's -- I think most, if not all, of these, I guess, forecast -- this is going to be more than a multiyear run. And the kind of impact that AI is going to have on businesses and on kind of society at large, I think we're just at the very early innings of that and starting to see some of the power of this and what it can do. And as that takes root, the need for data center capacity is just going to be -- is just going to grow. And so we feel really good about our longer-term growth rates. And then maybe I'll kick it to York just on the margin progression. If there are any comments there, York you want to make.

Yes. Just to follow up on the growth rate. So if you recall in our Investor Day back in March, we did have guide a 3-year CAGR for our C&I segment of low to mid-20% range. I think obviously, we've got some visibility to the 2027 numbers with that notice to proceed that Aaron talked about as well as the backlog that we -- the $700 million of backlog that we have that will spill some of that will spill into -- so we have at least clear visibility there and we're feeling good about the growth rate.

The margin progression, you're obviously seeing it here in Q1. You're starting to see that. A couple of comments there is the Enercon acquisition, which really starts April 1, that's when that closed. That should actually -- with the vertical integration and the margin profile of that and getting the margin stack of that business on top of the margin -- the data center margins that we were guiding previously, that's actually going to give us about a 50 basis point lift to our -- to the C&I segment. EBITDA margins or gross margins. So that's good.

And then again, as you grow low to mid-20% CAGR over the next 3 years, you start really leveraging the OpEx infrastructure that we're building to support the data center initiative and you should start seeing more mid- to high-teens EBITDA margins in the out years in that 2028 when you get out into 2028.

So continued margin margin growth for C&I is expected as you grow dramatically on the top line.

Our next question comes from the line of Praneeth Satish with Wells Fargo.

So the release in there, it references a potential multiyear hyperscale agreement. Is that referring to the same customer behind the $600 million notice to proceed that was discussed at the Investor Day, potentially extending that order. Are you signaling a separate hyperscale hyperscaler opportunity, just trying to get some more detail on the opportunity set?

And then just very quickly, can you confirm whether you've included the impact of the new Section 232 rules on steel in the guidance?

Yes. I'll take the first part of your question, and then I'll let York tackle the tariff assumptions. Yes, Praneeth, we're really -- we're in conversation with 2 hyperscale customers in particular. And both would be -- we would assume would present multiyear opportunities for us.

The agreements themselves, there's kind of a master supply agreement. And then once you get past that, you're officially added to the approved vendor list and then they can cut POs. So -- and each customer has a different approach to that in terms of giving you a forecast. And then those POs that would be with that. But because the planning cycles are so long on these projects, and because lead times have been stretched in our industry anyway, our lead times may be shorter, but industry lead times are longer.

Many of the planning cycles they're already looking at, in some cases, 2028, and beyond because the traditional supply base for these backup systems are constrained. And so the visibility we have -- right now, it's limited to 2027. We hope that, that -- we'll get better visibility to that as we kind of get through this final stage of negotiations with these 2 customers.

The customer that we are working with that we've got the notice to proceed with is the customer that were closest to the finish line. But I would say the other customer is close behind. There's just a few more steps there that we have to work through. But both of them and the volume numbers that they've kind of talked to us about in preparing us for being able to be a supplier they're significant.

And I think we're already turning our attention to what do we think about for the next leg of capacity growth because we're trying to accelerate our Sussex facility ramp here into Q3. We originally slated it as Q4, trying to pull that in, so that we've got an opportunity to maybe even do some of this in the fourth quarter. But we're going to need it's the old jaws phrase, we're going to need to be -- build a bigger boat. If we need a bigger boat if we're going to win both of these accounts because that's not in our our current capacity capability today, we would definitely have to add more. So -- and then I'll kick it to York on the tariff question.

Yes. On the 232, obviously, with the EPA reciprocal tariffs getting overruled by the Supreme Court that would be a savings to us. But with the Section 122 at least temporarily in place. And then to your question, the 232 steel aluminum tariffs, the way we've modeled it is that we're assuming that that just offsets any EPA tariff savings. So it's not going to be detrimental to our run rate margins.

Currently, as they're stated today, there's some benefit, but there's some uncertainty as to sort of what 232 tariffs will be in the second half, with 301 tariffs will be in the second half. So we've just assumed that in the outlook that we've presented today that we're just being consistent with the tariff rates from our previous guidance. So not any worse, not any better, which probably is a conservative view here.

Our next question comes from the line of Christopher Glynn with Oppenheimer & Co.

Just wanted to go back to the residential margin upside. Curious clearly sounds like it came in ahead of your expectations wonder if that was the speed of the unification benefits or kind of the scope of the cost structure opportunity? It sounds like maybe those 3 percentage points OpEx maybe a way point and a point in time that you continue to build off of. And really just kind of trying to tie into the 50 basis points boost to the EBITDA margin guidance. It seems like what you delivered in the first quarter. Residential EBITDA margins is really considered pretty modestly in the full year guide, especially since first quarter is the seasonal mix low for residential.

Yes. I mean I can I can start with that. Yes, so if you look -- if you factor in what do we factor in the updated margin guide, the extra 50 basis point improvement in gross margins. You're right, it's the outperformance in Q1. And then the margin accretion from the Enercon acquisition that I mentioned that will help impact improved margins for Industrial.

We, for the most part, are holding everything else again, that tariff assumption that I just gave on the previous question. Obviously, the mix elements there, we've taken up with taking up C&I, you'd expect actually expect it to mix down, but there's a little bit of improvement that we've baked in to offset that. So we're basically holding Q2, Q3, Q4, outside of our margin profile, outside of those other the Q1 beat and the Enercon acquisition.

Yes. And then maybe on the residential OpEx, Chris, just to put a finer point on that. I mean there's some really good things going on there. I mean unification has happened quickly. That was a process we began evaluating last year and really accelerated the combination as we got in here into 2026. And so there's clearly -- that is having an impact. I would also say we're on the backside of some of those new product introductions with the Power Micro, now getting into market ramping there.

And then Power cell to also in the market. So some of the the hard core development work being done last year on those projects is tapering. And then on the software side, like everybody else, we are benefiting from the trends in coding around AI and just not needing the intensity of head count there to produce productivity is up dramatically. And that's certainly helpful.

So I mean it's a combination of those areas that is helpful. And I think also as you look forward, kind of the other part of your question, I think it's a good jumping off point as we go into 2026 here. We do typically have expenses start to ramp as the season. When you go back to our core business around HSB, home standby and portables, There'll be some marketing ramp and whatnot as we -- as you would normally expect seasonally here. So the raw quantum of dollars will increase, but so does the top line as we've laid it out into the second half of the year.

So we feel really good about this, though. I think the Generac 1 Home project. I'm not ready to call it a complete success at this point. I mean, there's still a lot of things we're working through to bring those teams together. But we like what we see so far, and we're getting a lot of leverage out of that combined entity.

Our next question will come from the line of [ Julian Dominsmith ] with Jefferies.

This is Tanner James on for Julian. Maybe just a question on what you're seeing for pricing momentum for large diesel gen sets. You spoke to the lead time advantage relative to competitors. You're talking about additional capacity growth and investment. Just prospectively, how should we think about the sequential pricing ex tariffs here into the 27, 28, 29 time frame?

Yes. Thanks, Tanner. It's a great question. And I'll preface my response by saying, when we laid out our original business case to go into the large megawatt gen set market, historical pricing levels, the ASPs of those machines were lower because we put our business case together in a much less constrained with a much less constrained backdrop of supply.

And so as that's changed, and as you would expect, we've seen pricing improve. And that has improved the overall business case for those products. Even with data center customers who buy in large quantities where you would typically assume you'd have margin pressure. And the margins are lower kind of net -- on a net basis, relative to selling a similar machine into more of our legacy traditional market, but they're not dramatically lower.

And they're dramatically better than historical margins in the product segment would have been. So we feel good about that. Speaking to the forward ASPs, I think everything that we look at today is that lead times are going to remain constrained for the next several years. And a lot of that is underpinned by continued engine supply constraints. So with our competitive set, they are adding capacity. They've announced those projects and those plans, but it's going to take time to get that online.

I do think over time, that probably will find its baseline and normalize -- but at this stage of the game, we feel like there are also opportunities to increase our vertical integration and efficiencies. Again, back to the Enercon acquisition, a part of our calculus there is the opportunity to capture that value with the machine and the math is very good there.

As you can imagine, it's not only the ASPs on the gen sets themselves, the bar gensets that have increased, but also the packaged ASPs have increased. And so the opportunity to capture some of that value and bring that through in our gross margins there. is very strong. And so we'll look at other areas as well.

And I think as we improve our efficiency and we leverage our footprint here, we think there's probably some other opportunities there to to continue to improve margin on a go-forward basis, but that may be offset by ASP kind of normalizing or even coming down slightly, but we think those gross margins are going to hang in there for the foreseeable future.

Our next question comes from the line of Vikram Bagri with Citi.

I have 2 questions, one on C&I and one on residential quick ones. Are you hearing air quality permits for diesel generators as a sort of like a gating factor or a reason for delay in final orders. You talked about potential for next leg of capacity growth, where do you see sort of like the gating factors in capacity growth? You've acquired Enercon, -- so that part is said, would it require any more M&A to expand capacity beyond what you have?

And then on residential, you're seeing multiple benefits from at home and expense recalibration I was wondering if you've accelerated the ET energy transition breakeven time line at all, any update on that?

Yes. Thanks, Vic. Yes. So the C&I question -- in terms of -- I think the question was diesel on permitting, air permitting around some of these bigger projects and I think all permitting, whether you're talking air or water or other things that's become more challenging as communities grapple with the impacts that data centers may have on air, on water, on energy, there are solutions there with respect specifically to diesel backup generators, the option of using a Tier 4 certified solution.

There are after-treatment packages that can be added to those projects to further improve the emissions profile -- and in particular, there are some markets where that's required kind of best commercial best available technologies are required either because of the concentration of data centers in a particular market or just concerns around diesel particulate and emissions.

So -- but again, there are -- we have projects that we're involved with, where we're discussing site certifications that would include aftertreatment and/or Tier 4 certified product. So there are ways around that. I don't -- we don't see that being -- that's not a showstopper put it that way. That's something that we can solve for.

On the capacity question with C&I, that question -- as we look at the future here, we're already looking for ways to expand capacity. As I said before, we've got to be forward thinking here. And we've got to be thinking not about $1 billion in capacity. But $2 billion or $3 billion in capacity. What does that look like? How do we achieve that? Can we get more out of our existing footprint, the footprint inclusive of Sussex, inclusive of what we've acquired with Enercon, but beyond that, we're also looking at other facilities. And where would we cite those facilities? Do we have time to do a greenfield? Do we not? We can buy existing real estate? Can you buy existing companies? To your point, could some of that be solved through M&A.

And so we're looking at all those things. Everything is on the table. And I think you will hear from us about those capacity adds as we go forward here and in particular, as we get through these negotiations with these hyperscalers and it becomes more real, we definitely have to take action. So you should see that coming. The residential question, again, I think as you reiterated the One Home project has gone well.

We still love energy technology. We just -- the technologies themselves and where we're at in the cycle there, we've got a very competitive microinverter that's in market today, and we're starting to scale. So we're moving from our initial production tooling, which was more of an approved outline. Moving it to a scale line, that's here domestically.

We're getting on ABLs for more customers there. We're starting to dabble with some prepaid lease products, so that we can take away additional constraints there. And the market is changing too rapidly. As you know, there's a lot going on here in terms of consolidation of distribution. There's changes in terms of focus with other OEMs that supply either inverter products or batteries into the market.

Some of those pivots are the necessity of the current environment. But longer term, look, this is simple math. If electricity retail electricity prices continue to rise. And things like storage costs and electronics costs continue to come down, we're going to see strong demand for these products in the long run is clearly going to be a bumpy 2026 and into 2027, probably for these products in terms of market demand. But we feel we're very well positioned.

And when we put that together with our home ecosystem that we're building out, which is differentiated, we feel like we're in a really good position there to capture opportunities and it's a unique market. I think it helps round out our residential segment quite well, and we're very excited about the future. We just have to get through this kind of air pocket in -- at least as it relates to energy technology here in the market over the next, I would say, next year, 1.5 years.

And the breakeven time line remains intact for 2027.

Absolutely. Have not moved on that.

Our next question comes from the line of Keith Housum with Northcoast Research.

Just in terms of the telecom and the national rental trajectory for both of those companies. It appears, obviously, they're both on the upper swing here. Can you just remind us, are these more refresh opportunities or growth within these markets? And then traditionally, when you guys have had an upward cycle, how long do these cycles generally last?

Yes. Thanks, Keith. Great question. I'll talk to telecom first. Telecom cycles usually go, they're multiyear. And actually, that cycle it tends to follow kind of project build-out. So a lot of it is new build of sites. There is retrofitting of existing sites still available as part of the opportunity with telecom.

And this is mostly what's referred to in the industry as outside plant back up. So it's the towers that you'd see along highways, hillsides, things like that or -- and a lot of that is still around the 5G build-out that continues for many of the carriers we're the primary supplier to all the Tier 1 wireless carriers and have been for decades.

We customize product for them. We have great response rates from a service standpoint. We're able to work with their engineering and operations teams to create bespoke solutions and then build those at scale. In all honesty, it's a lot like what these hyperscale opportunities are on the data center side, in terms of working with engineering teams and operations teams for bespoke solutions and then turning that into product at scale and then being able to provide the service and support to surround it. It's just obviously a lot bigger factor, form factor and a lot bigger dollars.

But telecom is usually a multiyear run. We feel really good about that going forward, a lot of new build there. And then on the mobile side, that's a refleeting cycle, there is some new -- it's new equipment, but the cycle is they'll buy for a couple of years, and then they'll not buy for a year or 2 as they let the equipment kind of age out, they watch very closely their utilization rates, their rental rates, and then they watch the residual equipment value rates as well.

And it's kind of -- it's basically math. A lot of the equipment companies -- the rental equipment companies have become very sophisticated in terms of the math that they run and the metrics that they watch. And so they kind of know when they need to kind of hit the gas on spending CapEx to re-fleet so that it's available for the market and where it's supported, obviously, by the metrics that they needed to be supported by. And those typically, those runs can be usually, again, a year or 2 on and generally maybe a year, 18 months off. That's kind of what we saw here in the latest run -- there can be other cycle factors there. I'd just point this out.

In the past, we've seen energy cycles as domestic energy production increases that can increase the intensity of the rental market cycle. And we -- I think we're seeing a little bit of that right now. We'll see where that goes here over the next couple of quarters. But everything we're hearing is a lot of the refleeting cycle right now is just the age out of some of the equipment they've had in their fleets.

And then obviously, demand is continuing to be pretty strong. Again, you can built around data center construction activity and other activity in the domestic energy production sector.

And I'm showing no further questions at this time. And I would like to hand the conference back over to Chris Rosman for closing remarks.

We want to thank everyone for joining us this morning. We look forward to discussing our second quarter earnings results in late July. Thank you again, and goodbye.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Good morning, and welcome to Generac's 2026 Investor Day. I'm Kris Rosemann, Director of Corporate Finance and Investor Relations here at Generac, and I'd like to thank you all for joining us.

For your reference, today's slide deck is posted on our Investor Relations web page under the Investor Presentations page. Today's presentation will include strategic updates from leaders across our business, highlighting the range of opportunities that lie ahead for Generac. At the end of the presentation, we will conclude with a Q&A session for the in-person audience. So please hold all your questions until that time.

Now a quick intro of today's speakers. Leading off will be Aaron Jagdfeld, President and CEO, with a strategic overview of Generac and the mega-trends that we expect to drive our long-term growth expectations as well as the strategic realignment that we believe will help us capture those opportunities. Then Erik Wilde, President, Domestic C&I, will follow with a highlight of the global capabilities and market opportunities that we expect to drive significant growth in C&I end markets for Generac over the next 3 years. Following a 15-minute break, Norm Taffe, President, Generac Home will highlight the organizational realignment and innovative technologies that we expect to accelerate growth on the residential side of our business. Following Norm, Kyle Raabe, President, Home Power Generation, will provide a specific focus on the significant penetration opportunity present in the home standby category. And finally, York Ragen, Chief Financial Officer, will bring us home with an updated 3-year financial framework looking out through 2028.

We will begin our presentation 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 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 SEC filings. Finally, this presentation contains select recast unaudited financial information for the previously reported 12 months ended December 31, 2025, that relates to our organizational realignment, which will be discussed further during the presentation. Select recast unaudited financial information relating to our organizational realignment for the previously reported quarters in fiscal 2025 will be provided with our next periodic report or sooner.

And with that, I'd now like to turn it over to Aaron.

All right. Can you guys hear me, okay? Sorry, I didn't mean to -- all right. Good deal.

Welcome. Thank you for joining us today for Generac Investor Day here. It's been a bit since we've done one of these. We used to do them on every 2-year cycles. But we decided we'd wait a little bit longer this time around for 2 reasons. One, we noticed that the timing of our previous cycle we used to do it in the fall. And that's kind of right in the middle of the season. The season for our consumer power business or our residential business. So it was never really very optimal because depending on how the season turned out, it was difficult to set the baseline year with that timing.

But the second reason and maybe more important is obviously the changes that we've been undergoing as a company that we're going to talk about this morning, kind of the headline changes around not only the strategy of the company, which we've been committed to for the last 3 years, and I'll talk about that. But some of the bigger changes in terms of the mix and what we're doing, and where we're focused, where we're putting our energy, our time and our resources and our investment talk about that this morning. But obviously, the C&I business is a big part of that and where we're going and what we'll talk about. And the data center market opportunity, obviously, front and center kind of the middle of that entire discussion point.

So we thought that kind of moving the cadence here for the Investor Day to a spring season and then having this extra kind of 6, 8 months to kind of let that C&I business mature in terms of the developments there that we've been talking about as a business, and we'll talk and fill you in a little bit more on this morning. So just to level set here, starting out. You guys know the company quite well. This is a $4.2 billion company last year's sales, about $716 million of EBITDA last year. The last 3 years, $1.3 billion of free cash flow, if you know anything about this company, we generate a lot of free cash flow, which is great because we're putting that free cash flow to work, and we're going to talk about that this morning and how we're going to use that free cash flow enhance returns for shareholders and all of our stakeholders here in the next -- at least the next 3 years and probably longer.

We've got great scale that we've built as a company with 9,400 employees. We have a lot of engineers as a part of that staff, we are a product-focused company. It's kind of deep in our DNA. Our founder was an engineer back in 1959, and we really believe deeply in the power of engineering and the importance of products and solutions for our customers.

The center here is it says by segment, as Kris mentioned, and as you may have seen in the release, the 8-K this morning, we are debuting new segments today. Now I'll just point out that the 2 segments, residential and C&I, if you go back to how we used to use product classes, right? So product classes of our residential products and our commercial and industrial products. This is pretty close to what that would look like. We just don't have the other category. So the other category now is divided appropriately so into those 2 segments, and we'll talk a little bit further about that. But you can see how that mix kind of turns out based on last year's sales. About 59% of that would be on the residential side. Again includes home standby generators, portable generators. We have some core products still in that. We also have our -- some of our clean energy products. Our ecobee products are all in that residential bucket.

And then on commercial and industrial, we have the larger machines, stationary machines as well as battery energy storage systems and our microgrid components, and we'll talk a little bit more about that. But about a 59%-41% split, if you looked at it based on last year's sales on the new segment I do want to -- a couple of things, though, this morning just to talk about here. This has been -- it's been an amazing company in terms of growth. I've been with the company almost 32 years now. And just a couple of things to point out on this slide. Obviously, the company has grown a lot. It's grown a lot really in the last decade, the last 15 years, in particular. I think when you kind of back up at least for the last 20 years, it's a 14% compounded annual growth rate.

And I think the headline this morning, we want to talk about in terms of the next 3 years is kind of right there, right in that mid-teens compounded annual growth rate going forward. We believe we've got a great track record that supports that. And obviously, we believe we have a lot of really interesting things to talk about here and how we're going to make that work because as you know, in the law of large numbers, it gets harder to maintain that kind of pace of growth as the company grows.

I think another important detail this morning, you probably saw it already, but we are maintaining our 2026 guidance. That's another important point on this slide. But again, I think when you look at a lot of companies, somebody has said this in the past, but if you're not growing, you're dying as a company. And so growth is incredibly important part of who we are as a company. It's an important part of at least how we've built this company to really go after opportunities.

And to be aggressive. We have an aggressive slant in what we do. I think it's -- maybe it's deep, not only in the DNA of the company, but maybe deep within my own DNA in terms of being aggressive in terms of leaning forward in terms of going after opportunities and growing creates opportunities not only for us as a company, but obviously, our team members, right? So I think it's one of the things that I started out as a staff accountant with the company at one of levels that you could possibly come up with doing travel and expense report ticking and tying and things like that, work my way up to a CFO and then into this role. But I think that kind of opportunity only comes from growth. It's really difficult to get that kind of opportunity or to give that kind of opportunity to our team members, unless we're growing.

So we're very focused on growth. It's not a growth at all costs type of mentality, but it's profitable growth. We want to make sure the things that we're doing are worthwhile. There's a lot of companies out there that grow but don't make any money. I call that running in place. That's not what we want to do. We're going to run to get somewhere. And so growing and growing profitably and finding opportunities that make sense that our strategy and really play into our future is really what we're all about. This is kind of just a -- maybe just the takeaway slide. It's kind of starting out and you're doing this in reverse. But these kind of bold statements here around what's going on with kind of the industry around us, the environment around us, the grid is strained. There's no question about that, and I've got some great slides on that.

Load growth which has been flat for 2 decades is accelerating, and it's accelerating in a frightening way. And I've got a couple of data points I want to share with you. But I think if you're a utility executive or if you're a grid operator, and you're looking at load growth, I think you used to kind of used to -- you say, well, there's no load growth, 2 decades of 0 load growth, oh, boy, now they're projecting 1% and what are we going to do? How are we going to respond to 1% load growth?

Now the numbers are staggering in terms of where demand is going on the grid. And I've got some data on that. And power prices are surging, and this is the good news is this is -- this kind of simple economics 101, right? We do not have enough supply for the demand. And when you don't have enough supply for the demand, what happens, prices go up. And that is exactly what we are seeing across the entire U.S. across the system. And our prediction is that will be a global phenomenon here as we go forward. A lot of places around the world where the power prices are already a lot higher than they are in the U.S. But within the U.S. and what we're seeing in terms of power prices increasing, is pretty frightening.

All of those 3 bold statements kind of lead us to the fourth bold statement on the page. As we believe that we are at the intersection of a generational opportunity for Generac, right, both for our industry, but also specifically for our company in the way that we've aligned ourselves prepared ourselves, we've got the right strategy, and I'll talk to that. But we think that this is kind of one of those moments in life that maybe you can go through your entire career wherever you work, you may you don't ever have that chance to say that you have the opportunity to participate in something that happens only once in a generation, right? And this is, I think, one of those unique times, and we are directly at the dead center intersection of that generational opportunity.

Now we're getting a lot of help from the media in terms of kind of presenting our case, if you will, right? The headlines that are out there. And we've talked about the power quality headlines for a long time, right? We talk about mega-trends, the mega-trends that we see in our industry that we see that impact the company. We see 4 main mega-trends, and I'll talk to these 4 this morning. The top 2, lower power quality and higher power prices. These 2 mega-trends have been around for some time, in particular, lower power quality.

In fact, I might argue that as a company, Generac has maybe been solely focused on that singular mega-trend for the bulk of our 66-plus years, 67 years in business. The newest trend emerging here though, and as I said before, power prices, this higher power price concept these trends, I think, are -- have major implications on the direction that not only we go as a company, but I think about how we think about power in our own lives as homeowners, as business owners, right? It's -- and you guys get the system, right? It's a monopolistic system for the most part. You don't have a lot of choice.

If your rates go up, you can't just go across the street and go to the other utility company on the other side. There's a few places around the U.S. where it's a little bit more of an open market, but for the most part, you're kind of locked in with your provider, right? I mean you have -- honestly, you have more choice in cable providers. You have more choices when it comes to your mobile phone providers. You have very limited choices when it comes to your power provider.

As prices go up, that's going to put pressure on not only your household budget, but maybe your business budget. What do you do? What do you turn to you're going to start to think about this in a much, much different way going forward. And this is part of our thesis part of what we are focused on strategically as we believe there's an opportunity for us to play a role in that, not just about keeping the lights on, which has been Generac's kind of legacy business, but where we're going in the future in terms of helping homeowners, helping businesses solve not only for resiliency challenges that will still always be the core, but also for these higher power prices, right. Could be self-generation, could be different concepts around arbitrage, between when the grid is charging at high prices versus lower prices and what you do to kind of play that arbitrage as a homeowner or a business owner.

We are developing products and solutions to help not only keep the lights on, but also keep your power costs in check. And these headlines keep coming. I mean these headlines are, again, the power outage at mines, that's easy. The lights go out, right? That's like we're in Wisconsin, right? We're a Wisconsin-based company, right? And the first snowflake that hits the ground, the meteorologists are out there, right? Live reports, it's snowing. Yes, no kidding. It's Wisconsin. That's what happens. It's going to snow every year, we're going to get that in every year. The media has to make a big deal out of that.

That's what outage has always been about. When it powers out, it's easy to get those headlines. I think the bigger piece of this puzzle is the headlines now that are starting to come with regularity around these increasing power prices. That's a big change. I don't think we were talking about that a couple of years ago. We're almost talking about it relentlessly in a lot of places. In fact, you can pick up any of the major publications and you're going to find something about power prices, something about why those prices are increasing, and I'll talk to that because it's complicated.

As you would imagine, that entire -- it's an easy story in terms of supply and demand and why prices are going up. It's a little bit more complicated underneath, though on why we don't have enough supply and why demand is growing. And so we'll unpack that a bit this morning to talk to that in terms of how it impacts us and where we're focused. So those are the headlines.

Again, lower power quality. This is a long-standing trend. We are only going back a decade here to 2015, right? And on a 5-year rolling average, when we look at -- we call it our baseline average, and you guys who've followed the company for a long time know that that's how we guide, right? We use the 5-year rolling average of the 5-year baseline average of outages to set our guidance. We do that every year. And you can actually see 2025. So these bars represent total hours lost to outages. We call it a severity index.

Last year, actually quite low. Actually, it was -- and we see this occasionally, every decade, something like that, you'll get a year where we don't get a season. And that's what happened last year. Back half of the year last year was historically low in terms of outages, but that's temporary, right? Now most outages have historically been caused by weather. Over 70% of the hours lost for outages come from some kind of direct weather event. Hurricane, could be an ice storm, something like that, right? You've had 13 major outage events since 2007. Seven of those -- or 2010, excuse me, in 7 of those since 2020. So we do get these spikes.

Now in our 5-year baseline, we actually take those majors out in how we compute that because we don't, in fact, want to plan, we don't want to guide as if there's going to be a major event. For a longer-term planning horizon or so, we do include one major event. So for the next 3 years, our assumption is that, that happens in 2027. It might happen this year, it might happen in '28. It will happen. There's going to be a major event. And so in terms of outages and how we plan around that and guide around that, our annual guidance does not include that.

But the purposes of longer-term discussions here on growth, we have to include that because that's prudent in terms of just the frequency, you can see the frequency of how often those major events happen. I think the new kernel here, though, around outages and the potential for outages goes to the heart of this kind of supply-demand imbalance as we call it.

This map here, this is right out of North American Electric Reliability Corporation, NERC, if you will, they do a long-term assessment report once a year. They also do a winter readiness report and they do a summer readiness report. If you guys haven't read those I would encourage you to pick those up. This is the most recent, I think this was January of 2026. This was refreshed the long-term assessment. And this map kind of lays out kind of -- those are the grid territories, right? So you've got PJM, you've got MISO, you've got ERCOT, all the major grids that you guys are familiar with that we talk about. But these are the grid operators and how they kind of geographically lay out. The orange, kind of, color there represents what in NERC's vernacular is high risk, high risk for outage activity in the next 10 years.

Those orange areas geographically represent over half the U.S. population is at a high risk for some kind of outage event, a major outage event within the next 5 to 10 years. That is -- and it's frightening you go back in history, you look at these reports. But even more frightening, if you just read the headlines from the reports, a couple of things that were packed in this thing.

And you could argue maybe it's NERC's responsibility to scare people into action right? So is there some hyperbole in this report? I don't know there's a lot of data in the report. I think it's up to you to decide whether that data is hyperbolic or not. But at the end of the day, here's a couple of stats that are in that report. The peak summer and peak summer demand, right? So if you -- everybody kicks on their air conditioners and what could that peak demand look like is forecasted to be 70% higher than the previous year's forecast, 70%. Just from one forecast to the next, they said the summer load growth, the peak load is going to be 70% higher than they thought it was going to be a year ago.

The winter -- and this is probably the more frightening part of this. the winter peak demand is forecasted to be 65% greater than they had the forecast a year before. And why is that important? Because outages in the summer are bad. Outages in the winter are catastrophic. In terms of property damage, in terms of loss of life, right, the winter outage, and we see this in our own business. If you go back to the Texas freeze February of 2021. Texas figured out that it could get cold. That scared a lot of people in Texas.

And the damage that was done to homes and businesses from frozen pipes, right, the loss of heat. A lot of the heat in Texas is either heat pump or it's baseboard heating, right? It's electric. It has a lot to do, by the way, with what's going on with these winter demand peaks. It's electrification of heating, heat pumps now outsell gas furnaces, right? Just on a raw numbers basis, we clipped past that, I think, 2 years ago when heat pump sales actually eclipsed gas furnace sales. That has big implications, implications on the grid, right, that electrification just of heating, right? But there's also electrification of transportation.

Now maybe we're in a lull here but make no mistake about it, right? A generation from now, the only vehicles that are on the road are electric vehicles, right? Gas vehicles will be out there, but they'll be the realm of hobbyists. Why? Because the technology is better, right? And the cost continues to come down.

And the good thing about technology is it's politically agnostic. It doesn't really care whether you're red or blue right? What wins with technology is cost and performance. And if you've driven an electric vehicle, the performance is better, right? It makes me sad, I'm an engine guy. We like engines, right? That's at the heart of our business. But this transformation of transportation around electric vehicles has major implications on our industry, right, supply chains, things of that nature.

Now it's going to take a long time to play out. It's another generation out there. And there, it will ebb and flow in terms of the adoption rate. Right now, it's ebbing, right? Policy is pushing that retrenchment. But over time, EVs will continue to grow, and that will have major implications on the grid. Demand growth continues to rise and rise very quickly. And there's a lot of reasons for that. I think probably underneath all this, what's really interesting is if you look at last year, retired about 20 gigawatts of power across the country, right retirements of old coal plants or old power plants coming offline.

And on a net basis added about 20 gigawatts of new generating capacity. The difference, though, is important. What was retired were what are known as thermal assets. So coal, gas, nuclear, right? These are the assets that are great baseload power assets. They have 90-plus percent uptime in terms of planning capacity. And the 20 gigawatts that replace them were largely intermittent renewable, which it's great that we can build those plants on a relative cost basis, it's at or less than cost for a gas combined cycle gas turbine plant.

But the problem is, from a planning standpoint, you can only plan in the 20 percentile range for a utility scale solar plant for a utility scale wind plant. Wind is just slightly better. Solar, the planning factor, something like 21%. Wind, it's something like 32%. So it is better, because the wind can blow when it's dark out. Solar will not work when the sun is not up or when the cloud took on a cloudy day. So you have to have then storage to augment that. And that's where the cost formula starts to get probably not apples-to-apples in terms of that comparison.

Well, I can build and construct that utility scale renewable power plant for roughly the same or less than I can construct a typical thermal plant. When I add storage, some storage technology into that, it adds a lot of cost to the system. And who pays for that cost, by the way, I'm going to talk about that here in a second. We pay for that as rate payers.

So it's complex, as we said. And I think the NERC report kind of gets to it. To put a little bit of a finer point on it, though, when you look at kind of just demand in general and where that growth is coming from. You can see that if you go back, the decade 2010 to 2020, it was actually down 1%, right? So no demand growth, right? That's basically almost goes back 2 decades if you were to look back all the way. The last 5 years though, we've seen demand grow 9% over that 5-year period. 9% over a 5-year period doesn't sound that great, but it doesn't sound that outlandish, but that's a big number.

More importantly, though, is, of course, what's on the far right there, which is the forecasted growth over the next 5-year period. Demand is forecasted to grow 32%. That is an unbelievable number. And again, if you're a utility executive or if you're managing a grid, if you're a grid operator, those numbers are staggering. And you're basically -- you've kind of got your back against the wall in a lot of ways. By the way, there are just a couple of numbers here. There are over 3,000 independent power plant operators around the country.

Now in those systems, those utilities, they're really full utilities. A lot of those are smaller cooperatives. There's a lot of where you've got local generation for a village or a city. But of those 3,000 utilities, there are 3,000 regulators, regulatory bodies. So it's 1:1. So is it any kind of wonder why, first of all, the utility industry, the pace that they can react is incredibly slow. Somebody once told me the only documented death of the utility was somebody getting run over by a glacier, right? That was -- that's how slow the pace is in the utility world, and there's a lot of reasons for that.

It takes time, it takes money, right, to do a lot of the things that utilities need to do, whether it's building new generation, building new transmission and distribution. And then, of course, they've got regulatory bodies that tell them kind of what is -- what kind of return can they expect to earn on that investment, right? And there's been a lot of talk about this, right? Maybe we need to lower the return hurdles. In fact, there was just a ruling here recently where we saw return on transmission and distribution investments, the return on equity, the ROE was originally 10.57%. This is a FERC, the Federal group set that return on equity hurdle. It used to be 10.57%. They just changed it in a ruling, I think it was last week to 9.57%. 100 basis points less. They just said, you know what, it's not -- 10.57% is too rich. We're not going to allow you to get a return on equity 10.57%. It's going to be 9.57%.

That has major implications for those utilities, right, for the grid operators. And it's going to transition -- it basically is all going to come down to reliability. At the end of the day, the incentive, if you compress the return, the hurdle rates, the incentives to actually make sure the system is up and running. I mean, we're just -- we're diminishing those incentives, diminishing the return. And it's just, again, this is what we forget about or at least at the federal level, we seem to, that matters, right?

Those returns matter in terms of incentivizing investors and those corporations to continue to invest in the reliability of our electric grid. So what's underpinning demand growth, as I said before, these electrification trends, whether they be heat pump, whether they're EVs, EV trends. But also, as you know, data center growth is starting to come online and is having an enormous impact. It's -- I mean, it's hard to put into words when you look at the numbers in terms of the total gigawatts that are projected to be on the system here in the future as a result of data centers, but it's massive.

And it's going to absolutely change everything we know about the grid today. It's going to change everything about how we use power, what we pay to use power, and it's going to change everything about -- unfortunately, about the availability of that power. And again, I think that probably the most frightening thing about this whole thing is just how quickly the forecasts are changing.

Every new forecast that comes out is taking the forecast before. Some of these are 6 months ago. And it's dramatically increasing the percentages. You put that together with the pace of utilities, you have a major, major problem that we are headed towards. There is a huge cliff out there. It's either going to stop data center development, which I don't think is going to happen. Or right, the utilities themselves are going to find themselves in a position where they just can't supply enough power. And on very hot days, or very cold days, you're going to see stresses in this system with the utilities and the grid operators call reserve margins. They've always said, look, we've got to have between 20% and 30% reserve margin right? The excess highest point of demand over the excess -- or excuse me, the excess of supply over the highest point of demand. They call that reserve margin.

Those reserve margins are shrinking. And in some cases, the projections are in the next 5 years, there are reserve margins in some of those regions, right? Those independent system operators, those grids, those ISOs were actually negative. And when it goes negative, that means your lights go out. That's exactly what happened in February of 2021 with ERCOT. They were 6 minutes away from major destruction, long-term destruction to components in the grid, transformers, operating plants, things that would have taken months, perhaps even years to fix. Their only tool in the toolkit with 6 minutes left was to shut everything off. Drop the load, they disconnected loads everywhere. 9 million people. That was the tool in the toolkit. That was the last one they had, to shut it off on a very cold day.

This is going to happen more, right? That's an isolated example, right? It's 5 years old now. But we think that, that is the tip of the spear when it comes to what's coming at us in the future. As we said before, prices are going up. Who's paying for those prices? You and I, in the parlance of utility companies. In the parlance, the regulatory bodies that manage those companies and watch over to those companies. We are known as rate payers collectively together. We are the rate payers. We are the ones paying the bill. And there's a lot of discussion about there that data center should come out and they should pay their own way. Yes, they should. But this is a system. And the system has to generate power here, get power there, right, and has to adjust to stay perfectly in balance by the way.

This is probably the biggest issue is that if you're a grid operator, the only thing you care about. You don't care about you care about power prices, but you don't care as much about power prices. You care about making sure that your supply and demand are almost equally balanced every single minute of the day. You can't have too little supply and you can't have too much supply. Those are also problems, right? You can't have too little demand, you can't have too much demand. You have to manage those. The problem is the equation there to keep things in balance is becoming very, very complex and the changes on both sides are now happening much more quickly.

So the ability to react, the ability to keep those systems in balance is challenging. It's going to take a lot of money to do what we need to do as a nation in terms of investment in the power grid. $1.4 trillion is the estimate here. So it's not a small -- it's not for the faint of heart. That's over the next 5 years. Feedstocks going into the grid, those costs are increasing as well, right? I mean we all know what's going on right now with the energy shock that we're going through here over the last 4 weeks.

Natural gas prices are up considerably. As those feedstock prices increase, right, that's -- who pays for that? We do. That's the variable cost portion. There's not even a question about that, by the way. Like when you look at the formulas. The variable cost piece comes right to us. The fixed cost piece is that's spread out over time. And again, we can go back to, okay, who really pays for that? Is it data centers? Do they pay direct, right? Should it be industrial users right? How do residential customers fit into that? Every grid operator every utility has different ideas on that. But at the end of the day, the result is the same.

Our prices are going up, and they're not going up a little bit. In that same decade where we had 0 load growth, they only went up 6% over that decade. The next 5 years, they went up 32%, right? So if you've got your own power build at home and you look at that, it's up 30-plus percent, some parts of the country more than that from where it was 5 years ago. Where it's going is even worse. The next 5 years is going to go up another 40%. Power costs are going to double, more than double in the next decade. That's the forecast. That's the long-range forecast. There's a lot of reasons for this, but in the end, get back to that simple economics, supply and demand, the investments that need to be made to grow the grid to accommodate all that additional load growth that's coming at us.

Now underpinning that is AI, as we said before, and you guys follow hyperscale CapEx numbers, but look at that chart, $650 billion, $670 billion pick your number, based on the major hyperscalers and what they've said they're going to spend. That's an unbelievable number. And we're seeing it both indirectly in terms of the impact it has on power costs and what that does for our business, but even directly, in terms of the backup power needed for these data centers that we're going to talk about this morning that we've been talking about for the last several quarters.

The addressable market for our products for backing up those data centers grows commensurately with the CapEx spending, as you would imagine. Every single project, almost every single project has some amount of backup power on it, right? Some of them are fully backed up. Some are a smaller percentage, depending on if they've got their own generating capacity that they brought along. Over time, though, we think that based on at least the near term here, that market for backup power on a global basis, about a $14 billion to $17 billion opportunity.

So obviously, a huge opportunity for us as a company. We're a new entrant in that market. We'll talk about that this morning, but it has major implications on where we're going as a company. So those are those 3 mega-trends, so lower power quality, higher power prices and then the AI-boom, if you will, in terms of what that's going to do to the grid and what it's going to do to our business directly. Those are 3 of the 4 mega trends.

The fourth mega-trend is all about infrastructure investment. Now we've been focused on infrastructure investment as part of our strategy for quite some time, right? But we're doubling down on that. And we recently announced an acquisition, a company called Allmand that does mobile products, temporary lighting products, temporary power products, temporary heating products. These are the products you need when you're rebuilding infrastructure. When that infrastructure is finally rebuilt, you want to harden that infrastructure with backup power, we also do that.

A lot of that in our C&I business, whether you're talking about -- you're talking about backing up the telecommunication sites, wastewater treatment plants, right, other municipal installations. We do all of that. You'll see our generators on -- if you go on toll rolls, you see them backing up at the tollbooth locations. You'll see them at ports. You'll see them again at cell towers along the highway. That's all critical infrastructure. And we believe deeply that this $100 trillion global infrastructure requirement, this investment that's required for the next 15 years, that they're going to need a lot of -- they don't need a lot of our products, both to build and construct. So that's our mobile products, and we'll talk about that, Eric is going to talk about that here. But also in the stationary products, to harden those infrastructure elements.

Our strategy is powering a smarter world. This hasn't changed. The last 3 years, we put this together 3 years ago. There's 3 main pillars of this strategy: improving energy resilience and independence. That's kind of, again, as I said, if you were to look at Generac over the years, maybe over the last 60-plus years, that might have been the only kind of leg of the stool, if you will, in terms of our strategy. It's all about backup power, all about resilience. Optimizing energy efficiency and consumption, though, was a new leg of the stool that we added several years ago, 4 or 5 years ago, with our foray into battery storage, our foray in the rooftop solar right, battery energy storage in larger formats in our C&I business, micro-grids.

Those are efforts that are focused on controlling costs, helping homeowners helping businesses not only keep the lights on as part of that system, but also reduce cost. And then as I said, innovating and protecting and building critical infrastructure, that's the third leg of the stool when it comes to our strategy, powering a smarter world.

Now new this morning. In order -- we've got a great strategy, but in order to execute crisply against that strategy, we felt that we needed to take the next step in making sure we've got the right organizational structure. So we made an announcement this morning and something we've been working on over the last several months to get our segments and get the organizational structure of the company set up such that it can feed that strategy and help us quicken the pace of execution against the strategy. Our 2 segments, as we debuted this morning, will be our residential segment and our commercial and industrial.

On the residential side, we're introducing something we call Generac Home. So this is the combination of our, I'll call it, our legacy consumer power business, right, home standby generators, portable generators, combining that with our energy technology businesses. Ecobee, Energy Hub Thermostats, right? Security cams. We've got all of our PowerMicro products, which are our rooftop solar products.

Our battery energy storage products, power cell. Those products all combined, and then obviously, the monitoring and management of those assets underneath all that, and Norm Taffe is going to come up and tell you kind of explain the system. But as you've heard us talk about this, it's an ecosystem. We see the future of the home is not just a single product to solve a single problem, right, like a generator.

You buy a generator because you're worried about the lights going out or they have gone out. That has been our approach traditionally. We've broadened that approach with the development of this ecosystem that works not only to protect your home your family, your livelihood, right, with backup power. It could be a generator, could be a storage device, right, something different, but also to focus on helping you control the costs of what you're paying for that power. That is the ecosystem. And to deliver a full ecosystem and to do it efficiently, we felt we needed to bring those groups together, okay?

So we'll talk a lot about that this morning, but this is kind of the unveiling. It's about that ecosystem. It's about bringing those distribution networks from both of those businesses together into a single energy distribution network, residential energy distribution network. And obviously, when you do this, there's a lot of operational opportunities when it comes to efficiencies. We can leverage our technologies across the businesses better.

We can leverage the people across the businesses better. for a more efficient outcome. And that's really what we're after those synergies that are buried in this, and we'll talk quite a bit about this morning. And on the commercial and industrial side, that's a global business for us, but we're working on improving the structure to increase the collaboration because whether you're building a 3-megawatt gen set for the Australian market or for the European theater, or for some part of the Americas, the South America market or the North American market. We want to make sure that we're leveraging our scale on the supply chain, right, in manufacturing, the technologies, the controls. They are at the heart of these machines. We want to make sure that we're getting the most out of that.

Same is true of battery energy storage. We want to leverage our supply chains and technologies there across our global business. And so Erik is going to come up and talk about that. In fact, he'll be up next to talk about that. but this improved collaboration took some organizational changes as well. So bringing that together into a more, I would say, a tighter format was an important part of these changes that we're announcing here this morning.

And it's aligning those reportable segments then to our strategy, right? So our former segments, domestic and international. And that made sense 10 years ago, we were new to the international markets. We acquired a company called Pramac over in Italy. That became our -- essentially the nucleus of our international business, and we've grown that business very nicely, by the way. It's a $700-plus million business on its own today. We acquired it, it was something -- it was $300 million, something like that. So we've more than doubled that business in the 10 years that we've owned it. And we've done that through organic expansion as well as additional acquisitions to go after other regions.

But the fact of the matter is when we think about our business and where we're going and how we want to line up resources here, we feel that these new segments of residential and C&I are a better representation not only how we're going to manage the company going forward, but also I think how we talk to the company externally. How we talk to the investment community about Generac and the differences in those segments, both the growth rate differences, the profitability differences right?

So I think you're going to get a different feel for that today. In particular, York is going to take you down that path to finish off here today. But those segments, as I said, if you restated 2025, C&I would be about $1.7 billion and residential, about $2.5 billion. I think probably the most exciting thing here, though, is back to that 59%-41% mix based on 2025 is what happens over the next 3 years. This becomes a much better balanced company. And I'm excited about that.

I love our residential business as it's not becoming better balance because residential is not growing, by the way. Residential still has some very healthy growth rates in it. right? High single-digit types of compound annual growth rates over the next 3 years. But our commercial and industrial business is going to have better growth in the low 20s in terms of percentage. So a lot of opportunity there that we're going to talk to this morning. Again, if we execute, and that it's not -- can't take anything for granted. We don't put anything in a spreadsheet or can I talk about this all time. If you put anything in a spreadsheet that can be true, right? But the execution phase here is super critical.

What I love about this, though, and I think about what we've been working on the last 5 years, as we got into some of the newer technologies, you guys have heard us talk about this, some of the challenges we ran into, right, in terms of just perfecting those technologies, becoming proficient in them, which by the way we are today, and Norm is going to talk about that. It took a lot more to get to where we are today than we thought it would when we made those investments 5 years ago. But we're there. right? We've got great technologies. We've got the latest technologies. They're competitive, market competitive, both in spec as well as price. Those are great technologies, but they were new to us.

You look at C&I, if you look at the majority of the growth here, that is directly in our wheelhouse and what we do and what we have been doing as a company. Yes, they're larger formats, larger blocks of power. But these are generators. We know how to do generators. We know how to do these ecosystems on the C&I side. We've been doing it a lot longer. I'm not telling you it's a short put to grow 20-plus percent on a compounded annual basis for the next 3 years in that business. But I'm going to tell you that we feel very confident in the quality of the conversations we're having with the customer base there that Erik will talk to is fantastic.

And if we do this, actually, the C&I business is just slightly bigger. We didn't do that on purpose, but it's slightly bigger than the residential business in 3 years. And I think a better balance Generac between C&I and residential, I think is a good thing, right? Because as we know, the residential market can be a fickle thing in particular, in our core markets, a backup power. Look what happened in the second half of last year, right? Things that are outside of our control. We know this. We think they're going to happen with increasing frequency and velocity. We just can't tell you when or where. And that sometimes is not what an investor in particular wants to hear.

We know they're going to happen over time. And for the long run, we think that we're in the right places in our residential markets. I think we have the right strategy but the C&I market, again, there's no short things in life at all, but it sure feels like this is much more closer down the fairway to what we do as a company and what we have done as a company from a legacy standpoint.

So with that, I'm going to turn this over to Erik and he's going to get you oriented, if you will, on the opportunities in our commercial and industrial business. Erik?

Thanks a lot, Aaron. I was going to kind of -- a lot of people are new to the Generac C&I business. Although the business isn't new to us. So I was going to walk through kind of where the products are, how it fits in and end up with where we're going.

So the base business has been generators, which is top left, we have a mobile generator product line for site power, light towers. Our battery energy storage systems are part of our multi-asset solutions and micro-grids. We have our own natural gas engines, so we drive and develop our own products there. And then in the controls and connectivity, we've built out all of our controls and integration in-house. And we do sell those products externally, but really helps us drive a better value solution for our customers.

And as Aaron has talked about the scale and the growth of the business, we've been investing in facilities globally. So right now, we're up to 17 manufacturing facilities in the global marketplace. Both covering the North America and international. We're serving 150 countries. And our strategy is to build and produce those products in the markets they're serving. So we try as much as possible to find scalable locations that can deliver a local market that brings density.

And over the last 5 to 10 years, we've built out a really robust global distribution network. So we're not just a North American market. We have over 800 partners globally that we're working with. And how we've been doing it. So the Oshkosh factory, we have legacy facilities. But as we found the investment opportunity, we just added the middle factory, our Sussex facility that's going online in Q4, really late Q3 to build that large data center product.

And on the right-hand side, we added the Beaver Dam facility to actually scale up our base business because that business has been growing very strong.

And then with the Allmand acquisition on the bottom right corner, that's brought us additional expansion for our mobile product solution. On an international standpoint, as you can see, we're in market for market, and we build the same or similar products and solutions but we have it there for customers, their unique needs, their unique requirements to deliver that just-in-time experience that customers expect.

Oftentimes, the products are very large, sometimes delivered in 2 truckloads or 3 truckloads. So having them available in the local markets gives us a very distinct advantage. So we look about the opportunity change, and this is what we're getting a lot of questions and feedback on is how is the large data center, large megawatt products change in the business. really, I think, first and foremost, it doubled the addressable market we're serving. So we went from a $14 billion market up to a $30 billion market opportunity.

So purely just on the scale of the opportunity, it's giving us a lot more chance to really grow the business. So when Aaron talks about the C&I business growing and being as large as the residential side, the market is there, and we just have to capitalize on the market. And now we've opened up a whole new leg of growth in the business.

So where do we serve and how do we cover those markets? So just a little bit of an eye chart, but it's really important to note, we have a multipronged strategy. So -- and it's not just large megawatts, small megawatt. It starts really with the go-to-market. So we go to market through our distribution partners in region. So those 800-some-odd distribution partners we have globally, but we also go direct. We pick those strategic pillars that you can bring scale and value by going direct with those end users.

So we mix and match to optimize the way the customers want to procure products, and we meet them where they want to buy their products. What's interesting to us is that when you look at our below 2 megawatt, which we've had 2-megawatt products forever, basically, when you add in the additional product lines, we're already selling in those generator market segments to those customers. There's nothing we're missing on that far left side on those end use. Now we're just bringing a different larger product to those same end customers and end-use segments.

It's giving us a really great opportunity. And we're meeting when we say we go direct. So we have 17 global branches not to mention our North America opportunity that we have here. So how does Generac win? Really, we differentiate our products in many ways. But one of the key things is we're fully vertically integrated. We manufacture, design and integrate our products for their end use. So we're not just going out and buying off-the-shelf components, packaging it up and delivering it. We design and produce our own alternators, we actually make our own natural gas engines. So up to our 1-megawatt gas product, that's a Generac natural gas engine. We optimize that product to meet the application.

Metal fabrication and customization, it's something that's really our strong suit. So we been cut and shape our metal in-house, and we're actually expanding this kind of Generac core capability globally. And so as we've taken on the Pramac team, we've added these capabilities and our in-house expertise to their scale. So one of the key things that probably isn't known enough, the brains of all of our products come from an integrated control solution. And really, the Deep Sea acquisition we made several years ago, unlocked a lot of capability. So we had our own controls platforms, but this just took it to the next level to not only design but also manufacture fully end-to-end in-house and bring that technology and that technology curve very rapidly to deliver end-use customer products.

So we're going through the process now. We've integrated all of these new features and products from Deep Sea into the Generac product line, and we're expanding the Deep Sea portfolio as well. So it's really a differentiated advantage because this is how the generators function or batteries function, we control those assets really through that control side. And that's something that's our own technology that we leverage in-house.

We talk -- we really separate the markets into domestic and international inside C&I. On the domestic front, we approach the market in 2 ways. We go through independent distributors. But also something we haven't really talked externally about is that we also own about 40% of our distribution partners in the market. And really, why do we do that? It was more opportunistic. It's not a strategy that we're going to go up and buy distribution.

As we wanted to grow the customer touch points and our connection with customers, we invested in those local markets. And by having this great geography and great coverage. So we cover every county in the U.S., every province in Canada, end to end, and we have our sales partners and service partners in those locations. And one of our unique differentiation is our elaborate service technician bench strength. So we have over 4,000 technicians to serve customers. And so when we talk to these large accounts, that's how we win.

Historically, in the telecom side, we've been able to provide service for the customers where they need it. If it's on the mountain top, if it's in a downtown location, we have service partners that can deliver it or maybe it's even the Generac owned store that can deliver that solution. And what we really try to drive is that customer experience. And a lot of our expansion on the own distributors has been as we've gone to energy ecosystems, expanding the portfolio, selling microgrids to customers, so not just backup power. How are they using the assets to peak shave, to cut their energy cost, to optimize their energy bills.

So we built out this distribution path and it's working very, very effectively. And we'll continue to evaluate where we go next with it. But right now, we really love our distribution partners, and they deliver a lot of value for customers.

On the international side, really what we've been focused on is expanding our branch role. So you can't -- when you serve 150 countries, you can't have 150 different unique experiences. So we're leveraging our sales branches. We've been investing there. We just added recently in 2025 in Australia location to actually have like formal brick-and-mortar to support our channel partners in region. So we've really been broadening our capability and exposure, leveraging our branch to get us in region and then leveraging local partners to win big and win better like in that specific market.

As we've done that, we've expanded our technician partnership to 800 servicing companies. So when we talk to a global hyperscaler, they know that we can provide a service support in that region for that customer. They're very confident in that. We built training centers globally to train in those markets so that our technicians are ready to support the products. And we've added engineering capabilities. So industrial generators are typically a specified engineered solution. So the customer has a problem and an engineer comes up with a solution to solve that. And we've invested a lot in building out that engineering capability within the region.

And I mentioned earlier, leveraging the Generac playbook. So we're making a lot of investment to in-source all the previously outsourced components that the Pramac team had done. So now they're doing vertical integration just finished launching a new facility in Italy to in-source all their sheet metal fabrication to really want to deliver as a faster speed to market, but you also control your experience for the customer. You can have the products ready when they need it. And we'll continue to invest in vertical integration and expanding what we deliver as part of our value solution for customers.

So we've been known really as the leader in telecom. And really, there's multiple different segments of the telecom space that we participate in. This is really a global effort. But we're talking specifically here about North America. And a lot of our North American customers are global, and we're winning outside the U.S. as well. But we're the market leader in the macro towers and the CRAN Hubs.

And we provide products and solutions customized for those telecom customers, and we have a great support network. And really, as they're expanding their network and their products, so going with larger edge data centers, it's a growth opportunity for us as well. So when we talk about large data center products, it's not just for your traditional data centers. It also ties in and connects very closely with our telecom customers. And we're leveraging that customization and solutions that we've done with telecom as we jump into the data center space it crosses over very, very well. And we'll talk a little bit later on about edge data centers and how we're expanding there.

But this telecom opportunity, as Aaron mentioned, it's a critical infrastructure. people really just can't function without it. A lot of emergency communications. People don't go to the radio anymore. They want the alert on their phone. And so this critical infrastructure is being backed up. It's still underserved. Less than half of all cell sites are really fully backed up. And so the market continues to grow and expand, and we're well positioned to serve whatever segment of the telecom channel is necessary.

Rental equipment. So Aaron mentioned the Allmand acquisition. So in January, we acquired Allmand. It expanded our breadth of products. We've had mobile generators, mobile light towers and mobile heaters. This expanded it more, but it also gave us some scale and footprint, additional manufacturing capacity to better serve the market. It's been a great complement to our team, and it didn't really overlap. So their customer segment didn't overlap with Generac legacy customers and neither did the products. So we had similar products, but serving different market applications. So that's been a great addition to the team and really it ties into our global presence.

We've built out over the last few years, this global mobile business that we haven't really highlighted just like we haven't hired C&I, that we're serving infrastructure markets globally. We have the most robust product line in the world, light towers, mobile generators, and we're serving that through multiple channel partners, both North America as well as internationally. And there are some key themes that are really driving the growth in that business right now. fleet replacement as we came out of post-COVID, that cycle kind of missed the fleet replacement as people weren't sure what was going to happen. And then there continues to be a global shift on rental versus owning. So on large capital equipment, a lot of construction companies are switching to that rental model, which benefits us as we deliver great rental solutions and our products are what we call rental ready. They're more robust than a typical generator. It's ready to be dropped on the site and used in live construction.

So now jumping into really the data center side. which is a lot of what I think most people in the room want to hear about is what Generac is doing on the data center space and how we're going into it. And I want to start with what are the products and solutions we have. And really what happened, the bottom 3 right nodes are the only ones that are new. And as we look at data center business, we've been covering the product lines with our existing -- or the market needs with our existing product lines.

And it's not just a diesel generator play. We've been selling and promoting and marketing natural gas generators in the data center space for years. And so we cover all the different end segments. And we're actually very strong on the edge data center market. We built a lot of custom solutions for edge data center customers. And in some cases, like it's this 500-kilowatt Well, a lot of the edge data center sites are 2 megawatts or more. And oftentimes, they'll actually take multiple units to have redundancy.

So we pick 4 units, just like on a large data center, they're actually taking multiple units. We'll put 4 units on 1 site for that edge compute to optimize that performance. On the small-sized data centers, maybe it's a self-consuming data center, it's your own data and your own location. We've always had products to serve that. And really, even on the large side, we typically tapped out around 60 megawatts of power on a site. But as the generators have grown, customers desire to reduce the number of units on site has increased.

And so we've now built out, as we brought in the product last year, we've launched and started shipping those products. And now we can cover all the way up to and by the end of this year, a 4.25, 4.5 megawatt range and building out the portfolio as people try to shrink the units on site. So we'll jump into a quick video now, and I'll come back.

[Presentation]

I think one of the unique things about the product and why we like to show it is it is different than what you think for Generac, where a lot of people think portable, Home Depot, home standby. That's an 80,000-pound unit we started production last year in the second half of last year, started shipping products, and we're going to continue to grow and expand. And so what I'm going to talk about now is why we feel we're going to be competitive in that market space.

How -- I mean, we're already winning now and how we're going to continue to win and grow and really build out our capabilities and our partners' capabilities. So I think I brought up the earlier topics about our vertical integration, things like that to show we've demonstrated it. It's not like we're new to the generator space.

We were selling a 2-megawatt generator. Now this one is a little bit bigger. So we have this controls leadership position. So we're actually able to adapt our controls right over it directly correlates to the larger generators. So we're leading really with that innovation, and I'll talk a little bit later on, but the multi-asset solution and integrated solutions, we actually have a robust portfolio, probably the broadest in the market for integrated solutions, combining best microgrid controls transfer switches, switch gear and providing integrated solutions for customers. And we can talk about solutions for them, not just a product, it's not just a product we're delivering.

So execution at scale. If you looked in the past, our ability to ramp up, build product fast, you probably heard it more publicly on the home standby. We've had a big store. We ramped up our capabilities. We've been doing that on the C&I side for years. And we've already launched new factories in recent years and expanded our capabilities and portfolio. So we know we can ramp up our capacity to deliver these solutions and we know how to build generators.

And right now, by delivering them much faster than anybody else in the market, it's got us in the door, and then the rest of the work is going to be how do we prove that we deserve to be there, which we already are by a lot of the product innovation we're doing.

Operational excellence. Our vertical integration has the ability for us to actually help -- it helps us shorten the lead times. We actually know how to work with our channel partners, whether it's an alternator manufacturer or the in manufacturer to develop a plan on how to have materials ready when we need them for the customer to really optimize that agility that we have dynamically delivering products and solutions to customers.

Strategic partnerships. So we actually have a broad portfolio of customers we've been working with forever. So EPC firms are not new to Generac a lot of the developers building data centers, they built other products, and we're a partner of them already. So we're not new to them. So we're not a big concern. And the Generac brand name being public traded, Generac is a global company, we're well known. And so the objections that a lot of times people face entering a new market wasn't there because people know who Generac is.

So how are we winning? And this is really a mixture of 2 things. We're leveraging that. We talk a lot about technicians and customers need support. So North America, we have over 900 technicians that are able to support the data center market, the end market, and we have 400 dedicated data center technicians. On the international side, we have 800 service partners, and they're all able to support these products. And when we talk about support, we were trained up on the engines. We're trained up on all the technology needed to keep the uptime we have a vast distribution network for parts and aftermarket so we can serve customers where they need it. And we're also doing it on the technical side. We're responding quickly to bids. We're providing a great experience for the customer from cradle to grave. So from the time they conceptualize a project, we actually have the engineering resources and capabilities. We've been expanding our team, so we've rapidly grown over the last 2 years.

So it was probably new to the markets that we were actually investing in the data center space. But we've built this out over the last 2 years. So we have the people, the team, the application engineering that can actually deliver solutions for customers, and they're appreciating it right now. So one of the keys to be successful long term is to have these great maintenance plans to be able to fix units to corrective action. And we built all this out in advance. And we're really leveraging our distribution partners, both in North America as well as internationally.

The emergency response capability. We're leveraging telematics and solutions to actually know when there's issues with products and getting a solution there in time. Our network operations center works 24/7. And so we actually have had all these things in place because that's been required of telecom customers. And so really, the actual scale is much easier to manage. Instead of 20,000 telecom units, it might be 20 of a given large megawatt unit on a site. So we've actually been able to easily address this using our leverage scalable systems and really managing the experience for customers.

So we're approaching the market and the co-locator kind of the left-hand side, there's a colocator developer bucket and then hyperscalers. And there's 2 different ways to approach it. On the colocators side, so a lot of these people, we've already been doing business with. Now we're bringing larger products to them. And we've already been in there because they're familiar with our brand and the solutions we provide. We talked to them about full energy solutions. And you'll start hearing more and more in the end markets about multi-asset solutions on data center sites to optimize energy efficiency, optimize consumption and actually manage the grid challenges that are out there. And we are front and center with that market because we through some of our acquisitions, we've built out a portfolio of products that deliver those solutions. And then we provide that great customer experience.

We we're the underdog, and we're actually fighting for their attention and peace of mind and giving them great service. And so we're winning there. And we're building out a great pipeline of backlog just from working with the colocators. The hyperscalers is a little bit different type of situation. There's a much more rigorous process to get on an AVL. We're starting out. I would say we're in late innings now moving very far along, but the process is actually long.

And I think after we launched it, we were entering the space, a lot of people expected our very next earnings call, we talked about the great backlog and how we're building. But it's a robust process that they're requiring of all their suppliers. And it's not just the product and having a product that works, but it needs to work in their applications. So we're doing a lot of product validation right now, testing, durability analysis and then actually getting our processes checked.

So we have a lot of great capabilities, and now we're having to provide that and document it with the hyperscale customers. And we're moving into the pilot stage with customers now, and that's where we'll actually be showing our capabilities to deploy projects to sites. And hopefully, in near term, we'll be actually talking about global supply agreements publicly.

So I mentioned backlog, if you haven't looked at the slide. So from our last earnings call, our backlog continues to grow even as we're shipping product or up to $700 million now of backlog, and that continues to grow on a daily basis. We're deploying projects to sites. Example here in the photo 37-unit location deployed. We're doing global deployments. So outside of North America as well as North American deployments for the product.

And I think what gives us confidence, and Aaron mentioned earlier, the there's many different data points on what the market size is. But when you talk about a $14 billion, whether it's $14 billion or $17 billion, there's a great market opportunity, and we feel avoid by having a great product and we can competitively deliver based on lead time. And so as we get more into the market, our confidence and capabilities to support the projects is getting greater and the visibility into the overall market opportunity is actually giving us more confidence in this $14 billion to $17 billion market.

So what are we doing in North America? We realized very quickly that we actually, not to say we caught lightning in a bottle, but it came very quickly, and we needed to increase our capacity. So we've increased our Oshkosh factory, which was building our large megawatt units, and that wasn't enough, so now we actually started our Sussex factory. That will be online by Q4 at the latest this year. And we're fully underway on getting that factory up and ready to go. Just domestic capacity alone, we're sizing that at a little over $1 billion in available capacity. And those of you might say, well, why don't you have more -- why aren't you delivering more this year?

A lot of these customers are on 18-, 24-month purchasing cycles. And so we're filling in slots, and I should have mentioned in the backlog, in '27 and some customers are booking out to '28. So longer lead time product. And then on the international side, we actually have 4 facilities that can produce the products. And so we're up and capable Italy, India, China and Mexico to produce the products. And actually, even for North America, Mexico is an option as we need additional capacity to bring products from there into the U.S.

So we're sizing our capacity to meet the market needs. And I think as you've seen, we'll continue to invest and grow our capabilities as we have visibility into the requirements. So right now, we're sizing it at roughly $1.2 billion of capacity, but we're willing to invest more if it is justified. So talking about investments, we realized early on that the packaging could actually be a big bottleneck for us. And the open set generators, which are some of the photos we've shown already, they get delivered to a site inside a custom enclosure based on the customer specifications.

And that's where the Enercon opportunity came about. They were a supplier for us, and we were working with them. And we decided that based on the scale and how the market was growing, we need to vertically integrate that and bring that capability in-house. And really control more of our own destiny. So it will allow us to deliver to customers faster and invest at the scale we need to meet customer needs. It expands our margin portfolio. So instead of a pass-through cost on the product it will actually will be able to generate margin on the sale of the enclosure and really meet customer expectations where they need it.

With that, actually came switchgear capability. There's a lot of switchgear and electrical components built inside these enclosures. And that's an area that we didn't have a really robust product line on switchgear that opens a different market and actually now expands even on our multi-asset solutions, where we're selling a microgrid will now have in-house capability to develop our own switch gear to deploy with the products. So we're planning to close in Q2, and we did actually get approvals to close, so regulatory approvals are done. And so sometime in Q2, we plan to close the deal, and this will help accelerate our presence in the market.

So I mentioned earlier we're going bigger. So we're actually in full development right now of the next larger product. And by Q4, we'll have the open order board to start booking backlog for the large up to 4.25-megawatt products. This is changing the product road map that we had. A lot of the customer sites, they're actually going to higher voltage sites. So what we call medium voltage. And this allows them to go to the higher larger-sized generators. In the past, they were limited at 480 volts. And so if you went to a 4-megawatt generator, you actually couldn't match that voltage. And so now, actually, as they're increasing voltage capacities on sites, the larger generators make more and more sense. And so we're building out that product line, and we're excited to have that in the market later this year.

So data centers are not just a generator play. So we're actually working with quite a few customers on multi-asset solution. You might have seen we had a press release with EPC power, and really, there's 2 big requirements on why we're seeing a need to actually use batteries and multi-asset solution with data centers instead of just backup generators. So buffering volatile AI loads. So a lot of management of the energy, you'll go from 100% down to 30% and then back up very, very quickly. Generators or even grid infrastructure has a very difficult time keeping up with that. And a lot of the bridging power applications where people are bringing their own power to the site, a turbine can't react at all of that. It's a fixed load. And so we're seeing more and more requirements for the ability to buffer AI loads for the facility infrastructure.

And we're pairing that with generator switchgear and this unit that you see on there to actually provide the seamless ride-through so that the equipment doesn't see any fluctuation. And then talking about ride through on utility ride through specifically, down in Texas, they've actually passed legislation that the data centers cannot drop off the grid. So a lot of times and like prior to this bill, if there was volatility in the grid, so frequency drop, the data center would disconnect from the grid and they would go on generator mode because they want stable power coming through.

Well, the grid operators are saying, hey, we can't manage that to lose those large loads. So now they're requiring the data centers to maintain pulling power to their buildings. And by doing that, they need some more for that power to go because they can't afford to stay on a volatile grid and have surging in the building.

So they're dropping on a generator power and then they're charging the batteries from the grid, so they maintain that grid control grid flow. It's a great application for a multi-asset solution. And it's something that we've been doing on all of our microgrid and multi-asset sites already. And now we've scaled it up and working with EPC, we have an inverter that we can actually manage that and manage that 2-way communication and dispatch of power. So it's been a great experience for us. And it's early stages on it, but now that we're seeing more and more requirements for data centers to have batteries integrated in their solution rather than a traditional UPS product.

So we're really proud of our multi-asset solution portfolio. And really, we've built that over time. And it hasn't probably gotten a lot of press and publicity. So we talked about Deep Sea, bringing that controls the brain, the interface. We're adding Enercon in for switchgear. SunGrid was an acquisition a little over 2 years ago now that we acquired a battery energy storage company that developed integrated solutions with batteries and inverters. And then we added Refu store, an inverter manufacturer and battery packager in Europe. And then the Ageto product, which is our art control, so the microgrid controls. So these controls and the capabilities are what we're leveraging to take advantage of these opportunities with data centers, but also in our multi-asset solutions.

We're seeing more and more customers trying to take their power requirements in their own hands. Optimize power price, optimize availability and uptime and really control their destiny with power. And depending on where the customer wants to go, we have a solution that matches what they need. If they just need pure backup power, we have our own transfer switches and traditional generator or more complicated up to the end where you're integrating all the assets we have and they need into one site, including transformers. So this is a growing market, and we see as power prices become more volatile and power availability is more volatile. We'll see more and more customers go to really behind-the-meter multi-asset solutions and microgrids.

So how do we control it and optimize it. Generac Link is one of our proprietary platforms. And this is how we provide the customer confidence I talked earlier about the telematics solutions. This is our own in-house telematics solutions, we can actually control and optimize assets. So not just monitoring health, but if they want to dispatch their product into the open market. So they have excess power available and they want to run their generators. Our system is actually designed to actually be a dispatchable asset.

So we'll actually control. And we do this for large customers. The product solutions started for hospitals, controlling 500, 600 assets on one side. And so it's a scalable product, but you can turn it off and on and send commands to the products to create the optimization you need. And so we're actually grid users, grid managers are actually using our product to manage their dispersed assets. It can work on any of our competitors' products as well or other assets, anything that consumes or generates electricity. But really, it's our own system that we're using to optimize our performance on site.

And we're leveraging that with our next-generation AI to fault detect, to find what's going on. And when there is a problem, actually advance tell the customer or their technical support, you have a problem with your product. These are the recommended solutions. And there's a whole AI schematic tree that will actually walk them through how to troubleshoot fix so they don't have any downtime. So we think this is a great catch all for like in the back end of the systems to make sure customers have confidence that the products can be deployed and delivered successfully.

So global growth drivers. So Aaron talked earlier and kind of stole the thunder on this, and so we didn't even put out 2028, how big that was going to be. But the plan is to grow the business, basically doubling the C&I business. And really on the backs of one big driver is the $1 billion global data center opportunity. That's a big opportunity, but the rest of the business, actually, there's many key drivers in the different markets rental refleeting, telecom sustained growth and a broader portfolio of products actually for our legacy C&I stationary business that gives us great opportunity and then the growing emerging market for multi-asset solutions.

On the EBITDA side, right now, we're starting at a low base. As we get more operating leverage from the volume we're planning to get accelerated drop-through as well as the data center margins are accretive overall to the current EBITDA that we have. And we'll continue to vertically integrate in our own factories but also with acquisitions strategically, building M&A around it and continue to manage and optimize supply chain to improve our profitability. So in a nutshell, that's how we're going to move. So we're going to grow our EBITDA on a 20% CAGR or our top line and then grow our EBITDA to mid- to high teens.

And with that, we'll turn it over to Kris before break.

We'll take a quick break. We'll plan to be back here around 10:05. A 15-minute break.

[Break]

Good morning. I think we're all back together. So let's go ahead and get started again. My name is Norm Taffe, as Aaron indicated earlier, we've made rather significant organization change in the company. We formed a group called Generac Home. And it's more than just the combination really of our energy technology business and our consumer power business into one, it's really the full integration of several companies that we acquired 4, 5, 6 years ago. It's almost at least 7 different companies have been integrated together and now integrated into our core home standby generator business.

So I'm going to talk a little bit about that integration as well as kind of the overall technology envelope and the opportunity, I think it provides us for delivering solutions to homeowners, then Kyle Raabe is going to come up here and spend a lot of time focusing on our real core business, which is how do we grow and continue to grow our home standby business. And I'll come up for a couple of slides at the end, just to wrap up kind of where we see the financial model going for what we are now a single organization called Generac Home.

The other strategic reason we do this is we really have been building out the ecosystem Aaron talked about and building out an ecosystem so we can provide what we think is a better experience for homeowners and an experience to solve home energy problems that aren't just resiliency but also our savings. So if you take a look at kind of what I would call the business reasons behind the reorganization, First and foremost is that we were already seeing a convergence from a technology perspective.

In fact, maybe 18 months ago, we started to combine our software efforts internally just because it didn't make any sense to build a software platform from homeowners differently in one group versus another. And we can get a lot more efficiencies and build a solution we think has much more value to those customers from a technical standpoint. Also on the hardware side, we'll talk a little bit later and Kyle will talk about areas where in the interconnect to the home, the 2 sides of the business, the solar side of the business as well as the generator side of the business, we're going toward the same solution. And we can actually get great efficiencies by combining those.

At the same time, the changes, particularly in the renewable market had also led us to consider a recalibration of our spending profile. So what we wanted to make sure we did is in the combination, we could get efficiencies, allow us to put more leadership focus on growing our core home standby business, while at the same time, taking advantage of the new technologies that were part of the energy technology Group and apply them to a broader market.

And of course, along with that, becomes increased efficiency. We literally had between ecobee, the energy technology -- other parts of the energy technology, consumer power Three separate customer service organizations, the sales and marketing organizations and more than that in terms of engineering organizations. Now in some cases, that makes sense, right? You do need expertise in specific areas. So there's some of those engineering organizations have to stay separate to an extent, but there's an opportunity across the board to do a lot of combinations here to gain efficiencies both improve our effectiveness, deliver better solutions to the customer and also save money.

So that's kind of the core business rationale for why we made this change. And that's what's important from a business perspective -- it's also, we believe, a path to delivering a better solution for the homeowner perspective. So let me at this point, move to a video to give you a little bit of flavor for why we think that's powerful.

[Presentation]

Okay. I think the video kind of represents part of the vision of what we've been talking about for quite some time. The graphic at the top here -- coverage Generac for a long time, probably seen it for quite a while. We've been talking about home energy ecosystem for quite a bit of time. I joined the company 3.5 years ago, and this vision was already in place, and we were buying companies and trying to build -- had bought companies to build this vision. I think it's important to note that this is not just on paper anymore.

In fact, we really have built a very powerful portfolio of products, everything from a brand-new version of our home standby generator, which has much better connectivity and supports an ecosystem better, new portable products, new products in the solar space in the storage space. And then really at the center, a brand-new software platform to support it all. And even some projects we didn't envision originally.

Now I won't say that the market evolved exactly as we expected as we made these investments, that -- a lot of that stuff changes. But it doesn't change the fact that we now have a capability to offer both customers and dealer partners a huge array of solutions for their needs, not just resilience needs but their ability to save money and had all lower cost solutions.

I'll also say I've been around long enough that as much as markets shift in one way, before you know it, they might just shift another way again. And I think it's from a portfolio perspective, we're very well positioned to react to changes in the market. And one thing I know for sure is that energy and home is becoming more important than ever to consumers.

Aaron talked about the -- these 2 megatrends as kind of the core megatrends. The power outage over time, which has always been the core of the company in the past because we're resiliently focused, but also about the dramatic changes in energy prices. And I think this graphic is kind of amazing. You can see how level really things were, just 2015 to 2020, how little pricing really changed overall. And then the dramatic changes that have happened in the last 5 years. And Aaron showed the data that said this is actually going to accelerate even further.

Now I can tell you on the energy cost, I was from the solar industry, semiconductor and solar previous to this for quite some time. And it's probably about 10 years ago, we had -- one of the challenges we had in solar was we had done a survey at the previous company. And the survey determined that the average homeowner in the U.S. thought about their electricity built, 7 minutes a year. So one of the problems is we were selling on savings and nobody really thought about if we paid the electric bill.

I guarantee you, people are spending more time than 7 minutes a year today thinking about their energy bill, and thinking about their home energy. It's just totally changed. The headlines, you never heard about it. It was just something that just worked. You didn't really worry that much about it. But it's just changed so significantly. It's now suddenly headline news.

That -- the concentration effect that power goes more likely to go out and the power prices are going up is getting the attention to consumers. I think we have a great opportunity to give consumers a path to solve both of those problems with our portfolio. From just a pure market standpoint, it's also a great opportunity for us. Today, we have roughly $7 billion in 2025, a $7 billion SAM across the businesses, whether it be the power generation piece, solar and storage, or ecobee energy piece. Those are all growing over the next 4 years. We see a growth from about $7 billion to $12 billion. In the case of the solar and storage grows the most, part of that our SAM increasing. There is -- the market is, in the short term, has pulled back a bit, but it is going to recover mainly for the same reason we just saw in the previous page.

The power prices keep going up and solar prices keep coming down. At the same time, in our case, we had previously not really participated in the inverter or microinverter side of that business, and that's a new SAM form. So that drives a bigger SAM for us going forward. But in power generation as well as the ecobee energy side, we also see growth in those markets. I think for us, strategically, we kind of have 3 things we're focused on. One, and first and foremost, and most important, continue to drive the growth of the home standby market, where we are the clear leader, it's a very profitable and great business for us. And a lot of the technologies we built here, we believe, will help us do that further, and that's what Kyle is going to come and talk about primarily.

In the solar and storage space, it's a market we're still quite small. It's an opportunity for us to gain share in a growing space. It's an opportunity for us to deliver solutions which lower the customers' -- homeowners bill as well as providing some resiliency while our resiliency is primarily served by the home standby business. And an ecobee continues to grow, keen you gain share and has become a very nice business on its own. It's a nice market, #2 player in the space, gaining share. But at the same time, it also provides us an ecosystem, which we think we can leverage across the whole homeowner solution.

If I spend a lot more time talking about ecobee, this is really turning to be a super valuable asset to us. I think we were attracted to it because from the beginning, it was an award-winning technology. Any kind of 10 best or year's best awards, wire cutter or seeing good housekeeping. Almost always right at the top, best smart thermostat in the marketplace, and that continues to be to drive both customer loyalty and market share gains.

We're now in 5 million connected homes today. So there's more than 5 million thermostats out there at those homes. We are now 5 million homes that are connected. And now we've crossed the point where 1 million devices are enrolled in grid services programs. That is in addition to the business of selling the thermostat, that's ongoing revenue, which is highly profitable. Overall, we -- in the end of '24, we had our first profitable quarter. Last year, we had a full profitable year, and we're going to continue to grow that profit this year. as we grow market share, we think we took about 400 basis points over the last 3 years of market share. We're a strong #2 in this space. The GM gross margin in this business is higher than the overall margin of the company. and about 10% of the revenue -- just under 10% today is coming from recurring revenue streams, which over the time of the period, we expect to grow to over 15%.

So that recurring revenue is not only more profitable, but it's a healthy based on ARR base for which to grow on. The other thing that we don't talk as much about, but also fuel some of that growth is that we are seeing great partnerships with companies like Carrier and more recently, Ream, where they've sort of made the conclusion that as an HVAC supplier they would be better off OEMing a solution with us, in the case of Carrier dual marking that solution, Carrier and ecobee and offering that to their customers as a solution. So that they can deliver customers a great experience. They don't have to develop it and they get all the benefits of that.

So on its own, ecobee really has been coming just a great asset and an independent asset. But I think for from a perspective, both strategically and the vision right from the beginning, it's far more important to Generac than that. It really has become what we call the energy hub of the home. We've really based all of our software, as I mentioned, while we're announcing the full integration as part of the announcement today, the reality is on a software perspective, we started this effort about 18 months ago, where we built a program we call common platform. We started to combine groups within energy technology as well as consumer power to build the software platform that unifies that experience because we thought we could deliver a much better experience.

It also just made it way easier. We had it shows 3 apps here. I will tell you we had 6 different new customer apps between all these different companies that we purchased. We're able to combine all that into a single experience on a platform that was already award-winning. And so this ecobee Generac experience, takes advantage of the fact that, that was a world-class platform and start to provide consumers that experience. It's also super differentiated because you don't just have an app in your hand, everybody's got an app, but you also have an app on the wall, an app that allows your consumer to engage not just the individual, but the whole family with no -- you don't have to log in. Nobody has to have the password. They can see what's going on with the energy of their home. And it really drives an engagement, which we think is a long-term benefit.

And that -- one thing I'd like to say about this product in the equity. Sure, we'd love everybody to buy everything in our portfolio, and they will work together and there's a benefit for that. But this product actually makes every individual product of ours better. It makes our generator experience better if you just buy the generator, it makes our storage or solar experience better. All of them are better. It gets better and better you had more, but this is something that's a deposit differentiator no matter where you fit into the Generac puzzle. And then on the other side, and we don't talk as much about it, but for some of these businesses is arguably the thing that drives the buying behavior more than anything else is the dealer experience. the installation experience. And this actually has been fully combined.

Today, even with our latest home standby generator that Kyle will talk more about, but we introduced last year, it already is the same installer field pro experience based on that common platform. And that, in the end of the day, when dealers -- what they care about is how efficiently I can get into that home, get this installed and move on to my next job. And so the improvements and being able to take that entire organization work together and build that best experience for the dealer is often just as powerful as being able to provide that to the customer.

And I think that's kind of where we are right now, and that has, I think, had really strong implications on improving our experience. And we just had our annual conference in Florida at the beginning of the year. And across the board, the -- particularly the Field Pro is seen as just a huge step forward in the ease of doing our installation and doing their job with our products. And it's one of the things we think kind of creates a bigger and bigger moat around our core home standby business, a better experience for consumers to take advantage of.

I also think one of the things maybe we didn't anticipate at the time these acquisitions were made is that the advent of AI is going to make that fundamental, I would say, capability even more important to the future. We I will say, and I'm an engineer for a long time. I haven't seen anything like the productivity increases that this is done from an engineering perspective. It is -- it really isn't -- there's areas here where I'm worried about hype -- the engineering productivity and part of it is not hype. It is really impressive.

We've been able to do things in so fast in that integrated software group without -- actually the product management team has a hard time keeping up with development because development is able to do so much on their own. This is -- one thing wrong with tough about is it's really hard to do in a Justice on a PowerPoint swing. But this is something that we actually started working on end of last year, and we're already in beta test with 500 of our customers now, and we will introduce really the second half of this year.

It's just an assistant called Ask your Home, it's what we're internally calling. We'll probably have a different name when it comes out. But it's a way for to take stuff which actually is quite complex and sophisticated and just make it easy to use. It takes -- it allows you to optimize savings, resilience comfort all from just asking questions and not having to understand how any of this stuff works. And it's another platform for increased customer engagement. And I'm just going to -- for me able to read kind of this just example. If you have the system like the beta testers that have these systems now the prompt here is just how can I get ready for the storm coming.

The system automatically knows where you live and says, here's what we see in your area, what to expect, we expect power outage and 8 to 12 inches of snow with 40-mile wind. Here's our recommendation. We think you should -- would like to check your generator and check the fuel levels to make sure that's ready if it's needed to run. We'll change the battery mode to build optimize -- from bill optimizer to self-supply that's going from a place that focus on savings to a mode that's focused on better resilience. And update your reserve percentages. And we're going to go ahead and preheat your home in case the power goes out. That's our recommendation that just immediately within like 10 seconds comes back to and just ask you, would you like us to go ahead and make those changes that'll come back in about 15 seconds after that. If you say yes, and sent say your generator is ready to run, your propane is at 88%. Your battery has been switched to self supply. You should have about 22 hours for your -- based on your home usage. And the thermostat has been reset to 74 degrees. So it will be warm in case you lose your power.

So it's taking -- doing a lot there and just doing it really simply. And I think that as that investment on software has become both more of a differentiator going forward, but it's also going to become something, frankly, that users are going to start to expect. And so that's, I think, a key element of what that effort has brought us.

All right, I want to talk -- spend a couple of slides talking about some of the new elements to the portfolio from a hardware perspective and a market perspective before I turn it over to Kyle. The newest element from a hardware or for market for us is the introduction last fall and the beginning of volume shipments this quarter, the first Generac-branded microinverter called PWRmicro. Now this is 4 years in the making. We -- I would say, at least Aaron didn't expect it to take 4 years. But the reason it's 4 years we're making is this stuff is really hard. There's a reason why in the microinverter space there has been 1 company for a decade.

And the reason in this space more than anything else, it's not performance, it's reliability and quality. It is really hard to make something that lasts 25 years on a rooftop in Arizona, or a rooftop in Maine, that has to be in ice or in the summer, it has to be in 160 degrees and have it to really last 25 years. And the mistake a lot of other players have made is not making the investment to match the quality that, that market absolutely demands and actually has come to expect.

We have made that investment. It's that infrastructure investment was a significant investment that put in place a huge reliability capabilities and testing facilities and really it's like chambers, et cetera. This product before introduction or ad introduction has already gone through 2 million hours of reliability testing. By far the highest tester product in our company's history, and it's higher -- more testing than most products anywhere because of the difficulty of the environment.

That's really what's necessary to be in this space. But when you get on the side of that, it's a huge barrier to entry. My favorite thing is a barrier to entry is when you get to other side of them, you love having them. And so it's really put us in a position to where we have an incremental opportunity in a very high-margin space. to not just support resiliency at customers but to offer them a path to lower costs as utility prices go up because solar is sold on savings. And as the prices of the utility prices keep going up, more and more of the country is going to those savings. Incentives are not. It doesn't -- at the end of the day, much of the market would still see savings with solar. It's taken a bit of a step back. But as those prices go up and frankly, in some ways to have the incentives in the back will be good for the industry. We expect solar to continue to grow again.

And so this gives us an opportunity to be -- to take a part of that. On the other side of the incentives on the positive front, these are all manufactured in the U.S.A., the parts of the incentives, the 45x incentives. That have been preserved in both administrations, they continue to contribute this and also allow the cost structure for this to be very, very strong. So it's a great incremental high-margin opportunity for us. On the battery side, we introduced last -- earlier last year, PWRcell 2, which is a complete redo of our battery system. Back, Aaron made the comment we learned a lot. This is one of the areas we learned a lot to improve the product so that we have a solution here, which is complementary in many ways because it does some of the same resiliency capabilities that you get from a generator, although it is a shorter-term resiliency capability.

Interesting in this space, we actually see a lot of attention partly because of our history, it's Generac, and people wanting to have a battery to make their solar to improve the ROI of their solar because in some states, that actually can be quite helpful. But also want to pair it with a home standby generator. And the reason that is, that's your ultimate backup experience. You have the quiet seamless backup experience of a battery, where you don't even notice the power went out, your apple tell you, the power went out. But batteries have a certain amount of time available. If you really want are worried about lasting through more than a day or half really more than half a day, having a generator allows you have really unlimited duration and get the best of those worlds.

Now some people have said to me your sales we said, they really want to buy all that for a solution. Is that really realistic. I'll give you a data point, which about competitors batteries, the market-leading battery company that in terms of solar batteries, the average number of power walls, I'll just say, that were installed, is closer to 2 than it is to 1. Average number at home. That tells you that more than half the people or more people are putting 2, 3, 4, 5 multiple power walls that are just putting one. The 1 is there to make your solar more efficient. The other batteries are there because you want to go through resiliency.

Well, I can tell you, if you're starting to stack a bunch of batteries, you're way better off putting 1 battery for the solar and add a generator with whoever is battery it is add a generator for long-duration resiliency because that actually solves the resiliency problem while you use the battery to lower your cost.

And so we see a lot of people. And that isn't by the way, new with us, that's been done, Generac have been used with resiliency and batteries before. We're seeing an acceleration of that. And of course, our distribution network and sales network is really familiar with putting the generators in. So that's an opportunity. We see them pair together that does give you more of that full ecosystem experience. It's also just a great margin opportunity for the company.

And in my last slide before I turn it over to Kyle. While we are excited in their own right for these new opportunities for us, like in the microinverter space to add incremental business, really, the integration as well as the development of software stuff really then building around our core generator business and making that experience both more -- a better experience for customers but also building a better moat around us versus competition in that space.

And Kyle's going to go in a little more detail, but some of the areas like from a differentiation perspective that came from the IT side, and in some ways, more compelling on the generator side. If you're in the solar business, you know about things like a meter switch or other people call it a meter collars. It is for the places that they've been introduced there has been almost a 100% switch over to this approach. This approach essentially eliminates the transfer switch install and makes the installation itself of moving the ground wires, all the wires in the back way simpler.

It literally plugs right into the meter, and it saves hours on installation time. And so it's become standard in areas for solar. It's brand new and the generator stuff and Kyle will talk more about that. Same thing for the generators. The smart breakers he's going to talk about. And of course, I talked to it about the benefits of ecobee brings to that space. So the innovation there is both making our generator business is more affordable, but also more differentiated. In the centered, one of the things we're also seeing is a lot of interest from people say, look, I want resiliency. I believe generate is the best thing for silent but I also want to save money. And one of the challenges we always have on generators is when you're just selling something resiliency only, there's really no economic case for that.

However, if you could -- if a customer is open to saying, I'm going to put solar under roof, we can make a case that essentially the savings from solar more than pay for your generator over time. And so that combination building to be able to talk to customers about solving 2 problems, solving your savings issues, your cost issues, but also given your resiliency is a super compelling combination.

And then finally, something that's happening, we see in the market and the channels and I would say the sales channels, is that these distinct markets of solar installers and customers which are very large variety of dealers in that space. And generator installers have been largely separated in the past. We're seeing more and more overlap. I can tell you, I would say this is one of the areas to where I think we -- or at least I kind of was seeing it the other way. Early on, it was my expectation was that a lot of generator deals are going to say, I want to get in that solar space. I would tell you in the last year, it's been the opposite. What's happened is that solar -- as a solar market has gone through a lot of change with 25D and the finances. A lot of your best solar companies that said, I need to diversify. A lot of them are doing HVAC and a lot of them are doing generators. And we're seeing that ability to come in with a generator solution actually really appealing on that side of the network.

But it really expands us into kind of a whole new TAM of dealer market. I'll give a specific example. There's a company that's well known in the solar and she named Freedom Solar, that's based in Texas, actually, my previous comments, our largest dealer in the country. And one of the largest solar dealers anywhere for anyone. Freedom Solar renamed themselves in December, Freedom Power. The reason, because they're not just selling solar anymore, they're selling generators, and they're selling HVAC equipment. And I think you're going to see more and more of that happen. And I think it speaks back to the original thesis that portfolio of products is exactly the kind of portfolio of your products.

If you were to see yourself as a dealer delivering energy solutions to the home as opposed to just either solar or backup solutions. So that's the strategy coming together. It's a long -- we'll see how that process evolves. But we see more and more of that happening. And I think we're very well posed to take advantage of that.

With that, I'm going to bring up Kyle to talk about our core generator business.

Thanks, Norm. I'm going to talk to you a little bit about some things that you're probably familiar with in some of the slides or the things I'm going to go through, you might have seen a little bit earlier today. Actually, I should probably first introduce myself. Kyle Raabe, President of Power Generation for Home.

As we brought the groups together, it's an area that I'm very familiar with. But we're going to bring these strategies together, not just for the sake of technology, not just for the sake of bringing technology, bringing our sales groups together. But you're going to see the themes and the strategies actually play out to our strength in an area where I talk to my teams very frequently, and I say, hey, guess what, we're an organization, we're in a position where we have an opportunity to go create the market. I talked to our groups, I talk to our customers, I talk to our dealers, major retailers throughout the world. And we talk about the ability to lead from the front, right?

Aaron mentioned this morning, hey, you're doing one thing, you're either growing or you're doing the other thing, you're dying, right? And the choice that we have today is we're already in front on the standby power category. We're leading from the front. And what you're going to hear from me today is, yes, there are some things that we talked about this morning that you see behind me here. You see lower power quality.

It's the things that you know demand is coming, and it's residential, it's commercial, it's industrial. You see people moving from fossil fuels over to electricity inside their homes, inside their vehicles. So we know that's happening. It's a proven fact, and you've already heard about it today. But the reality is, from a power generation perspective, from a resiliency perspective, the sensitivity to that going away continues to go up. And there's a couple of things at play here that I'll start out with today. Number 1 is that our core customer group, which is typically 65 or 60 years and older, right, continues to grow. And as they grow, they get older. As they get older, they're choosing day after day after day for a lot of reasons, which I really -- and I won't go into today because I could spend a lot of time as to why it's happening, but they're choosing to stay in their home longer.

And as they go even as an older adult, right, in today's society, my dependence on the power being on every single day grows. And when you take that away from me, especially as I move into our core age categories, you create a problem for me. you create a problem that I can't solve. I can't get in the car. I can't drive away. I can't go to the neighbors or maybe frankly, I'm in an economic situation where I just don't want to. So we've got a couple of things coming together when we look at, hey, there's an opportunity in front of us for our core customers, our core segment to continue to grow and for us to continue to penetrate, it really becomes, hey, we have to go create the market. That's the opportunity in front of us. We've done it for years. In fact, we've done it for decades, go create the market. Our name is synonymous with backup power.

And what you'll hear today is we're going to go and we're going to continue to do that, not just with the customers that we have today, but with a growing segment of customers but in a way that's smarter, more efficient and better for those customers. As we went through the decks here today, it's pretty funny. This is the third time you're seeing this chart, but to be unique here. I added 1 line on. And we've talked about it a little bit, but that thin line that you see cutting in between the dotted lines or below the dotted line there is your base power outages.

We mentioned earlier today that that's how we plan the business, base power outages. And when you see that line continuing to trend up over that 11-year cycle behind me, there's really only 2 years that you've seen base power outages. And that's the daily outage that happens because of a thunderstorm, that's a daily outage that happens because the grid gets overloaded in a specific area, a transformer goes down. There's an accident somewhere and a poll gets hit, those continue to go up.

Very rarely, do you ever see those reverse down. So when we plan a business on a long-term trend that continues to go up for a customer that is becoming more and more sensitive every single day, we see a heck of an opportunity to go and say, guess what? There's a market not that you just go take advantage of but there's a market to go create.

With the demand side of it, right, Erik talked this morning, Aaron talked this morning, and they all said, hey, the AI, industrial, it's all sucking more power down, right? It's putting more stress on the grid. Utilities, hey, 1%, 2%, 3%. That all makes a difference. It would be one thing to say, if it's just an industrial demand going up. But as I've already mentioned, as you can see on the bottom line in the chart behind me, residential usage also continues to grow, although not at the same pace, it continues to grow. And that layers right on top of what I was talking about before when we think about, hey, my ability or my sensitivity to when that power goes out, goes up every single day.

Every single time it goes up, I can't cook. I can't charge my car. I can't heat my home. I can't cool my home. I can't run my medical devices. I can't charge my phone. Those are things that we, as Americans, we take it for granted. I take for granted that want to plug something into the wall, it's just going to work, right? And as I get older, I have less tolerance for that not happening because it affects me personally, it affects my household personally and affect society in a greater way.

So what is this in front of us? I talked about a market, a market we have to go create. How big is it? What really is the opportunity out there? We step back for a second and we took a look at our best states today. So we took our 5 best states, those that were penetrated almost up to 20% in most cases. And we took a look and said, there's an opportunity as the grid continues to get worse, storms get stronger. We're going to put more tax on the grid, both residentially, commercially, industrially. We're going to put the tax on the grid.

Getting to 20% home penetration of our market in the next years is not an impossible feat. And in fact, we think it's very, very practical. And that brings to us, and this is something a little bit different than we showed a few years ago but that brings to us a $50 billion opportunity at wholesale prices, right? In the past, we've talked to you about retail prices and what the whole retail market looks like. But as we continue to push the market from where we are today at approximately 6.75% penetration up to that 20%, $50 billion.

Now there's things built in there. As you can see down below, there's things built in there for replacement. As we got into this business 20 years ago, 30 years ago, we're starting to see that cycle start to build, right? People who have had a home standby generator. Actually were just sharing some pictures last night, a 22-year-old home standby generator, right? What does that look like? And when are the wheels going to fall off of that machine? 22 years is a long time, by the way, like not typical for machines. It's a very well taken care of machine. It doesn't look like it. But it's very well taken care of machine. But as they get older, they're still a mechanical device, right? And they're going to decay, right? They're going to be affected by saltwater, they're going to be affected by storms, rodents. They're made out of metal, plastic, steel aluminum, and that replacement cycle is going to lean into our business as a whole.

The other thing that we're doing that is really starting to take effect are very strategic and very focused efforts in the new home building industry. The cheapest time. And if you talk to somebody actually I'll back up here a second, if you talk to someone and you say, hey, would you like a home standby generator. And you explain the concept to them.

Is that a single person on the planet that says, yes, that's a bad idea, right? No, I don't want to control my own destiny, I don't want to back my family up. That conversation doesn't happen, but it does come down to affordability. And that work that we do with homebuilders is by far and away, still the cheapest way to acquire backup power. The cheapest way to ensure that your family is taken care of because we're putting it on a 30-year mortgage. We're running electrical, concrete, plumbing at the same time. So the efforts that we have here going forward is really to go acquire and to go create make and market into a $50 billion opportunity that we're going to take advantage of over the next years.

Three ways that we're going to go do that. I'm going to walk you through each one of these, and it's about going and getting that consumer that knows they want the product, right? They know they need it. What do we have to do? Number one, bring the best product we possibly can. Lead from the front. Our standby generators are already considered the best in the market. We hear from our competitors, hey, we want to go design a unit that's as good as Generac. We want to have Generac quality. We're going to carry that forward with a heck of a lot of innovation.

Number two, we're going to create the market. There are people that don't know that they can get a Generac. There are people that don't know about standby power. They're living through it. And sometimes because where you're in geography, sometimes it's an age group, but we're going to go attack both. And then last but not least, we're going to bring, as Norm was alluding to there, we're going to bring a unified network to be able to deliver that promise that our consumers are actually looking for.

So when I start with product really quick. And for those of you that have been following us for a while, we've talked a lot about the one on the left side there, right, our air-cooled lineup over the course of 4 years roughly, maybe 5, right, depends on how long you want to think about when we started designing that new air-cooled product. It's into the market now, right? Every unit that comes off of our lines today are these new units. And the innovation that sits inside of that, what looks like a Tam-box that eloquently designed Tam-box does give us the best power output the best footprint, the widest portfolio or broadest portfolio up to 28 kW on an air cooled machine than anyone else in the industry.

But something that gets overlooked that I think Norm addressed really well is the fact that every one of these are connected, and we can see every one of the units running. Now it sounds simple, it sounds, of course, you can, Kyle. There's a $7,000 machine in my backyard. I would hope somebody is looking at that every single day. But the reality is in the past that wasn't the case. We had a fraction of them being connected. So for us to be able to see is your unit ready to run? Are you having a problem? We can message you and say, hey, guess what, as Norm was talking before with the ecobee development. your units not ready to run. We see weather coming. How about we connect you with the dealer.

So thinking about the service that we provide, it's not just a machine. It's taking care of you as a homeowner to make sure that the bet you placed with us to make sure the investment you placed with us actually comes to fruition when you need it is a massive advancement in the category, and no one else is bringing that. That also pertains to the far right, on the liquid cooled side. We're in the middle of redesigning our entire liquid cool portfolio that goes from 22 kW up to 150 kW with all of those same things that I talked about in our air-cooled platform. the quietest, the smallest footprint, the easiest to install. So the technology that we've learned and brought through our air-cooled product, applying that to a 60kW, a large unit some for commercial applications, some for home applications, but bringing that connectivity, bringing that ability to service the flexibility to install in any 3-phase application are major advancements that none of the competition is even come close to catching up with us.

Now what you see in the middle, and I chose these 2 units very specifically, what you see in the middle is really building on what Norm talked about is now there's an ecobee thermostat. We call it ecobee Generac that can show you and visualizes exactly what is going on with your generator at any given time. It's ready to run. You have fuel, you have no maintenance needs. Here's your dealer but more importantly, and I'll talk about it here in the next slide as well is that it now has the ability to control temperature in your home and manage load.

Why is that important? We've got a lot of different ways in which we try to manage load. And when we say manage load, you translate that to a homeowner, that means a smaller unit, right? That means price. That means I can get into a home that maybe I wasn't able to get into. Maybe they needed a 48 kW by any C code. That's great. We start managing loads. We drop you into an air cooled unit. We dropped thousands of dollars off your install cost, total in-cell cost, both unit and wiring.

So knowing that I have a thermostat that's hanging in the living room, hanging the kitchen or whatever you put it, that is not only telling me what's going on, but it's also helping me manage that power, so as affordable as possible. Massive advancement again, something that I never thought of 6, 7, 8 years ago, did I ever think that a thermostat, hanging in my home would be the thing controlling my energy, saving me money, helping run my power plant not a chance. It's fantastic innovation.

Price, everything is always about price. When I think about a consumer. We talk a little bit or I talked a little bit about ecobee being a way, the single way that we think in the future we can regulate temperature and manage temperature load. If I can't do that, right, or if that is the only mechanism I have, I can certainly drop down from 28 kW down to 16 kW, I might go from 48 down to 28. But we also have devices coming, and I'll focus on the right-hand side there first to keep the theme of load management, a new smart breaker coming out in 2026 here in the second half.

The idea behind the smart breaker is, again, just like the thermostat, we can take any load off at any time. We start to see the generator overload. We can take it off, let your generator run and bring it back at the right time. What does that do? Again, number one, it's price. But number two, as Norm mentioned, sometimes our biggest asset are dealers and their capabilities. Being an electrician by trade, snapping a breaker in the single easiest way to digitally control the load going on in your home, very easy to adopt very little training.

On the meter switch side, which is on the right-hand side, as Norm alluded to, really, that's industry revolutionizing, right? Today, we hang a transfer switch. Wires running conduit back and forth. I'm going down to a box. I'm going to a panel somewhere, putting a meter switch on by pulling the utility meter off putting a collar behind and reinserting it, we believe, has the ability to take anywhere between 1.5 and 3 hours out of the installation.

Of course, it's very dependent on where you are. Does your utility allow you to do it, what's the complexity of the install, but between the ecobee load shedding, the Generac meter switch and our smart breaker, we think there's 15% of labor to pull out of that install which again comes back to what's my consumers total cost to put a standby generator in to put back up power in their home. We think we can take a significant bite out of that, along with bringing our costs down across the board with all of the innovation that we have.

Last but not least, is that Field Pro app. It does sound -- how would say it. It does sound interesting that you would say, hey, how does an app really help a homeowner. It's an installer app. Over the years, if you've been around Generac for a long time like I have, you hear all the stories. Our dealers are great. They do fantastic installations. But we also have electricians that put them in.

They're not a certified dealer. Maybe they put in 10 a year. When you put the Field Pro app into their hands and they start walking through an install. And that Field Pro app as the unit is going in, sees a problem and comes back to the installer, albeit a dealer, maybe it's the dealer's new employee, maybe it's an electrician, putting in their first unit. And it gives them feedback. And that feedback says, hey, you missed a step. You haven't done the right thing for that homeowner. You haven't done the right thing for that machine.

Again, massive innovation that helps efficiency of the dealer, especially as they learn the process but number two, improves the quality of installation on what can be a very complex system. So some really big innovation that we've pulled in with a joint effort from our energy technology teams into our traditional home standby business. Now as we continue pushing forward here and we talk about market creation, I want to give you a snapshot of who's coming into the funnel. When you look from 2019 through 2025, great advancements, massive steps forward in creating IHCs or in-home consultations, which are when our dealers go out and they talk to a homeowner. They might come in to via phone call. They might come in via the web. We make it an e-mail.

However, they make their way to us, we get them in the hands of a dealer. To be able to take that and grow that by 2.5x but at the same time, not just focusing on our existing segment, and we love our older segment, right? I talked to you about, hey, who actually buys these products and who puts them installed. But one of the things that we're doing is we go create these new customers, we go create the market is bringing a younger generation on making people who are in their 20s and 30s and 40s aware of the product category.

Now it might not be the time for them to buy today. They might not have hit the level of, I call it, the pain threshold where I have to go and I have to make that purchase. But the awareness that is coming forward at age 30, at age 40 and age 50 is building a very sustainable funnel, and we're actually finding that the age group that we service that are buying generators is starting to move down slowly. It's a big number to move, right? But as we bring new customers on board, we're finding they're hitting the pain threshold and our ability to bring new customers in continues to grow. We do that in a couple of very specific ways. And there's a couple of takeaways that I want you to -- want you to go away with here on if you think about this slide in specific. We're leveraging all the things that we have done for years on the left-hand side.

Fantastic infomercials our e-mail marketing as we bring somebody on board, maybe they're 40, maybe they're 30, and we have to educate them through the process. maybe they're 65 or 70 and they've never heard of a standby generator. We've got to bring them along. We do a lot of that work via e-mail, and it's becoming very, very, very effective. We also are reaching out to that younger crowd via social media. That's new over the last 3 years or so.

But our velocity to bring younger people in, educate them and then convert them continues to go up. And we measure ourselves very specifically on how many can we bring in per outage hour right? So if you look in 2024, hey, guess what, record outages, what do we have 3 landed hurricanes, we had storms rolling through Texas. There's a lot going on. So our ability to bring a customer in there, you would say, well hey, guess what, Generac? I expect that to happen that you should be able to do that. It's the years like 2025 where outages were at all-time lows, that our ability to bring people in per outage hour has improved dramatically because of all those mechanisms that you see on the left-hand side.

So our marketing engine and our marketing teams have been able to go and create interest in the market that statistically shouldn't have interest. The market statistically drop 64% from an outage perspective. But our customers coming in the door were down only 29%. So a huge lever, a huge weapon not only to take advantage of it of the times where the market is good, but to keep us from going backwards.

York will walk us through and what we talk about a lot is a new and higher baseline. How do you create the baseline, you create the -- how do you hold the baseline, you do that by creating opportunities when they're not walking in the door.

Aaron and the team have walked you through, and I know they've talked to you a lot about our lead generation, okay, what do we do with it when the customer comes in the door. I want to take just 2 minutes and walk you through really quickly what exactly happens when we moved from a push lead system to a pool or pull lead system and why we think the innovation there is so dramatic. When a customer comes in, in the past, we would receive them, and you'd push them out, you'd say, hey, guess what? Here's your ZIP code. We've got 5 dealers in the ZIP code, and we would assign it to 1 or 2 specific dealers. With this regard to whether that deal was suited to sell to you disregard to whether the dealer really service your neighborhood disregard to whether the dealer was at capacity.

We knew they were a great dealer, but we didn't have the details. And in some cases, we never will have the details to define exactly what dealer is ready to go and get to the customer quickly and effectively. When you transform to a pooling system where a homeowner comes in, they digitally flow into a pool, they get pushed against a tiered section of dealers that then go and pull that customer out and say, acknowledge that I'm going to go connect with that homeowner, I'm going to go to the front door. I'm going to get on the phone. I'm going to send him an e-mail. I'm going to go convert that customer. You change the mindset. You change the behavior. And we reward dealers when they close leads. Period. In the past, we've had a lot of different metrics that we've put on dealers to enable them to receive leads, but now we measure dealers, do they close the business for us. When a dealer raises their hand and say, I'm going to go get a consumer. And if they can't get to the front door, they can't close that lead, that's a black mark on their record, and that prevents them from getting leads in the future.

So every dealer that grabs a lead out of our pool is an active participant to go close. Well, what happens? That means we have dealers going to homeowners faster. The chart you see in the bottom behind me is kind of a representation that we have got an opportunity to push it and test the system out. And what you can see is that during storm firm, which is was a phenomenal marketed storm. It actually didn't matriculate into that many outages. But the press, the news, everything around that storm drove thousands and thousands of homeowners to raise their hands and say, get somebody to my front door. I want to get an IHC.

In the past, you can see -- in massive surges, we would get there or our leads would be slowed down to 10 days, 15 days. In some cases, you see the bottom left there, 25 days. Now in a surge, we have the ability to respond because we can leverage the entire network via the pool in a much faster way. In the case of firm, 7 days, it was the longest we were getting somebody to the front door across thousands of people coming in, even though markets were flooded. It's better utilization of the network that we have, which is really the advantage of putting the system in. But prior to coming in, we actually are putting in things that will again build efficiency.

The potential customers that come in were dropping AI and we're dropping tools onto the customers to segment them in the right way. It does us no good to pass a homeowner off to a dealer off to the pool that is not ready to buy. So we go and we score them with an advanced algorithm, right, and with AI, constant learning. If you're not ready to buy, we'll bring you down through the bottom path. We'll educate you will nurture you. We'll get you ready to go so that you're not shocked by a price. So you're not caught off balance by a complex solution. And when your score gets ready to go, we're going to push you back into the pool. And we're going to make sure that you have a dealer who's there and ready to grab you ready to get to your front door.

Again, it sounds like very, very simple things, like, of course, you would do that. Why would you push somebody to a dealer that isn't ready to close that just heard about the category that doesn't know what they cost. We're going to take that onus on one, to create a better solution for a homeowner, but secondly, create a better solution for the dealer. So they're actually going out and utilizing their resources effectively as we continue to boom and grow.

So as I bring this down here, we're going to bring more homeowners in. We're going to educate them. We're going to put them in a pool, and we're going to need more dealers because we're going to grow and expand out to homeowners. How do we solve the problem of volume. As Norm talked and he showed the overlapping circles in his presentation, we're going to bring together a network of over 10,000 energy partners. And they come from all walks of life. We've got the core HSB customers or the core installed base. You guys know those. We've talked about them for a long time, about 9,000 dealers. We're going to bring those together with our aligned contractors, a pool of contractors that help us service the storm, and we're going to bring them into the install network.

We're also going to reach out and bring in the solar and storage installers. A big group of customers a group of customers that serve a big market and actually provide new access to a market that we don't serve today. Today, a standby generator never walks into a solar opportunity. But tomorrow, a solar installer might walk in and find out via a complex sales process, hey, this customer just needs to stand by generator, right? Those are at bats, I call that we wouldn't have gotten in the past. And bringing a network this large and setting it on top of what is already the best retail distribution in the country, what is the largest and our biggest share position, which is an electrical wholesale distribution ,HVAC wholesale distribution. It creates a network that can now work to go and deliver something out to a homeowner that they actually need with pace, with scale and with some of the tools that you see behind me in a way that we're going to bring them along.

I talked about the digitization of the IHC or bringing a digital IHC through educating them, handing them off to a dealer. I talked about the journey. If they're not ready to buy, what do we do? We're going to nurture them. We're going to bring them along. We're going to score them. But the biggest part of our process that will make a difference as this complex ecosystem comes together is how do I train a solar dealer to deliver a system that includes a standby generator and a thermostat. How do I treat someone who came from the HVAC space to go and install a home standby generator or to include solar into a package.

Creating a digital tool and a digital sales platform will help us not only ramp the business, but it will help a very complex solution become very, very simple for the installing dealer and then translating that over to a very simple solution, as Norm mentioned, for a homeowner, right? What does a homeowner want? Just tell me how you're going to lower my electrical bill, just tell me how you're going to solve my resiliency problem. Our solutions and our systems that we're developing today with faster speed than we've ever developed in the past, will bring our partners along and will bring our consumers along much faster in a very complex space. So what do we have as I wrap down here? We have an opportunity in front of us. We have an opportunity to go capture our piece, our share of $50 billion. And we're doing it from the front. We're doing it as an 80% market share leader already, right? We're going to continue to innovate our products, both on the standby side themselves, but also on the products that help us install faster and more efficiently. We're going to continue to push the market really, really hard with our marketing assets, with the way we handle consumers, with the way we pass them on to dealers. And we're going to create this network of over 10,000 professionals, 10,000 energy partners that are out there putting the products in and bring the customer the Generac promise of lower bills and more resiliency. So with that, I'll hand it over to Norm, and he'll walk us through the close.

I just want to kind of give you a residential business. So what it looks like today -- so just from a pure 2025 in terms of sales and adjusted EBITDA, when you combine the businesses in this way, you have a $2.5 billion business in 2025, which delivered 22.5% from an EBITDA margin standpoint for the residential segment. Obviously, certainly a healthy business. I think it's even more impressive that if you think about that business, that was in a year of both, frankly, a lot of tariffs and a year also with a light outage environment. So still on its own, quite an impressive business to sell. We see that from a sales standpoint, growing in high single digits through 2028, kind of building a business north of $3 billion, while at the same time, growing even faster on the EBITDA side.

Now the EBITDA side has tailwinds of really improving margins across the board, but also recalibration on the OpEx side. We do see some synergies that are going to impact that and allow us to grow to mid- to high 20s on EBITDA. We also see a lot of, I think, success on the tariff side, both potentially some adjustments in tariffs, but really a lot of the mitigation efforts we've been putting in place are starting to have an impact, which is going to drive some of that EBITDA improvement as well. So that's how we see the model evolving for the -- what is really the new residential segmentation. And then just to summarize the story of Generac Home that we talked about today. We have consolidated the organization.

That's really been an ongoing process over the last couple of months, the more, I guess, with more urgency. So we have a new structure. We think it both aligns with the customer experience we want to provide, but also increases our efficiency as an organization, allows us to reduce cost. We have brought out a comprehensive home energy offering. And I would also emphasize that a lot of the big investment, the upfront investment when you're entering new stuff, a lot of that is behind us. So we actually kind of leverage the fact we have this capability without necessarily having to do a lot of the start-up costs that we've already paid for. So it puts us in a very good position. We can offer solutions to improve people's resiliency like we always have, but we can also offer customer solutions to lower their energy bills. And I think the combination of those 2 things give us -- we both have an incremental market opportunity, but overall, just a consumer that is much more -- paying much more attention to their energy bills, much more attention to how they get their energy and the reliability of their energy. And I think we are very well positioned to show great growth and very healthy returns as a business. So that's all I have. I'm going to turn it over now to York to finish with.

The financial framework for the company.

Awesome. All right. Let's put a bow on this. We heard a lot today. Financially, putting numbers around the strategy, that's basically what we're going to talk about. I like why are we all here? We're all here to try to figure out why I'm investing in ticker GNRC. My first slide, obviously, is a summary of what those investment highlights would be from a financial standpoint. You heard Erik, you heard Norm, you heard Kyle, massive opportunity on the top line. The generational growth opportunity around data centers -- right now, so our 2028 numbers have -- I think you saw it from Erik. We have $1 billion of top line in our 2028 numbers, let's say, roughly half of that's hyperscalers, a placeholder for hyperscaler, the other half, for co-locators, and given some of the dialogue that we're having on the hyperscaler side, as we continue to that $0.5 billion -- $500 million is just a placeholder as we continue to advance our discussions with those hyperscalers there. There's -- there could be significant upside with that. It's -- if anything, that's the low end of what we're talking about here. So a $1 billion opportunity, that's just the beginning, and that's what we baked in.

Than you think about all of the significant penetration opportunity that Kyle talked about with Home Standby as the peer leader in that category and then continuing to sell the ecosystem, not only on the residential side, but Erik talked a lot about the ecosystem on the C&I side as well. There's lots of growth opportunities there. So mid-teens CAGR over the next 3 years. That's what we're talking about, that's significant top line growth and we heard and we'll see in a couple of slides where that's coming from.

And then Aaron talked about a more balanced business. So more durable with C&I growing at a faster rate than Residential, that makes the durability of our demand more significant at a more balanced 50-50 blend between resi and C&I. There's more certainty with that demand profile. The reality is on the Residential side of the business, like Aaron said, you're a bit reliant on power outages, and that's something that we can't control, even though we know that outages will happen. We just can't tell you when that will be. We like the more balanced 50-50 blend from a demand profile. As we grow that top line, we're going to leverage our EBITDA margins. You're going to see that. I'll talk a little bit more about where that -- how that's going to get delivered.

And with that, then we'll generate a significant amount of free cash flow, over $1.5 billion. We're expected to generate the next 3 years. And with that, with strong free cash flow and a strong healthy balance sheet there's significant optionality to drive significant shareholder value that's not baked into these numbers. So -- on a high-level summary, this is why you'd be investing in kicker GNRC. So base case assumptions. So we've talked a lot about the next 3 years. And the base case assumptions are as follows. The top two bullet points are on the megatrends that we talked about at length, lower power quality, higher power prices. And then the continued investment in AI and data center CapEx that the overall overarching assumption is that all those trends will continue and sustain for the long term, especially over the next 3 years.

We talked -- so we're assuming a baseline level of power outages for 2026, in 2028. And then we're assuming, like Aaron said, and you saw like those power outage severity charts. Periodically, you get a major event and you see a big spike in power outages. We're assuming one of those in 2027, the middle of the 3-year period. I think it's important to note we're assuming that we maintain our recent pricing actions. And so as you recall, in 2025, we had to put price into the market to address tariffs, higher tariffs and as well as launching the new next-gen Home Standby, there was some price there. We're assuming that we maintain that price. And then any future inflationary pressures, we'd also be able to take on more price as the leader in particularly on the Residential side.

So I think it's important. I mentioned tariffs. So tariffs, the assumption here in our guide is that although the IEPA tariffs have been ruled unlawful by the Supreme Court. The assumption is that somehow, some way, be it a section 122 tariff, a 301 tariff, 232 tariff. Somehow, the administration will figure out a way to get back to the same level of tariff profile that we had prior to the Supreme Court ruling. So our assumption is that the tariff rates remain at current levels. We will get a recovery from those IEPA tariffs. We haven't necessarily baked that into the numbers or, I guess, a onetime windfall. It's not in our free cash flow assumption, but we will get a tariff recovery but that's not in these numbers.

I guess, capital expenditures, 3% to 3.5% tax rates. And again, the additional optionality around shareholder value, we are not assuming additional M&A, debt prepayments or share repurchases. So on a high-level summary, we unveiled our new segments today, Reporting segments. Erik talked about from a net sales standpoint, a low to mid-20% 3-year CAGR on the top line, mid- to high teens percent on the EBITDA line in 2028. On the Residential side, Norm just talked about a high single-digit 3-year CAGR, mid- to high 20s on the EBITDA. And then consolidated, you roll that up, as Aaron mentioned in one of his first slides mid-teens percent 3-year CAGR, low 20% EBITDA margins. There isn't a side note -- what's not -- what we haven't talked about is there's a corporate cost layer that we'll maintain, we're modeling that, that will stay at around 1% of net sales during the forecast period. So that's -- that's part of the segment profile there.

So I'm going to make their jobs a little easier. So you saw all the qualitative -- lot of words on the previous slide. But I thought I'd just lay out, okay, where is the jumping off point with these new segments? And that's the 2025 financial results. So Residential $2.5 billion, C&I $1.7 billion, there's the $716 million of EBITDA. That's at 17%. That's what we carded in 2025. We gave guidance that we're reiterating for 2026. And again, when you lay that out for the new segments, roughly 10% Residential growth, low to mid-20s C&I, mid-teens overall. We guided 18% to 19% EBITDA margin. So that's all the same thing that we talked about mid-February. We're reiterating that. And then I thought I'd put dollar ranges then on the previous slide.

So for Residential, all that would mean roughly $3.1 billion to $3.3 billion in sales. Same thing for C&I, $3.1 billion to $3.3 billion, there's the 50-50 split from a balance standpoint, mid- to teens percent CAGR will be roughly $6.2 billion to $6.6 billion. Talk low 20s percent EBITDA, that's about $1.25 billion to $1.45 billion, and we'll generate a lot of free cash flow, which we'll talk about in a second. So thought I'd -- thought I'd make your jobs easier and lay things out and try to quantify those ranges a little bit more precisely. So again, Erik, Norm, Kyle talked a lot about how they're going to grow their business over the last 3 hours or so. And again, we're talking mid-teens overall CAGR going from $4.2 billion to $6.2 billion to $6.6 billion. And so when you quantify the growth, the low to mid-20s percent CAGR growth for C&I, that's about $1.4 billion to $1.6 billion. And then the high single-digit CAGR for residential is about $0.6 billion to $0.8 billion.

So drilling into the C&I, $1.4 billion to $1.6 billion. Like I said in the opening statement, $1 billion of that is data center growth. in revenue. And like I said, about half of that is hyperscalers, half of that is co-locators. The hyperscaler number -- a placeholder right now. And we're having, like I said, meaningful conversations that, that should be the low end of any range that we're talking about. So there should we'll continue to evaluate upside, and we'll continue to relate to the market, as we develop those conversations on the data center side. So that's -- what is that?

About 2/3 of that C&I growth. The other $500 million is all the other initiatives that we're we're talking about growing that side of the business. Our industrial distributor channel, we expect to see good growth there, in particular with that large megawatt-diesel product offering, we can now offer in the traditional C&I market. That's through our traditional industrial distributor channels. So that's part of that growth there. Our international geographic expansion, we'll see good growth there. The Mobile business, again, as that cycle and the rental cycle starts turning positive. And the re-fleeting cycle begins, that mobile business, we expect to see very good growth there, and again, Telecom and the Multi-asset Integrated Energy Solutions growth. That's how we're going to generate low to mid-20% CAGR over the next 3 years for C&I.

And then the, call it, $0.6 billion to $0.8 billion of Residential growth. I'd say about 2/3 of that is Home Standby growth. Really on the back of I would say 2025, maybe because we had such low outages in the second half of 2025, maybe it's a bit of an easy comp for lack of a better word. There's a little bit of pricing that's part of that growth that we'll get here in 2026. And then all the other initiatives that Kyle talked about in terms of driving lead generation, improving close rates, that's how we're going to continue to drive growth in that home standby business. And then the remainder of the growth is on the ecosystem side. So continuing to build out Power Micro, PowerCell and Ecobee growth, which we're expecting strong double-digit CAGR with that Ecobee business. So -- these -- this is basically trying to summarize in one slide, everything that you've heard the folks talk about the team talk about on how they're going to continue to drive growth.

And then margin improvement. So we're expecting 400, 500 basis point expansion on EBITDA. When you quantify that in dollars, it's near doubling our EBITDA dollars, from that $716 million jumping off point to something closer to that $1.25 billion to $1.45 billion in 2028. And again, through -- if you look at that price-cost column relative to the mix column, those two bars are going to offset each other. So within price-cost is a lot of that I guess, operational execution that is going to be important to continue to drive positive price costs over the next 3 years. And you see some examples of that on the left side. Continuing -- supply chain resi -- internally, we have significant effort around supply chain resilience, trying to mitigate tariffs, continuing to work on the cost structure of our supply chain. Profitability enhancement programs, that's just something that's embedded within Generac that we continue -- are driving profitability enhancements around the entire organization, not only in the operations, but in the back office, improved plant operational execution. And then the vertical integration for an example, the [ Enercon ] deal. That's an example where we're acquiring a company to drive incremental margin stack on that business. So those are all examples of how we're going to drive incremental price cost over the next 3 years. And again, that should offset any mix -- unfavorable mix impact that we would see with C&I growing at a faster rate than Residential.

So what's left then is this large operating leverage that we're going to see. When you have mid-teens CAGR overall as a company for the next 3 years, we're expecting significant operating leverage, the 4% column, which will drive EBITDA margins above -- back above 20%. And Included in that operating leverage is also the recalibration of our energy technology OpEx that we've been talking about at length to continue to recalibrate that investment lower and really driving profitability to those products. So the -- in the model, we're expecting profitability of Energy Technology products in 2027. And we've been talking about that for a long time. And and we're continuing to drive that. That's embedded in the 4% operating leverage.

So again, with our new reporting segments, we talked -- this is just another way to maybe show how we're going to continue to drive top line growth as well as margin improvement. On the C&I side, again, that $1 billion of data center top line growth, along with the margin improvements that we've talked about in terms of operating leverage, vertical integration, operational execution. The fact that our data center margins actually are accretive to the overall C&I segment, that should allow us to see significant margin improvement in that C&I business from, call it, the low teens up to that mid- to high teens over the next 3 years. And then with Residential, we've always had good margins on the Residential side. But 2025, maybe you'd argue was probably artificially lower because we didn't have a season -- so we're starting off at a relative low point. If you get back to normalized outages and driving growth in that home standby business as well as the ecosystem recalibrating investment -- OpEx investment on energy technology downward, that's how we're going to drive margin improvement on the Residential side as well to that call it mid- to high 20% range.

So free cash flow, Aaron mentioned, we've always been a known -- Generac has always been known as a strong free cash flow generator. The forecast period is no different. When you factor in our strong margins, strong top line growth, strong margins, the CapEx investment, which is around 3% to 3.5%, factor in some working capital investment to drive as a result of the mid-teens CAGR. When you put that all together, we do expect to generate over $1.5 billion of free cash flow over the next 3 years. Again, the pretax conversion in 2028 would be in that, call it, 80% to 90% range, again, factoring in some of that working capital investment that is required, to grow that top line. And so coupled with the strong free cash flow with a healthy balance sheet. We look at -- if you look at our gross debt leverage, continuing to work down from 2x down to 1x, well within our targeted range of 1x to 2x. So we like where we're at from a leverage standpoint. I like where we're at from a capital structure standpoint, our term loan A and term loan B. We don't have any near-term maturities, relatively low-cost debt. And we have a revolver where we don't have anything borrowed on it today. We have $1 billion of capacity there. So strong balance sheet, put the strong free cash flow with a strong balance sheet, drives significant optionality to continue to drive shareholder value.

And then when you put it together from a more of a priority uses of cash standpoint, what are our capital allocation priorities. It's really no different than what we've talked about since we've been public since 2010. For the last 15 years, it's always -- we obviously prioritize organic growth. But given that we're relatively asset-light, which maybe at 3% to 3.5%, maybe it's a little bit higher than normal. Maybe normally, we be in that 2.5% to 3% range. But given some of the capacity expansion we're talking about, on the C&I side, we're forecasting a little bit higher but still relatively reasonable, modest CapEx investment to drive that organic growth. Strategic M&A, that's always been core to us. healthy balance sheet we talked about. And then when there's excess cash left over, we've always been returning capital to shareholders. You can see that on the far right. So in 2021, we had some -- we had some meaningful investments from an M&A standpoint, in particular around the Deep Sea acquisition that Erik talked about, that controls business relative for C&I power generation and the Ecobee business. So that's -- that's sort of the 2021 column with that middle section being the M&A investment.

But I would say the last 4 years, we have prioritized organic growth, CapEx as well as share buybacks the last 4 years. In fact, the last 4 years, we bought back over 1 billion of our shares at roughly $138. Looking at 2026 and forward, when you think about the opportunities that we have in front of us. Again, I think there's opportunities to continue to expand capacity on the C&I side, both organically and inorganically. And again, you can see that with the [indiscernible] acquisition, the Enercon acquisition that will close here in the second quarter. So we'll start to given the opportunities we have on the C&I side of our business, you'll start to see some M&A activity there on the C&I side as well as driving organic growth from a CapEx standpoint. So with that, we'll wrap up final takeaways before we go into Q&A. Final takeaway before we go into Q&A.

Okay. Just a couple of things here just to bring this home as -- I guess, we're calling it final takeaways, and -- we'll do a short break to kind of set the stage up. We've got some chairs and things to bring the team to do a Q&A.

Obviously, we talked a lot -- or I did this morning about the megatrends. You've heard it from the team as well. Four kind of key themes there. So lower power quality, which has been a long-standing trend. Obviously, Generac has been a beneficiary there for arguably 40 or 50 years -- that trend is firmly intact. A lot of data to underpin that. The next megatrend is higher power prices. And as you saw some of the data there, perhaps that was not a trend up until maybe 5 years ago. 5 years ago, we started to see power prices rise, up 32% in the last 5 years, projection for the next 5 years at 40%. So we think this is an important megatrend, for a lot of reasons, but not the least of which is that we think that there are opportunities for us given the fact that we're already there providing resiliency for homeowners and businesses, right? We understand, we know the electrical systems of these buildings, these dwellings. We understand the codes and standards. We have the distribution networks. And we have proficiency in the technologies. We've created proficiency in the technologies, invested in the technologies to create products and specific solutions to help rate payers as all of us are known as to help us rate payers reduce our dependence on utilities or at least not give them as large of a share of wallet as I think most people are going to have to shell out here in the future. It's just -- this is a reality.

And again, probably -- even though the headlines are starting to tilt that way, this is definitely a theme that, I think Norm mentioned it. The survey showed that people on average spent 7 minutes a year, looking at their utility bills, 7 minutes a year, that was previous data. They're going to spend a lot more time than 7 minutes thinking about the cost of that power going forward. So that's the second megatrend. So lower power costs, higher power prices. You've got the AI infrastructure-related boom, the spending that's going to come from that, and the impact that, that's going to have on our Commercial and Industrial business in terms of backing up those data centers. These are massive, massive machines, as Erik showed you in the video, a single machine can weigh 80,000 pounds. The ASP on that machine is between $1 million and $1.5 million depending on the content, right? So it adds up very quickly.

You're talking about data centers, you get into 300-megawatt data centers, that's going to look small. It's going to pale in comparison to the 1-gigawatt data centers that are projected to go online in the next couple of years. And you're talking about hundreds of those gen sets on a single site. Huge projects, right? Obviously, we've had a lot of success initially here with co-locators and we're getting a lot of traction with hyperscalers. We're not here to announce a hyperscale award this morning, but we've got a lot of deep conversations that are ongoing. And we have a lot of confidence, a lot of confidence that those awards will come. Just a question of timing.

So the third megatrend of AI and driving not only the pressures on the grid, but also the CapEx spending, that's huge. And then last but not least, is the overall mega trend of the infrastructure rebuild of infrastructure, not only in the U.S. but on a global basis, the roads, the bridges, the ports, right, the airports, right? Just look at the investment here in the New York City market on airports alone. I keep waiting in Chicago O'Hare, and that is a disaster. But at some point, they're going to make the investment there. But those types of investments, that $100 trillion globally over the next 15 years, there's a lot of opportunity for Generac to participate in that, not only in the actual construction phases where you need those types of mobile products that we produce, the [Almond] acquisition that we just completed here to give us scale there. but also the backup power opportunities and the micro-grid opportunities. We're seeing this as well. Microgrids for things like wastewater treatment plants for infrastructure around health care, where you've got campuses, health care campuses or universities. You could argue universities are part of infrastructure as well, I suppose. Those four megatrends, firmly intact, we believe deeply in them. And we've oriented our strategy, powering a smarter world directly around those megatrends.

We've oriented our investment. And when you look at everything we've been doing the last 3 to 5 years and the dollars that we've been investing all that free cash flow, the $1.3 billion of free cash flow in the last 3 years alone, we're putting that to work to chase after those mega trends to make sure that we're putting in a position to capitalize on those megatrends as they as they evolve. Our organizational realignment that we're talking about this morning, again, we've got a great strategy. We're going after the right megatrends. And we've got to make sure that the organizational structure of Generac is we've got it oriented properly around those megatrends and around the strategy. And so that's what the changes are this morning. Introducing Generac Home, right, the consolidation of our consumer power business as we used to call it, alongside our Energy Technology and Clean Energy Technology businesses, putting all of that into a single entity to allow us to leverage all this tremendous investment we've been making in the individual technologies, the technology stacks, right, the software and hardware layers, to bring all that together to support that home energy ecosystem that we believe deeply in to provide homeowners resiliency as well as opportunities to reduce their overall power costs, improve the efficiency, reduce their consumption and effectively make them better stewards of the planet with a lot of the products alongside helping them save some money and making sure that they're protecting their homes and families. It's a big part of that Generac Home org change.

And then obviously, on the C&I side, as that commercial and industrial business has grown globally over the last 10 years. And that used to be $150 million business, public in 2010. It's a $1.7 billion property. We've been quietly building it out, right? We don't talk enough about it. Every meeting I have with probably everybody in this room, an analyst, an investor right, prospect for, as an investor. If we've got a half hour meeting, we spent 25 minutes talking about Home Standby, probably some Energy Tech discussion, and as I'm packing up my stuff to get to the next meeting. Somebody says, "Oh yes, tell us about that C&I business. I can tell you that over the last 6 months, maybe even the last 9 months, we've definitely changed the tenor around the talk track, right?

Obviously, data centers being an important part of that. But I think what's happened here is people have come to realize that we have this significant global business in commercial and industrial, that we've built. It's a very valuable property. And yes, the EBITDA margins at 11.5% last year. We've got work to do because we've been building. It's in an investment phase. But as we scale that business, and we will scale it -- the opportunity to get to those mid-teens or higher EBITDA margins, I think that's real. We're going to leverage that, the mid- to high teens. And I think there's even probably upside beyond that, depending on how much business we see from the hyperscalers. We have $1 billion worth of backlog or $1 billion worth of data center business assumed in our 2028 guide here. And right now, we've got $700 million of backlog. So we're not that far away from the $1 billion. The backlog that we have is mostly -- there's a chunk of it for this year, about $300 million to be delivered in 2026. The rest of it, we're building the backlog for 2027. There's a tremendous amount of opportunities there. And when we scale that business, I think we're going to be talking a lot more about C&I, better visibility, right? We've got great growth rates. It's going to have great profitability long term. And it's going to present.

I think it's going to put Generac in a different light relative to how people think about this company we love our consumer business. We love the brand that we've built there, being able to leverage that into something even bigger into something greater. I think it's definitely what we're on to here. when it comes to this next phase, this next chapter of the company. And getting that org structure right is a big part of that. Talked about this generation and it truly is a ton. -- what's a generation, 20 years, 25 years, I don't know how the -- how it's defined anymore. But it's maybe the last one I'll see in my career. right? But I have been here a long time, and I can tell you, I've seen a lot of really cool things and all that growth I showed you before, all the great opportunities that we've been talking about as a company, I haven't seen anything like this in our C&I business. What the data center market is going to do, and we were talking kind of in the break a little bit about what keeps me up at night. Well, obviously, I think any company that's coming close to the data center market are participating in this market, the biggest question is how long does it go? How far does it go? Is there something existential out there that changes it. And we're obviously believers that this is longer and stronger right?

But I think that it's underpinned interestingly enough by our own experiences, Norm mentioned it a little bit that when it comes to software, just raw engineering, coding, software, the stuff that is going on in our own business, right? And you guys read about this every day, it's incredibly transformational in terms of just that part of the business, just the engineering part of that -- of our business when it comes to software, when it comes to firmware right? The part of AI, obviously, if we can use to enhance individual productivity, small team productivity, right? That is also very exciting. But I think probably what most companies are faced with is how does it change the way they think about deep within the company, the systems they use whether they're go-to-market systems or manufacturing systems, right, design systems technologies themselves, every single platform that we have is going to change. And we're going to be making choices as a company. Every company in America is going through this, making choices about how do we invest in the future.

Today, it's simple. I go buy a license from Salesforce. I go buy a license from SAP. I buy a license from Oracle Tomorrow, not so easy. The next dollar we put down for a software package in this company, made a lot of scrutiny around what it is we're buying and how much we're paying for it. The power of the ability to create proprietary solutions that are lighter, more cost-effective and more rapidly evolving is right in front of us. That is going to change the nature of how we do business, every company. And that has wide-ranging implications, obviously, on the dependence on AI. And bringing this back around, that's why we think, at least I'm convinced based on the changes going on in our own business, just how important this investment cycle is that's going on. $650 billion or $700 million, whatever the new number is, keeps changing, right? Every time there's an update from one of these companies, they are taking their CapEx numbers up. And that's because of the real change that's going on underneath this. This -- and that change will translate into that generational opportunity for us.

And not to be lost in all this, I said before, if you go back to of our previous Investor Day, we've done -- I don't know, we've done 5 of these in our time as a public company, 5 or 6 of them. We bought Home Standby has been a great opportunity. We sold the company back in 2006 to private equity. I remember, we were talking about how the penetration rate was at 2%. And here we stand today, just under 7%, right? And every 1% is about $3.5 billion to $4 billion amount of value to us as a company. Just thinking of how much value has been created to get from 2% to 7%. And what we laid out here this morning for you is a case, when we think what's realistic because this is a question we always get when we talk about Home Standby, where can penetration go? What is -- when you look at that curve, -- and we try to compare it to other technologies to control air conditioning. That was -- it was very small, 50 years ago. And today, it's in 98% of homes. Is that realistic? I don't know, home security systems, we lay out that kind of model, to show what that might look like. I think 20%, here's why I think 20% is real. You take those top 5 states, where we are today.

Today, the average penetration rate in our top 5 states is 20%. I don't know if you caught that, those are real numbers, right? And they're not -- it's not something we made up that's not aspirational. That is today. The top 5 states are at an average of 20% penetration. So can we get the rest of the U.S. from 7% to 20%. If we do that, it's a $50 billion market opportunity, $50 billion. We have 3/4 of the machines or more that are on the ground today are Generac, right? That's our market share or greater, depending on who we talk to. So there's a lot of opportunity from here to there to get that $50 billion, that next incremental $50 billion. And that's real. I mean, that's again, these are numbers that are actual states with those pen rates -- and so I don't think it's a long way to think about that.

As Norm pointed out, we've been talking about this Generac energy ecosystem and all these components and the hardware and the software and all the pieces of it, was always just on a page before. We'd show people what the idea was, the thesis. It's real. It exists today in real format. And every day, we are working to build it out even further. And not only does it present a ton of opportunity for us in adjacent spaces, like the solar markets, the storage markets. But as Norm said, it strengthens I would say it deepens, it widens the moat around our home standby business. How do we make sure that we not only grow that Home Standby market and we're making that market, by the way. So nobody else in that industry, it wakes up every day spending as much time or money thinking about selling the next home standby generator as Generac does. We do that. We drive the market. We made the market, it's our market. We're going to grow that market. But we got to make sure that we don't lose sight of the importance of the moat around it, right?

Our distribution is critical, but the technology is equally critical. To be a market leader, you have to stay in front of the pack. I want my competitors in that business every day waking up, hating life. That's my job. They wake up, they think, how do I got to go compete against Generac. I don't even know what I'm doing. I'm going to call in sick today, forget it. I love that. I want them to hate their job, i want them to hate life, competing against Generac. I want to win every time. I tell Norm, I tell Kyle, why don't we have 100% market share? I don't understand. How do we get 20 points get away? That's the kind of approach that we have to that business, is growing it, owning it and making sure that we lead it. And what we're doing with the home energy ecosystem is super critical around the next phase, the next leg of growth. That next $50 billion of incremental opportunity, it's about leaning in, not only on resiliency, but leaning in on the opportunity to help these homeowners save money. As that becomes a bigger theme and as they spend more time focused on it, right? So that's -- I think it's super critical.

Mid-teens sales CAGR, right? We've got a long track record here with that 14% CAGR in the last 20 years. I think this opportunity in front of us is -- I don't know, I think it's a layup, -- that's just me, right? It fits right in with what we're doing. We've got a lot of -- I think we got a lot of shots on goal. You look at everything that we're working on here at the company, and we have a pretty cool opportunity to do something unique here as we talked, not only generational on the C&I side. But as I've been talking here on the residential side as well, to go after those new opportunities around helping consumers save money. And then obviously, significant operating leverage that's going to come from that. If we can grow at that rate, -- we've made the investments. We've made huge investments, especially on the Residential side, right? Those are some costs. They're there. They're in the run rate.

In fact, we're going to shrink that a bit because of the efficiencies of combining the Generac Home Group, bringing that group together. We're going to squeeze more out of it. But there's substantial opportunity here to improve our EBITDA margins in that low 20s range. From where we were at 17% last year. Can we get that another 400 or 500 basis point improvement Absolutely. We're going to get that from leverage. We're going to get that from improved profitability in some of the areas that we're talking about investing in more vertical integration. Erik talked about that on the C&I side. We believe deeply in that. The C&I market, by the way, is globally, in particular, it's littered with gen set companies. And I say littered. I mean, there's literally thousands of generator companies that serve the C&I market. Residential market is uniquely U.S.-focused. But on the C&I side, that's a global market. You need to back up hospitals no matter where that hospital is right, that wastewater treatment plant or that manufacturing plant, cold chain distribution that's [indiscernible]. It's a global market. The differentiating factor between packagers and manufacturers is a pretty high bar. We are a genset manufacturer, right? Major manufacturer -- or the major genset providers in the world are manufacturers. And they have gross margin profiles and EBITDA margin profiles that look like ours or better.

As you've seen, we've got some of our competitors who have divisions, genset divisions, big companies, that where they've shared those numbers, I think they're -- you've seen -- they've got the benefit already of the scale from the AI build-out. We're just getting started. So I think it's -- in fact, if you were to wind the clock back on many of those companies and looked at their gen set division margins prior to the data center markets, margins look more like ours today. And so we've got, I think, we've got a clear path here to improve EBITDA margins to leverage all of this growth and to do something pretty special as we go forward. And all of that is going to bring it back to free cash flow.

York Jorge said, we kind of have an asset-light model here, again, 3%, 3.5% of sales for CapEx. We're going to put that money to work. We're going to keep, as we've been doing. Over the last 15 years, we've been reinvesting very heavily in Generac. We've transformed this company from -- when we went public in 2010, kind of a one-trick pony. It was home standby. It was dependent on Mother Nature delivering our next demand surge. We've changed the nature of the company. We've changed the face of the company. We've changed the outcome right? We've changed the visibility going forward. And so I think that's important. And the cash flow that comes from that, we're going to continue to reinvest it in places we think we have even greater opportunities perhaps than the opportunities that we're sharing with you today. And that's going to drive shareholder value. It's going to drive stakeholder value. We love shareholders, but I love stakeholders in general, right?

We're doing this. I wake up every day. I do this for our teams. I know you want to hear, I do it for you. I don't. I don't know. What we do, if we do it well, that's an outcome. It's a benefit for you, right? You're the beneficiary when we execute well, when we find the right strategic growth curves and the growth opportunities. When we have the right organizational structures, those are the things that you dependent on us doing. And those are the things that our team is dependent on us doing. We've got 9,400 employees and their families that depend on us doing that well every day. I carry that weight. The outcomes financially -- [indiscernible] are going to -- they'll go where they lay right? That's going to happen, those outcomes, and I think our track record speaks for itself.

I went public at $13 a share in 2010. So we've got great outcomes. We got a great track record. And I think we've got a great future. So with that, we're going to take a quick break. I really appreciate you kind of listening to me, drone on here. I suppose the final takeaways supposed to be like 3 minutes, sorry. I got monologue in there. But we're going to take a quick break. They're just going to bring up some chairs grab fresh coffee and then we're going to open it up to Q&A. Thank you.

[ Break ]

Yes, let's let George ask questions. George, yes. Get the mic over to you. This is webcast, so careful what you say. I'll be careful how I answer.

Hi, everyone. George Gianarikas from Canaccord. Thanks for having us today. Maybe first, point for York. I'm just curious about the 2026 guidance because specifically, I know you re-segment some stuff, but the Commercial revenue growth is a little lower than before, but I'm assuming that's because of just the re-segmentation. Can you...

The other category, if you think -- we're trying to refer to our product class guidance that we gave historically relative to this guidance, the difference is the other category is now getting blended into 2 segments. And if you recall, there are some divestitures that we talked about on our last earnings call, are causing that other category to go down. So it's maybe inorganic-type activity going on in other that maybe is causing that C&I, secondary lower '26 growth in what maybe on a segment basis relative to the product.

The guidance hasn't changed in totality.

Guidance hasn't changed at all.

No change at all. Maybe one follow-up. You've sort of eked into more vertical integration. I'm curious as to how far you want to take that?

Yes. I think it's a great question. When you look on our Residential business as an example, highly vertically integrated, right? So in a Home Standby generator, we make the engine, we make the alternator, we make the controls, right? It's our design in terms of the package around it, the fuel systems, the emission systems, all of that is vertically integrated.

When you look on the C&I side, we have a high degree of vertical integration as well. When you get into certain ranges below 500-kilowatts, we are doing our own engines, our own alternators for gas engines anyway. Our own alternators all of our own structural elements, the base frames, the tanks, if they're diesel, enclosures and housings around the units. We do our own controls through the Deep Sea acquisition. And that break point today is about 500-kilowatts.

As Erik said, we do engines up to 1-megawatt on the gas side. We are looking for ways to stretch our value add because obviously, what happens is as you get into the larger power ranges, in particular, the engine becomes a much bigger percentage of the cost of the overall cost of the package. And we don't make diesel engines. And these are primarily diesel engines above in these types of power ranges. That's the format today anyway for backup. And we're not going to go into diesel engines, right? That's not -- so let me answer the question maybe you're not asking, George.

We're not going to go that vertically integrated. But that said, we do think there are opportunities to improve our integration of the fabricated components. So today, you get above 1-megawatt, and we start to hit our break points on just how big we go in terms of manufacturing our own and fabricating our own sheet metal components. We're going higher on those. We've got -- those plans are underway. And it's our intent to take over more control there on the fab on the the actual structural elements of the generator. The Enercon acquisition is a good example of taking it another step further.

In our industry, when you get into those large power nodes, historically, the generator manufacturer would produce a generator that when you looked at it, it was just a basic set. It had an engine, it had an alternator, a set of controls, and it was on a steel skid. That particular product then would be shipped to a third-party packager, for final -- they build a housing around it. And these housings are more than just a steel skin. They oftentimes have fire suppression systems. They have electrical systems, lighting. They have alarms, security. There's all kinds of things, controls going inside a lot of times the switchgear and things are built into the housing. So those opportunities were left to third-party packagers before. We feel this is a great area for us. If we're not going to do the engine. We're not going to go down that path. There we think is a great opportunity for us.

In fact, Enercon acquisition, just looking at that acquisition and taking that into consideration, there's more than 100 basis points of margin improvement in the C&I segment as a result of that acquisition going forward. So that's the kind of margin accretion we're going to get as it translates through. So that -- I don't want to say that's the end of how far we're going to go, but it certainly, I think it demonstrates the importance of us owning more of the content if we're not going to be the engine manufacturer.

Thanks for having us here today. I'm Dimple from Bank of America. Aaron, on the last earnings call, you mentioned you're in deep discussions with two hyperscalers. And today, you kind of reiterated about $1.2 billion worth of capacity that you have. Are the sizes of those two potential opportunities in line with that $1.2 billion capacity? Or do you think you might have to expand down the line? And I have a follow-up.

Right. So as it relates to that, we would have to expand. So the $1.2 billion today would serve, we think, very well our traditional market as well as the co-locators that we've -- we've nurtured relationships with and begun to receive orders from. On the hyperscale side, again, we said this, we are very far down the path, in fact with one of them. we received something called a notice to proceed. It's nonbinding, but it actually lays out in concrete terms what they want to buy from us in 2027, it's over $600 million. So if we can get on the ABL, and we expect to have that happen, that is something that we would use up a lot of that $1.2 billion worth of capacity very quickly. It's why today, we continue to look at additional sites. It's why we also, in our guidance, put in that kind of higher CapEx range, that 3% to 3.5% range for the entire 3-year period, because we believe we are going to have to add capacity.

And that's something that I look at what we did at the existing capacity, we doubled it in the span of about -- it will be about 9 months, when we acquired a new facility, a brownfield site outside of Milwaukee, Sussex is the name of the village where that's located. That has basically helped us double our capacity north of $1 billion here domestically. We can do that very quickly. We think that there's a lot of opportunity. And we just want to see a little bit more -- I want to -- these are all wonderful. These terms we talk about, notice to proceeds and this I keep asking, when do I get a PO like, I want a purchase order. When do I see a purchase order? And the reality of it is, in order for these companies to cut you a purchase order, you've got to be on the approved vendor list. It's a very strict process because there's negotiated language on both sides of an agreement like that. So until we're there, we're not going to get a PO.

But the fact that they're giving us these advanced notices to proceed, they're trying to tell us because we have to prepare for that. There's long lead time components, there's capacity considerations, things of that nature, we're preparing as if we're going to win that business. And so we're building that out here near term and longer term if we win more than one as a hyperscale account. That's where we're going to have to go even further.

Got it. And that follows into my next question regarding ABL. A large portion of that co-location backlog is related to hyperscalers. So how confident do you feel that your product kind of meets the requirements that hyperscalers are demanding today. And how long does that ABL process typically take?

Yes. I'll probably let Erik maybe chime in here because he's been in the middle of it.

Yes. So I think from a product standpoint, our products have actually passed all the reliability, durability testing, and they're actually being deployed in the field for validation further. But -- so from a product side, we've achieved all the required necessities. And just from some processes when we started this, we were told to take 18 to 24 months. I think some of our customers need product faster than that. And so we're assuming that there's going to be a faster track process. And it feels very much like that. But we're in the final stages.

Yes. They're bringing us along. I would say that if not for the current super-heated environment around CapEx spending and their need for these products, every one of these co-locators hyperscalers that we've talked to will tell you there's two major components that they worry most about in terms of time line as it relates to their projects and it's transformers, and it's generators, backup generators. And so because of that constraint, we found ourselves on the fast path. We've been fast tracked through these ABLs, even though it's not fast enough for the markets, of course, everybody wants to know that we've been put on it. It's a process. And you've got to go through that process. They're in our factories. They're qualifying the equipment in separate testing. They're into our supply chain, right? So we're taking them to our sub-suppliers. So they know that they understand who those folks are, and they run those companies through the [indiscernible] as well. It's just a process. There's a lot of boxes to check -- we're very far along on it. And I think that we're highly confident that we're going to get through that.

We haven't had anything yet, that says we can't. All the performance testing of the product, you asked about that specifically, Dimple. Our products outperform the competition. And there's a simple reason for that. Our engine supplier has the most current technology of a high horsepower diesel engine in the market. We bought a company, they retooled that company from a technology standpoint and supply chain standpoint. And what they have on the market in the product ranges that we're supplying today, these high horsepower diesels are the most technologically advanced engines in the market. And therefore, when our customers and these prospects are testing these engines, we're actually outperforming current market specifications, what they've kind of aligned to. So we feel really good about the product. It's not about that. It's about getting through their process.

Praneeth Satish, Wells Fargo. Two quick questions here on C&I. So the first one you talked about upside to the mid- to high teens EBITDA margin guidance for C&I. I guess that's based on your traction with hyperscaler deals. So do you think there's a path here to getting to over 20% or even as high as the Resi business between hyperscalers and vertical integration on the packaging side, you mentioned 100 basis points with Enercon. .

Yes. Thanks, Praneeth. So I would say there is definitely a path to that, certainly, there's a -- for us, anyway, a very clear path to the mid- to high teens that we guided to today. Beyond that, should scale -- should we grow scale quicker? Absolutely. There's an opportunity to further leverage the operating line there and further opportunity for us to deepen the amount of vertical integration Enercon alone is not enough, right? Enercom alone only gives us a percentage of packaging capacity for planning here. So we're going to have to invest, whether it be additional M&A or organic investment to scale what Enercon has brought to us, those designs, the technologies, the teams, the certifications, all those packages are certified, and they meet our customers' needs, right?

Our customers today, these hyperscale customers and co-locators are using Enercom packages today. So it puts us in the game immediately, and we're going to have to scale that up. And if we see the pathway to growing the top line, we're absolutely going to continue to invest there. Will it ever be like Residential margins? I don't know. I mean the Residential margins, we like to refer to them as special because I think they're very unique. The position we've built there, I think it's very rare to find a situation, you guys have a lot of companies you cover or invested in. And so you coverage universe, take a look, companies that are in the Residential kind of hard goods space like this, a durable goods space, where you've got the kind of growth profile you've got here, you've got a market leader from a share percentage with market-leading pricing, that has EBITDA margin profiles like this. I'm telling you right now, unless it's a software company, if it's a durable good company, it's very few and far between.

And so those are unique margins. I don't know that we'll ever get there on the C&I side. But I do think there's upside to that mid-teens to high teens guidance range today.

Got you. That's helpful. And maybe switching gears on EPC power and the push into [indiscernible] and inverters for data centers. I guess, any metrics you can share in terms of the opportunity there, the TAM revenue per gigawatt on the surface seems like that could be a very large opportunity, granted there's more competitors. And then in the 3-year CAGR guidance, is there any meaningful contribution from this business baked into the guide?

Yes. There's not a huge amount of business baked into the guide there. I think it's only recently been an area of intense focus from the same customer base that we're talking to. I think, Erik, you might just share a little bit of some of the conversations we're having. These projects are massive. And this issue that Erik mentioned of AI or data centers disconnecting from the grid and what that does to both voltage and frequency on the grid.

If you drop a large load suddenly, it has downstream ramifications for grid customers and grid operators in a way that they just -- it can't happen. So creating a buffer -- and I think the most likely buffer there is a BESS type of system. I mean that your customers are telling you this, if it's not already required it's probably something that will be required.

The architecture is being evaluated. And as we looked at our long-range plan, we know that we lead in the control side. So software and control space. And so I think that is what we anchored on. When you look at the overall battery market and the front of the meter drives the large scale, those margins are exactly what you don't want to see from us delivering. And so we're not viewing that like a huge dollar amounts, might not be coming through on the Generac side. We might find a way to deliver that value, but we definitely think on the controls and optimization. We're part of that discussion. And we have product solutions that meet the needs. But if the battery portion of that gets commoditized, we're not sure if we want to participate in that end.

Stephen Gengaro, Stifel. Two things for me. The first you're so dominant in the Residential business. When we think about the commercial opportunity, what are the few things that you really need to focus on to make sure you win in that business because it's obviously a bit of a different landscape you're facing.

Yes. It's a great question, Steve. And first of all, it's a much more mature market, right? So -- and you look at the players in that market, they're big companies, there's back to a little bit of the dialogue around value add. There's a reason that the diesel engine, every single large diesel engine manufacturer has a generator division effectively or a partnership as in our case. And that's because they need to scale.

A generator is a great vessel for a diesel engine, and diesel engines, there's a lot of R&D to continue to meet ever-increasing emissions regulations. And there's a lot of capital involved in the tooling to produce those products. You need to spread that across both that R&D investment as well as the capital investment across a lot of units in order to make the math makes sense. For us, again, we're not a diesel engine company. We don't endeavor to be a diesel engine company. Our differentiated factor has been not being a diesel engine company. We tell people, we're focused on the generator, not on the engine. We're focused on the solution, not on this particular product with this horsepower output, this emissions profile, this fuel consumption rate, right, the engine. That engine that's, by the way, built for a myriad of applications in construction, in marine and rail.

We are purpose-building generators for customers, we're optimizing those products for their application, right? I think the biggest proof point I can give you there is I'll take an area, so we're a 15% share in C&I domestically. Where are we better than 15? Telecom? In the Telecom space, we're a 60% share, maybe more. We're the #1 provider to every single Tier 1 wireless carrier in the U.S. today. We're #1. They're go-to supplier. How do we do that? We don't make the diesel engines. Those are all diesel, by the way, almost all of them. There's some gas. The majority, the vast majority are diesel. So how do we get that spot?

Well, we got it because we engineered solutions for their networks that were unique, from AT&T to Verizon to T-Mobile, they all have different specifications. We went ahead and added the scale to produce to support them as they rolled out third generation, fourth generation, and now fifth generation wireless technologies. We made the bet. We said we're going to be able to be there to provide it. And then we wrapped around the entire system with a service network coast to coast, whether that tower is on a mountain in Colorado or it's down in the bayous in Louisiana, we can get a service technician there inside of 4 hours. Just sort of guaranteeing that, right? We tell them we're going to get somebody there if that machine goes down, because we understand how important network uptime is to those companies. Time is money. It used to be when the networks were down. It was a dropped call. Now it's lost revenue, right? We're all getting charged by the drink in terms of the data we consume. And not only that, but the critical nature of the communications that are going across these networks, life for death in some cases, right?

So that's just one -- I think that's an example that we can say -- we can point to that example to say, look, we have an opportunity. Maybe we even have -- we can say we have a right to be greater than a 15% share in this space, even though we don't make the engine, but we can design purpose-built solutions that are focused on uptime. Five9s of reliability in these networks, in these data centers in these critical applications. So that's kind of how I think about it. And I think it's a great proof point for us to share, probably we don't share it enough again me because we don't talk about C&I enough. But that's one where I think telecom, we've done a marvelous job. And that's not something we just woke up and did. That's a 40-year relationship with those carriers that we've developed.

Thanks. I think you're going to be talking a lot about C&I. On the residential side, just a quick question. With the new product design, and you mentioned the 15% lower installation cost. Does that just drive installers to use your product? Or is there a way for you to capture any of that profitability? Or does the installer just kind of pocket the difference?

Well, our hope is -- and I'll let Kyle speak to this next. But our hope is that as we take labor out of the installation, right? And the meter switch, which we probably could have done a better job showing what that is today. You install a Home Standby generator on the wall somewhere near the panel, the main panel of your home, is something we call -- it's another box, we call it a transfer switch, right? So the electrician wires either critical circuits that you want to back up or maybe the entire service coming into the home goes through that switch to back up the whole home.

The idea of the meter switch is that we take that box and replace it with something that is very common today, if you pull the meter out, you put this -- basically, it's like an insert in between the meter and the meter connection to the home, and that becomes your switch. That reduces all of that labor, right? High cost labor, too. You're talking about depending on where you're at, which part of the country, we are billing out at $150 an hour, sometimes more, depending on the market. And we would think our studies have shown, we can take 15% out of the installation cost, which is meaningful. Question is, do our dealers, do our channel partners pass it along. I mean we've gone through this before, and we think it's an opportunity. And it's a conversation we're certainly having. But of course, we don't control the full bid, right? We control, what we charge for the equipment to the partner, but we don't control what the partner charges, and we can't control, what the partner charges to the homeowner.

But what we can do is make sure that we send leads to dealers that close better. And we do know with data that dealers that close better have lower prices, than dealers who don't close better. It's an inverse, directly inverse relationship. So over time, as those leads come through and as they end up tilting towards partners who win more, the assumption is they're winning more because they have lower prices. And we'll tell them the way to win is to translate that through to -- if you've got less labor, it's not about us taking money out of your pocket and saying you can't charge what you want to charge for it. It's giving you more bandwidth to sell more, to install more product with the same amount of crews. I don't know, Kyle, if there's anything else to add to that?

No, that was pretty spot on. There's oone idiosyncrasy that you might not have caught in one of the slides that I went through is we actually encourage a homeowner to get two quotes. So back to, hey, how do we drive price down, it's competitiveness. And when you're 80% share, right, you'd say, well, if I just hand it to one partner, they're going to get the price that they get. We actually encourage a homeowner to come into our pool, right, and to then be selected by 2 dealers, which then offers a competitive environment, which transitively what Aaron talked through is my best price as long as I'm delivering, a quality sales pitch, installation and total cost of ownership, right, actually wins the business. That win then translates into, hey, more opportunities for us to provide a lead back to that dealer.

So it will take some time. to go do that, but by us dropping that labor out. And it's the skilled labor that we're after, right? It's not the manual labor. And we like taking manual labor out too. But it's going after that skilled labor and the competitiveness that we drive amongst our dealers that will translate into a better price for the homeowner.

Christine Cho with Barclays. I just wanted to kind of ask about your TAM number for the data center opportunity. as more of these data centers are looking to go find prime power solutions behind the meter. How do you think about that risk and like potentially eating into your $14 billion to $17 billion TAM as they kind of reduce their reliability on the grid altogether or using it, using the grid as back up?

Yes. I'll let Erik take that in a second. But I think it's really important that -- they may be relying -- or reducing their reliance on the grid if they bring their own power, but they still need backup because there are points of failure even if it's maybe not a single point of failure at the grid, okay, those assets could break down. And so having back up, again, the engineering teams that Erik and our teams have engaged with for the hyperscalers, these co-locators are very clear on something that Five9s of reliability is an absolute must. I couldn't even say this one of the things that blows my mind at this point is, a C&I gen set, well cared for, and we've seen these. They can last 40, 50 years in the field. They're already telling us that, well, we can't do that. We want to stay at Five9 reliability, the formula says we've got to replace that in tenors. Right. Well, if that's what the formula says. I guess so, have added.

Maybe it should be 7 years. Why 10? But that's something -- we wouldn't even think of in our industry for a backup system like that, but they're thinking about this completely differently. And as a result, even when they're bringing their own power to site, whether that's a combined cycle turbine or whether it's a recept gas engine that's in a lean burn configuration like a [indiscernible] or [indiscernible] could be a fuel cell system, something like that. They're still going to need backup. And that's -- there are some examples where it's not 100% backup anymore, but we did take that into consideration in the formulation of the TAM.

Yes, we assumed, as we looked at it, roughly the 30% to 40% of bring-your-own power in certain markets. I think the challenge is fuel delivery. In many cases, getting that amount of natural gas to a facility is going to be almost as difficult electricity. And when you look outside of North America, it's few and far between on the bring your own power.

And then I have a question for York. I appreciate the EBITDA bridge, but I was curious -- I noticed the gross margins are flat in 2018 versus today. But C&I, which I believe is lower gross margin than Resi it's outpacing the growth for Resi. So just curious as to what the puts and takes are to have margin be flat despite the negative...

The unfavorable mix. Yes. Well, you saw that middle column, that price cost column was offsetting the unfavorable mix. So again, we're the assumption there is there's -- there's a number of things we're working on in terms of -- to deliver that positive price cost. It's 2% over 3 years. So whatever that is, 2/3 of a percent per year. There's a lot of things we're working on from supply chain resiliency, tariff mitigation is a big one. I mentioned this profitable enhancement program. That's just part of our DNA now in terms of delivering improved margins throughout the company. the vertical integration we talked about. So there are specific initiatives we're working on today that we'll continue to work on for the next 3 years that will deliver that positive price cost, which was 2% in the bridge, and that's offsetting the unfavorable gross margin impact on mix.

Brian Drab with William Blair. If I could ask two quick ones. You mentioned the $600 million notice to proceed. And if you think about the forecast for data center, about $300 million in revenue this year, $1 billion revenue in 2028 kind of a linear ramp, I think York had mentioned at least in the model -- in the model, $650 million then for 2027. How does that $600 million notice to proceed factor into your forecast for roughly $650 million?

That's all upside. I mean it's basically not in there. We have a little bit ascribed as it grows out through 2028, some hyperscale business. But the $600 million and some of that could actually be delivered this year. So if -- again, we've got it through the AVL [indiscernible] for this hyperscale customer, which we think we will. And if we do and if we have the supply chain capability the capacity we're trying to bring our Sussex facility online faster. So we originally targeted at the end of this year. Now we're shooting for the end of third quarter. Can we bring it on a quarter faster, which would give us some additional upside for the fourth quarter, if we were to see one of these deals come through as an actual PO as opposed to something that's nonbinding.

But again, this particular customer, the quality of the conversations at a high level, the fact that they've sent us this notice, they're like, look, we can't give you a PO -- but we want the product, and we're going to get you through this process. And you're going to have to buy on risk when it comes to some of these longer lead times components you're going to have to make some bets on capacity, but we're going to be there. And if we can get through the rubric here on this AVL process, and we will and when we do, there's potential upside in '26, and certainly, beyond for this particular customer. I mean, really very little of that.

We did have some hyperscalers for '27.

But not all of it. It's definitely upside. Big time upside.

Okay. Got it. And then on the Service business, you did a good job outlining a pretty robust service business for the data center product line specifically. How do you envision that in terms of like a revenue stream maybe in 2028. Is that potentially a material revenue stream at that point?

I think it is. I don't I think in our company-owned distributors, that definitely plays into it the opportunity per unit.

The maintenance contracts that are going to be available to us with -- owning 40% of our distribution there and growing. Erik was keen to say it's not a strategy, it's an opportunity. But we can demonstrate holistically that where we've bought distribution, we have faster growth rates in the years that follow. And there's a reason for that. We're more focused on it, right? It becomes the only thing that, that former business, whatever it was. And a lot of these distributors of ours are not just generator distributors. They're in material handling or they're in construction or electrical contracting. They are in other businesses when we buy them, generators are the only business at that point. And focus does matter, and we see that come through in higher growth rates.

But these service contracts and these maintenance contracts, again, back to the 5 -- 9s of reliability, the kinds of opportunities there to touch these machines monthly not just the normally once or twice a year that distributors, I think, would normally be banking on. Now there's not a ton of parts for us, right? These are limited use products for the part. But I think the labor that comes with that through distribution is important. And I think as the service models evolve, and I think they will evolve, maybe there are other places where it might make sense for us to be involved. The actual testing of the unit load banking as it's known in our industry, right? They load up the generators with load. It's actually -- they roll up a box. It's like a hair dryer and die. It puts resistive load against the generator, simulates the grid load, or the building load, I should say. And the opportunity perhaps to do some of that work.

We're seeing it in the rental channels today. There's opportunities there. So that's something that as we look at this evolve, we'll keep an eye on.

I think it's a separate part of the business, though, so we have to keep it that way. But it's not awarded with the purchase of equipment. So the sites we're already delivering on are distributors, whether it's ours or the third party, they have to work to -- is the data center operator going to self-perform the maintenance? Or are they going to rely on a third party. And if they rely on a third party, then we have the opportunity to win. So there's a lot more steps. And -- but I think over the next 12 to 18 months, we'll have really good visibility into how we're going to participate in that and what that could turn into.

Jeff Hammond KeyBanc Capital Markets. I wanted to hit on energy technology. I mean, you talked in the opening about profitable growth that has been challenged. You seem fully committed to it. As we've got to reset with the new products in the market, what kind of growth do you see for this business in that 3 to 5-year plan? And then how much of the path to breakeven or profitability is this re-org cost takeout versus that growth assumption?

Yes. Maybe I'll speak to kind of the strategy around I'll let Norm too and then York can give you a little bit of the details. It's about $500 million in the 2028 number there that I just do it? I guess you don't need to do it, forget it. A good chunk of that's ecobee right? 3/5 of it's ecobee, 2/5 would be the rest of it. we still see strategically as power prices rise, even with the loss of support support being tax credits, the 25D credit is the most visible one for individual solar customers as that went away at the end of last year.

As power prices continue to rise and these technologies continue to come down in cost, the payback will return very quickly. In some estimates, it's as quick as 2 years. We're right back to where we were prior to -- I actually personally -- I think the loss of those subsidies is a good thing. Solar is a market that's been around for 40 years. It's been subsidized for almost all 40 of those years. I mean at what point do you say a technology should no longer be subsidized and can stand on its own two feet. And so I think that the technology, I think it's sure enough, and it certainly cost competitive enough in relation to power prices that it makes sense. And as power prices rise, homeowners are going to turn to self-generation. Self-generation in the format of solar is probably the most likely outcome.

And as Norm pointed out, especially when you talk about micro-inverter, which is the preferred technology in solar, there's one player. And so the opportunity to be a secondary source there -- we think that couple of hundred million dollars of business there between solar and storage assumes very kind of very, very modest market share.

Yes. No, I think you're right. And I think from that standpoint, the other piece of it is that side of the business in particular, also has a much better margin profile than I think the flat storage business. So you kind of also have the opportunity to do that. And I think it's -- the reality is there's a significant sun cost aspect to this, particularly on that one where we had to put in a ton of infrastructure. And the willingness to put in infrastructure.

I appreciate because without it, you really can't truly compete in that space. That infrastructure is in place. We tested the testing room for those products is bigger than any other testing room we have, in terms of equipment, but that's in place. We use it, we build it. There's a lot of engineering in that. So what we've been able to do now in the integration is now start to shift much more of the resources elsewhere, save some money, obviously, at the same time. And then I think we're actually going to get overall for the business, I think a tailwind of, I think, the efficiencies as an organization. On the sales front, the marketing front, on the customer service front, et cetera, that is -- that will help the overall business, as you can see from kind of our expectations for the overall EBITDA margin improvement over the next 3 years.

I would say, though, that make no mistake about it, '26 and into '27 is a pivotal time period for those products for residential storage and for the micro-inverters. We have got to see traction. We've got to see market share, real market share gains even in a down market, even in a down market, we haven't moved the goalposts and when we said we're going to be profitable with those products. It's still 2027. So I've been very clear to the teams. We're not moving the goalpost. I don't care if the markets don't. They go out and win more share. That's -- and that's what we're focused on doing, and yet, that still is a pretty modest share postion, Jeff, that we're talking about. But if for the sake of argument, we don't see the traction there, we'll definitely recalibrate further. We've taken the first step here to recalibrate and making -- putting investment into places in our business where we have higher growth opportunities like C&I right?

I mean we're giving Erick's business I don't want to say it's an open checkbook because you'll never hear that from me. I don't think you've ever heard that from me. No. You never will, because there has to be a return with everything we do. On these technologies, the return has been harder to come by. There's no question. And we've said that. We've been very open about that. But we also will deeply in the importance of those technologies again in terms of power prices and I think the knock-on benefit here is what we've learned over the last few years is just how much stronger, deeper, wider they can make the moat around that Home Standby business. And that, I think, is not a small thing. When you talk about the software layers -- you talk about firmware layers. You talk about this meter switch that I just was mentioning before, that technology is very prevalent in the solar and storage industry. It's not nearly as prevalent in the generator market. but it can take 15% out of the installation cost. So using that same core technology and applying it into our legacy market, that's a great side benefit. We wouldn't have been able to do that, in my opinion, as quickly or efficiently as we've done, had we not had our investments there. And then I still believe deeply about batteries and where that technology ultimately heads long term. So important.

Just one more. As you look kind of beyond this $1 billion capacity in data center and if you get these hyperscale opportunities, like what are the biggest risks of bottlenecks from your perspective? It seems like adding the capacity isn't hugely a challenge? Is it engines? Is it other supply chain or what?

So near term, it's -- it is in the supply chain. I would tell you, it's not in the engines. The engine partner we have is very committed to the space. They've got a tremendous amount of capacity, they've already put in place, and they are eager to add more capacity should it be needed. I'm not -- I'm actually not worried about the engine space, as much as I am some of the other components that go into the package.

So today, near term, alternator capacity. So this is the business-end of the generator, right? It's a set of copper windings that the engine turns to actually produce power. -- those alternators and those frame sizes for these kind of 3-megawatt and higher machines, there is -- like on the diesel engine side, there's a limited set of suppliers in the world to produce those. Now every single one of those suppliers has big capacity plans coming online really towards the end of this year and in 2027. Near term, it's a problem. We're already seeing that. We're stretching some of these suppliers because we're trying to ramp faster, and they're trying to keep up. So near term, I think it is some of the supply chain elements.

Beyond that, I think it's probably -- it's going to be more around some of the labor that maybe we don't talk enough about the trades labor to install these machines, right? The electrical contracting labor. We have an issue in this country. If you were to look at our Residential side in particular, we have a pretty good lens on electrical contractors. 80-plus percent of our dealers are -- like ECs. The average electric contractor is a 57-year-old who has been in the trades for 30-plus years, and they're looking forward to retirement, put it that way. And I think -- and I was talking during the break too, I'm part of the problem here. We all have taken our kids, and we said, "You're going college track, right? You got to go to the college track. We didn't push them into the trade track, we didn't push them into the tech track. We push them into the college track. And I think we've done a disservice probably to an entire generation maybe of college grads here who have come out with 6-figure loans. English lit majors working in Starbucks, that there's a lot to be said there, you can unpack that.

But we probably might have done better to turn some of those folks into the trades. I mean -- and that will right itself because you're starting to see salaries for trades people rise very quickly, plumbing, HVAC, electrical, right? This is the new -- this is the new profession, I think, for a lot of people. And we're going to need a lot more of those. But I am worried if there's a constraint anywhere on this, it's actually probably in that trade -- those trade areas in the labor I was sitting at a recent event with somebody who's -- they do a lot of the data center development work, public company. And he shared the same. I mean, it's the trades that they're worried about the most. Trying to get these pads ready to be built on and then to actually construct these data centers to construct this critical infrastructure. We just don't have enough electricians. And so what are we going to do about that? We can wait for the market to come to them and get the economics right. But I think we're going to have to do something more quickly if we're going to make headway here and not have that be the constraint. But that's probably -- the one area I would worry most about.

Keith Housum from North Coast Research. Let me play devil's advocate a little bit here. If we look at Generac history in the Residential space, you guys were generators. HSPs were the one -- the one story. That's -- solar was expensive. Now you've got these battery systems. You got the Teslas out there. You have a bunch of new guys, commodity pricing. What's the confidence that you guys have that HSPs will still be the [indiscernible] product that people will need? And in the face of these cheaper alternatives coming down line with the battery and unique pricing that some of these guys are coming up with.

Yes. No, it's a great question, Keith. And this is Look, when we got into the battery market, the storage residential storage market 5 years ago, part of our thesis was defensive in nature, right? These technologies were improving in performance and reducing in cost very quickly. And look, you can't ignore some of the players that are in that market today. Now almost always, when a residential storage system is sold today, it's sold with solar. So you're talking about a project, the ticket is much bigger, right? You're talking about $25,000, $30,000, $35,000, $40,000, $50,000, if you've got multiple storage devices on site. But as time goes on, maybe battery technology gets to the point where if you've got somebody and they're just worried about limited outage protection. And that's all you're going to get out of one of these cabinets, half a day maybe if you're managing your loads closely, maybe you can stretch it a full day.

But I don't think it's ever at least in the near term, going to be a stand-in for what a Home Standby can do. Here's the problem with a power outage. When it happens is you don't know how long it's going to be. How long powers going to be out. And so if you've made a bet on a short-term solution, the battery or even if you have two or three of those things. The reality of it is, if you have a multi-day outage, you got a problem there. I think the most likely next step in this evolution is some kind of hybridized system. And Norm touched on it. Kyle touched on it, but the idea don't buy 4 power walls. That is [indiscernible]. You buy 4 power walls. You don't know when or how long an outage is going to last. You only need one and a generator. And you have what in effect is about -- it's a bottomless battery. That technology and from a cost perspective, far less cost than doing multiple storage devices.

Generators themselves are fantastically cost effective relative to the cost to actually produce the power, right. The cost -- the capital cost of the equipment. And so I don't see that changing anytime soon. I do think that over time, this hybridization strategy could become more prevalent. One of the benefits, by the way, if you do have a battery, if you have a hybrid system is you have what we refer to in our industry is a no break experience. Today, if you just have a generator on your house, utility drops, you still have the flashing clock problem, right? I mean it still happens. And as houses become, as homes become more sophisticated, as home automation systems, all these other technology or security systems. Oftentimes, those devices don't play well with a short-term outage, right? Your router drops, all the connectivity drops stuff that should work, doesn't work, has to be reset, powered on, power cycled, right? All the stuff that drives us nuts as consumers.

If you have a battery system, that can act as a whole home buffer for that 10 seconds to 30 seconds between when the power is lost and when the generator comes fully online, you have an outbreak system. We have customers who are -- they're like, "Yes, I want that. Even if they aren't a solar on the roof. I just want to. I don't want to have to reset the clocks or they have a significant issue with even a momentary loss of power, and they can't have it. Oftentimes today, people buy individual is right for a point solution, uninterruptible power supply for your computer or a particular maybe a medical device in the home. But a whole home battery paired with a whole home generator, is probably the solution of the future. And you probably don't need as big of a battery, and you might not need as big of a generator, something of that -- so in our laboratories today in our R&D centers, we're working on hybridized products because we believe the future continues to change. And again, we think we have an advantage there because of all of the investment we've made in storage and all the investments we've made in clean energy, we think we have an advantage to come up with a hybridized system that by far would be not only the best performing system but also the lowest cost system in the marketplace.

Great. And quick follow-up here. Data center is obviously is the excitement from investors today, but there's also a fear that this excitement data center strength is going to wind down at some point in time. And everybody is going to have to go back to relying on other sources of growth, your nondata center business for these [indiscernible] diesel engines. I know it's probably not been a priority for you guys. But where is that falling in terms of what your plans are for the future in terms of building these relationships getting growth from that vertical?

Yes. So actually, we launched the products at the same time, and we're generating backlog on these products in a traditional application. Cold storage, wastewater treatment facilities. That was a very easy bolt-on to the business, just having the products available. So it's very complementary.

Yes, I mean we started quoting that maybe a little bit after -- we launched the data center units. The data center units are admittedly maybe a little more simple. Oftentimes, you'll see in our traditional business, when you get a machine that's required on a specification that's of that size, it's a lot of customization the bigger the machine, the higher level of customization. It's been the history in our industry. The data center thing is kind of breaking that because they want 100 copies of the same machine, that's like we're talking like build home standbys then, right? Like we're counting them out down an assembly line versus [indiscernible] building them in kind of with a high degree of customization. So we had to get some of that customization stuff ready. We're in market with it now. We took an order for our first project here recently. We've got a nice pipeline building there, to make sure on this Erik's got -- we have a project internally to double the size of our C&I business over the next 3 years.

One of the core tenets of that project is not losing sight of our traditional business and the importance of that business. Because you're right, the data center market -- are they going to spend $700 billion a year for [indiscernible]? No, probably not. But it could be a lot on here. But even if there's not, there's a traditional business we weren't participating in at all. And that's all -- it's 100% incremental. And it's a space we think at least entitled to the 15% share we get in the rest of our C&I business. So as we build that out, that's a market that we're keen to make sure that we focus on it can't all be about data centers.

And Erik's done a great thing in his business is he separated the teams. We have our traditional teams. We have a data center team. We have a direct sales team that he and his team have built to go directly after the data centers and call on those. And I think the service model, which was a question that came up before. That's why you got to keep that [indiscernible] as well. We can't lose sight to the importance of our traditional market as grows as well going forward.

Do we have time for one more, Chris? Maybe we could do one more quick. We do one more. We'll just do a closure here. Anybody? Maybe there were no more questions, maybe you were ahead of me. Forget it, go to lunch. I don't care.

No. Well, if there are any other questions. I really appreciate your time this morning. We hope that the takeaways here were meaningful. We hope it was worth the time. I think as I said before, we've got a very unique opportunity, an exciting opportunity as a company here to do something that we believe is, again, generational probably over using that word this morning. But stay tuned. Now it's on us. We've got to execute, and we will do that. Thank you very much.

Hello, and thank you for standing by. Welcome to Generac Holdings Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Kris Rosemann. 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 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 that 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 our 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 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 C&I 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% were 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 2 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 C&I 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 C&I 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 C&I 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, PWEcell 2 as well as our first Generac-branded microinverter PowerMicro 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 mega trends 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 5 years. NERC contributes 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, 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 see -- 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 sixfold as compared to the rates seen over the last 5 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 5 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 C&I 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 increased production rates across our existing facilities and with our new plant in [indiscernible], 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 2025, increasing approximately 27%. And 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 C&I 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 5, we further strengthened our position in the market for mobile products with the acquisition of [indiscernible], 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 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 [indiscernible] remained resilient despite the continued softness in outage activity, channel partner sentiment was negatively impacted by the weak second half 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 and 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 U.S. 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 align 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 solutions remains central to our developing residential energy ecosystem with our PWRcell 2, PowerMicro 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 PowerMicro 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 that a 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 C&I 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?

Thanks, Aaron. Looking at fourth quarter 2025 results in more detail. Net sales during the quarter decreased 12% to $1.1 billion as compared to $1.2 billion in the prior year fourth quarter. The net effect of acquisitions in foreign currency had an approximate 1% favorable impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the fourth quarter by product class. Residential product sales decreased 23% to $572 million as compared to $743 million in the prior year.

As previously discussed, continued weakness in power outage activity resulted in lower shipments of home standby and portable generators as compared to a much stronger outage environment in the prior year period. Residential energy technology sales increased year-over-year, driven by shipments of energy storage systems to Puerto Rico as we completed the Department of Energy resiliency program during the quarter.

Commercial and industrial product sales for the fourth quarter increased 10% and to $400 million as compared to $363 million in the prior year. The combination of contributions from acquisitions and the impact of foreign currency had a 3% favorable impact on sales growth during the quarter. The core sales growth was primarily due to revenue from products sold to data center customers, both domestically and internationally.

Net sales for the other products and services category decreased approximately 6% to $120 million as compared to $128 million in the fourth quarter of 2024. The core sales decline of 7% was primarily driven by a decline in aftermarket service parts related to the residential products due to a strong prior year comparison that included multiple major power outages, partially offset by continued growth in ecobee Services.

Gross profit margin was 36.3% compared to 0.406 in the prior year fourth quarter. This decrease was primarily due to unfavorable sales mix, together with a $15.6 million net inventory provision recorded in the current year quarter related to the settlement of a contract dispute with a supplier for a discontinued product. as disclosed in the accompanying reconciliation schedules to the earnings release.

In addition, higher input costs and lower manufacturing absorption were mostly offset by increased price realization. Operating expenses increased to $405 million or up 34% compared to the fourth quarter of 2024. The increase was primarily driven by a $104.5 million provision recorded in the current year quarter for the settlement of a portable generator product liability matter as disclosed in the accompanying reconciliation schedules to the earnings release.

Additionally, lower incentive compensation was offset by higher marketing spend to drive incremental awareness for our products. Adjusted EBITDA, before deducting for noncontrolling interest, as defined in our earnings release, was $185 million or 17% of net sales in the fourth quarter as compared to $265 million or 21.5% of net sales in the prior year.

For the full year 2025, adjusted EBITDA before deducting for noncontrolling interest was $716 million or 17% of net sales as compared to $789 million or 18.4% in the prior year. I will now briefly discuss financial results for our 2 reporting segments. Domestic segment total sales, including intersegment sales, decreased 17% to $889 million in the quarter as compared to $1.07 billion in the prior year, which included a slight favorable impact from acquisitions.

Adjusted EBITDA for the segment was $151 million or 17% of total sales. as compared to $243 million in the prior year or 22.7%. For the full year 2025, domestic segment total sales decreased 4% over the prior year to $3.49 billion, which included a slight favorable impact from acquisitions. Adjusted EBITDA margins for the segment for the full year 2025 were 17.1% compared to 19.1% in the prior year. International segment total sales, including intersegment sales, increased 12% to $209 million in the quarter as compared to $187 million in the prior year quarter. including an approximate 6% sales growth contribution from foreign currency.

Adjusted EBITDA for the segment before deducting for noncontrolling interest was $33.7 million or 16.1% of total sales as compared to $22.5 million or 12% in the prior year. For the full year 2025, International segment total sales increased 7% over the prior year to $777 million, including an approximate 1% sales growth contribution from foreign currency. Adjusted EBITDA margins for the segment for the full year 2025 and before deducting for noncontrolling interests were 15.1% of total sales during 2025 as compared to 13.2% in the prior year.

Now switching back to our financial performance for the fourth quarter of 2025 on a consolidated basis. As disclosed in our earnings release, the GAAP net loss for the company in the quarter was $24 million as compared to net income of $117 million for the fourth quarter of 2024. As previously discussed, the current year quarter includes the impact of the aforementioned product liability and supplier contract settlements, which drove our net loss for the quarter.

GAAP income taxes during the current year fourth quarter were a benefit of $3.7 million or an effective tax rate of 13.4% as compared to an expense of $27.3 million or an effective tax rate of 18.9% for the prior year. The lower effective tax rate was driven primarily by the impact of certain favorable discrete tax items and their impact on a lower pretax income in the current year.

The net loss per share for the company on a GAAP basis was $0.42 in the fourth quarter of 2025 compared to net income per share of $2.15 in the prior year. Adjusted net income for the company, as defined in our earnings release was $95 million in the current year quarter or $1.61 per share. This compares to adjusted net income of $168 million in the prior year or $2.80 per share.

Cash flow from operations was $189 million in the current year quarter as compared to $339 million in the prior year fourth quarter. And free cash flow, as defined in our earnings release, was $130 million as compared to $286 million in the same quarter last year. The change in free cash flow was primarily driven by a significant reduction in net working capital in the prior year, which did not repeat and lower operating income in the current year, partially offset by lower cash payments for taxes.

Total debt outstanding at the end of the quarter was $1.33 billion resulting in a gross debt leverage ratio at the end of the fourth quarter of 1.9x on an as-reported basis, which is within our target gross debt leverage range of 1 to 2x adjusted EBITDA. For the full year, Cash flow from operations was $438 million as compared to $741 million in the prior year.

Free cash flow, again, as defined in our earnings release, was $268 million, as compared to $605 million in full year 2024. Capital expenditures during the full year totaled $170 million or 4% of net sales as we invested in additional production capacity and other capabilities to support future C&I growth. In addition, we opportunistically repurchased approximately 1.11 million shares of our common stock during the full year for $148 million at an average price of $133 per share.

Additionally, on February 9, Generac's Board of Directors approved a new share repurchase authorization that allows for the repurchase of up to $500 million of the company's shares over the next 24 months, replacing the remaining balance of the previous program. We will continue to operate within our disciplined and balanced capital allocation framework as we evaluate future shareholder value-enhancing opportunities.

With that, I will now provide further comments on our new outlook for 2026. As disclosed in our press release this morning, we are initiating 2026 net sales guidance that projects strong year-over-year growth for the full year period. We expect consolidated net sales for the full year to increase at a mid-teens rate as compared to the prior year, which includes a favorable impact of approximately 1% from the net combination of foreign currency and completed acquisitions and divestitures.

Consistent with our historical approach, our guidance assumes a level of power outage activity in line with the longer-term baseline average for the remainder of the year and does not assume the benefit of a major power outage event during the year. Breaking this down by product class, we expect overall residential net sales to increase in the plus 10% range as compared to 2025, primarily driven by growth in shipments of home standby and portable generators, given the assumption of a return to a baseline average power outage environment in 2026 as compared to an easier comp in the second half of 2025.

In addition, we expect higher price realization for home standby generators, the launch of PowerMicro and continued growth at ecobee to contribute to the strong residential product sales growth. The residential growth will be partially offset by lower energy storage sales due to the end of the Department of Energy Program in Puerto Rico. As Aaron discussed, we expect robust C&I product sales growth in the plus 30% range during 2026, primarily driven by products sold to data center customers.

In addition, the acquisition of Allmand is expected to contribute approximately 1/4 of this year-over-year growth, with the remainder coming from modest organic growth in our traditional C&I products and

channels. Additionally, in January, we completed the divestiture of certain noncore assets that will impact sales for our other products and services category, resulting in an approximate 10% year-over-year decline for this product class in 2026. From a seasonality perspective, we expect 2026 consolidated net sales to be approximately in line with normal seasonality, resulting in overall net sales in the first half, being approximately 46% weighted and sales in the second half being approximately 54% weighted.

Specifically for the first quarter, we expect overall net sales to increase in the plus 11% to 13% range compared to the prior year primarily driven by strong growth in portable generator shipments related to winter storm fern and significantly higher revenue from products sold to data center customers.

Looking at our gross margin expectations for the full year 2026. We expect the full year realization of price increases to be fully offset by higher input costs and unfavorable mix, resulting in approximately flat gross margins compared to the prior year in the 38% to 39% range. From a seasonality perspective, we expect first quarter gross margins to mark the low point for the year, with a slight sequential decline from the fourth quarter of 2025 in the 36% range.

In line with normal seasonality, gross margins are expected to improve sequentially into the second half of the year given the increasing mix of higher margin home standby product sales, resulting in second half gross margins in the 39% range. Looking at our adjusted EBITDA margin expectations for full year '26.

Adjusted EBITDA margins before deducting for noncontrolling interests are expected to be approximately 18% to 19% for the full year 2026 compared to 17% in 2025. At the midpoint of the sales growth and margin ranges, this would result in an approximate 25% increase in EBITDA dollars in 2026 and compared to 2025. We also expect adjusted EBITDA margins to follow normal seasonality and improved significantly as we move throughout the year.

Specifically, regarding the first quarter, adjusted EBITDA margins are expected to land in the 15% range and then improved sequentially throughout the year, reaching approximately 20% for the second half of the year. This sequential improvement is expected to be driven by the previously discussed gross margin mix improvements, together with significant operating expense leverage on the seasonally higher sales volumes. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2026.

Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add back items should be reflected net of tax using our expected effective tax rate. For 2026, our GAAP effective tax rate is expected to be between 24% to 25% as compared to the 18.9% full year GAAP tax rate for 2025. We expect interest expense to be approximately $65 million to $69 million for full year '26, assuming no additional term loan principal prepayments during the year. This is a decline from '25 levels of $71 million due to the full year impact of lower sulfur interest rates.

Our capital expenditures are projected to be approximately 3.5% of our forecasted net sales for the year as we continue to invest in incremental capacity and execute other projects to support future growth expectations, particularly for C&I products. Depreciation expense is forecast to be approximately $104 million to $108 million in '26, given our assumed CapEx guidance.

We have intangible amortization expense in '26 is expected to be approximately $18 million, $112 million during the year. Stock compensation expense is expected to be between $54 million to $58 million for the year. Operating and free cash flow generation is expected to be weighted towards the second half of the year in '26, resulting in projected free cash flow generation of approximately $350 million for the full year 2026.

Our full year weighted average diluted share count is expected to increase modestly and be between 59.5 million to 60 million shares as compared to 59.3 million shares in 2025. Finally, this 2026 outlook does not reflect potential additional acquisitions, divestitures or share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Tommy Moll with Stephens.

Aaron, I wanted to ask about your progress with the hyperscalers. Just to level set, I think what I hear you saying is no orders in backlog yet, but the advance to the pilot phase is new versus last quarter. So maybe if you could just confirm if that's correct. And just give us a little more insight about what you're expecting in the go forward. You talked about orders to come? Just walk us through what the phases of that might look like.

Yes. Thanks, Tommy. So yes, that's largely correct. The backlog, there's a couple of units in there for the pilot program, but that's it. So the $400 million. And remember, the $400 million is after we began shipping product in Q4 and here also started Q1. So good order flow again over the last 90 days to get the backlog to 400, and that's without any material hyperscale business at this point. So that's the answer to that question. And the second part of the question in terms of the progression there. The pilot programs are in flight. We are in deep negotiations with the -- with 2 hyperscale customers in particular, and that's what the pilot programs are related to. And we would anticipate with successful completion of those pilot programs here in the call it, the end of the first quarter, beginning of the second quarter, we would be in a position then with each of those customers to sign a longer-term supply agreement, a master supply agreement. And then that's when we would start to see purchase order flow, and that would then feed into the backlog. They've been holding off on that, although I will say all of our conversations with those 2 hyperscalers have been about how much can we supply for 2027 and 2028, what's our capacity. And then also, do we have potential to supply product in 2026. And so that is not in our guide at all, obviously. So that could be upside. Again, as I said on the call, with the purchase of the new facility here in Sussex, Wisconsin. We'll have that facility online in the second half of the year, and we could respond to potential or potential for additional orders from those hyperscale customers in '26 should we be able to work through the successful completion of the contract negotiations in the pilot phases. But we feel very good about where we're at. They need additional supply desperately. And we believe we're going to be in a really good position certainly for '27 and '28, but also potentially here for 2026. The addition of that facility and some of the tweaks we've made, just to our domestic capacity, we believe we're now over $1 billion here domestically for capacity. So -- and we're looking at ways we could go higher because the volumes we're talking about in '27 and '28 could take us easily above those numbers.

Our next question comes from the line of George Gianarikas with Canaccord.

So as it relates to the data center opportunity, can you just maybe talk a little bit about the competitive environment, how that may be changing or if it's the same and whether or not this enormous opportunity is inviting any new entrants into it?

Yes. Thanks, George. So as it relates specifically to diesel generators, large megawatt diesel generator backup, the market is has not changed in terms of participants at this point other than our entry into it. I think that the reason for that largely is the limitation around the number of diesel engine manufacturers in those high horsepower diesel engine ranges. That's a pretty static number because of the investment required, not only in R&D, but also just the the production investment needed to -- for tooling and the manufacturer of those types of products. So we think we have a great partner there that has invested very heavily in capacity. So we don't believe we're going to see capacity limitations in the near term or in building out the rest of our supply chain, obviously, it's not just engine. There are alternators, there are cooling packages, there are structural elements of the generator in terms of the steel base frames and the diesel tanks themselves. And then obviously, the packaging structures that go around these machines that typically is handled by third-party companies. We are evaluating and deepening our relationships in the supply chain. It's not just the investments we're making in our own production environment, right? We can go out and buy a plant and we can buy the equipment and hire the people, [indiscernible] the plant, but we need to make sure the supply chain is ready for those higher volumes. Fortunately, this is something we do really well, right, we're taking a page out of our residential side of our business where we've been very agile over the years and reacting to surges in demand and the ability to get our supply chain at the levels that we need them at to be successful and to handle increased demand. So we're kind of built that way. So I guess, just -- it's part of our DNA, and I think it's going to serve us quite well in this new market.

Our next question comes from the line of Mike Halloran with Baird.

Maybe just a thought about how you're thinking about directionally the TAM or the growth profile over the -- for the data center markets over the next 3, 5 years, whatever kind of time horizon you're talking to. Just to put it in context of the growth from an industry perspective? And then secondarily, the types of share that you envision is realistic within the context of that overall market opportunity.

Yes. Thanks, Mike. It's a great question. And obviously, the numbers around the size of the price, right, in terms of how how much market -- what is the TAM for just specifically the day center element there in this market for diesel, a large megawatt diesel backup generators, it keeps changing because a lot of that is tight, obviously, as you would imagine, to the amount of construction. But we think that, that's something -- that market could be as much as $15 billion a year alone. For us, I think when we look at what's reasonable for us for share position, we look at our share here in North America, depending on the segments of the markets you look at, we're a 10% to 15% share player in the C&I market. So we think that is that a reasonable target for us? We believe so. Maybe on the low end of that, it's 10%. I mean, again, we believe that the opportunity here is great enough that we can take what effectively was a $1.5 billion business last year in C&I, and we can double that in the next 3 to 5 years. So that would be the addition of another $1.5 billion. So just a 10% share. So now if the market is bigger, maybe that number grows. If the number is smaller because of the potential cycle, cyclical nature of like all markets, there are cycles, we're going to be measured about that. I will say this, in addition to just -- obviously, the discussion this morning is heavily focused and waited on data centers. But we basically are starting from 0 with our traditional market, which already existed that traditional market, obviously not a $15 billion a year market in that range, but it's half the dollars in our traditional market. So it's another, call it, $3 billion to $4 billion. And so just getting a portion of that, we believe, is going to be supportive of the growth that we're seeing. And for the record, the $400 million backlog that we keep talking about, we don't have any of our traditional large megawatt products in that backlog at this point. So that's a recent product launch. We launched with the data center-focused sets first, and we started quoting now in the traditional market. So that's an opportunity for us on a go-forward basis that will, I think, be able to talk more about as we go throughout 2026 here.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Maybe shifting gears to residential. I wanted to just better understand what you think the hole is for the Puerto Rico wrap and then how you're thinking about power micro demand and feedback. And then within the home standby, I think you said mid-teens growth, how much of that is price mix and volumes. And then just an update on kind of the cost structure in energy technology '26 versus '25 bringing that loss down towards your target?

Yes. Thanks, Jeff. All great questions, and I appreciate, by the way, the question on residential. Good to talk about that. That market, obviously, the second half of last year was just incredibly softer outages. So when we think about the opportunities for residential next year, and we're calling out a mid-teens growth rate overall. But when you kind of pick apart the pieces, which I think is what the gist of your question is, Jeff, the DOE headwind, that program ended here early '26. About $100 million of energy storage, that's a hole that we've got to make up. Now we do have our next-generation power cell products in market. And then as we noted on the call in our prepared remarks, PowerMicro, which is an exciting -- the microinverter market is an established market for residential solar. And even though the incentives and support at the federal level for residential solar and maybe even storage, you can make the argument is going is gone for intents and purposes at least at the homeowner level can it still exists for third-party operators, DPOs. But we do think that, that market, while it will compress in the short term, a year or 2, all the forecasts are that as energy costs continue to rise, the need for these types of products is there's going to be a demand for them at the residential level for sure and certainly at the light commercial level, which we'll focus on eventually long term as well. So there's a hole there. That's going to be offset by PowerMicro, not fully. It will also be offset by ecobee growth, not fully. So when you look at just those products, storage, microinverters and our ecobee products, that's going to be down but then obviously, good growth on our core residential products with home standby and port generators. In terms of like where that's coming from next year, we see about half of the growth in the home standby category coming from price. So it's the realization of price, not only from the new product line, which has a higher ASP, a bit higher ASP, but also full year realization for some of the tariff price increases that we put in last year. That's about half the growth. And then the other half would be unit volume that would accelerate based on a return to a more normal. The assumption that we return to more normal outage in [indiscernible] more in the second half of the year, of course. So that's kind of how if you unpack it, but still kind of exciting that even in spite of kind of having a challenging second half of the year last year, the category -- the metrics in the category actually hung in there. I mean we were surprised to see home consultations, activations, dealer counts, you still got our dealer counts, all the things that we watch very closely and then you look at winter storm firm, we kind of got off the year on the right foot finally with the category. So we were able to see some nice volume on portable generators. It's going to give us -- it's going to put us in a much better position starting out the year then had we continued the power outage kind of drought that we've been in here in the second half of the year. So we feel pretty good about where we're kind of where we're leaning here as we start the year for the residential products.

Our next question comes from the line of Brian Drab with William Blair.

I'm just wondering if you can update us on what kind of margin are you expecting from the data center products? And I know you're not going to give maybe specifics to like relative to home standby. And then also, how does that progress over time? Obviously, you're at a moment where you're ramping capacity dramatically and the costs associated with that. Are there -- and just the inefficiencies that often come with new product launch where margin is going to be this year and longer term?

Yes, Brian, this is York. Yes. Good question. The way we're seeing it play out in terms of these projects is -- and to your point, as we ramp up capacity, there will be some start-up costs. We're seeing around mid-teens EBITDA margins or contribution margins for these projects in 2026. And then as we ramp up and get more scale, we're seeing more high teens margins in the 27%, 28% range in the data center space. So basically in line with pretty close to corporate average EBITDA margins which is [indiscernible]

Yes. And I would say the upside there potential, Brian, would be as we look to bring in-house more elements, more vertical integration in the entire package, there's an opportunity there for us should we find the right way to do that either through M&A or organic investment to do more of the content. Obviously, we're not going to do diesel engines, but we have the opportunity to add to the content, which then would have the potential to improve the the margin profile even further. So yes.

Our next question comes from the line of Stephen Gengaro with Stifel.

Just I was wondering about the home standby generator business. Just as you sort of observed the trends in that business over the last couple of years, how do you think about just the penetration rates you're seeing and kind of just sort of the growth rate you would expect over kind of a multiyear period in kind of a sort of smooth outage normalized outage activity market?

Yes, Stephen, great question. I think the challenge in answering the question, of course, we haven't really had much of a "normal" outage environment. We talked about that on the averages, of course, and that helps smooth things out. And I guess to answer your question, today, we're only 6.75% penetrated. And every 1% of penetration is a $4.5 billion market opportunity. Our share is is outsized in that market because we created it, we own it, we drive it. There isn't a single other player in the home standby category that puts the kind of muscle we put behind. And we do that because it's only 6.75% penetrated, and we think that there's huge upside there. I mean when you look at where could penetration go, which maybe is your question, in terms of terminal penetration rate, for the category. I mean we have states and mind you, some of these states are our fastest-growing states where we're in the 20% range, right? We're 23%, 24% in states like West Virginia and may not huge states, right? But you look at other states like Michigan. Michigan for us is a 17% pen rate. So can we get the 17% pen across the U.S. I mean, there's -- California is low. So there's opportunities there. Texas, which is a massive market, is only really right at the median now. Florida is really kind of right at the median. So I think the opportunity here, if you look historically, the growth rate in the category over the last 25 years has been roughly 15%. It's been pretty consistent over that period. And I would say, we're saying residential products in total are going to grow in the mid-teens. Home standby is a component of that obviously a driver, a major driver of that. So 10% of that.

So in terms of where we think we can go with this category, we just think there's a lot of runway here. I mean, you look at just all the data around outages and the trends over the last 20 to 30 years are all up and to the right. And as Americans, we deal with outages more than any other kind of developed nation in the world. It's amazing, really. The state of our grid and the reality of it is, and it's complex. There's a lot of reasons for it. And we've always said Mother Nature has always been kind of driving 70% of those outages. We are seeing a change we're seeing a change in basic kind of math around supply and demand and shortfalls in supply. You may have heard in my comments, the National Electric Reliability Corporation calling out that half of all Americans are at risk for significant outages over the next 5 years because of energy shortfalls, not because of mother nature. So you look at that and you look at the structural things that are driving that right? We've brought a lot of supply on the grid that's renewable. So in terms of how you plan for that in terms of capacity planning factors, they're much lower than thermal assets like coal or gas plants or nuclear, right? You can't plan them as high. So that's a problem when it comes to -- you've got periods of peak demand. Very hot days, very cold days are going to present significant challenges to grid operators and keeping the lights on. You're going to see more rolling brownouts, more rolling blackouts as a result. This is fact. Without a question, we are going to see this. It's been called out over and over again by a ton of prognosticators and others who follow these markets much more closely than we do. And so we think the opportunity for home standby backup power. And then, of course, in our C&I business, our core business, backup power, the requirements there are going to be significant in the years ahead.

Our next question comes from the line of [indiscernible] with Bank of America.

Just to clarify here, when you say you've progressed to the pilot phase with hyperscalers. What's the pilot mean in practice? Is that based on performance validation? And then the second question I had here, we're talking about potential significant volumes in '27 and '28, right? Is that based on customer provided demand forecasts that are tied to specific cycles or more to a general capacity reservation for future expansion, right? I'm just -- I'm trying to confirm here what we can anticipate in just in the C&I profile. I think last quarter, you maybe spoke about C&I doubling in the next few years. And -- was that kind of based on just 1 hyperscaler award here because now we're talking about 2. So trying to get more clarity around this in general.

Those are great questions. I mean, first, on the pilot programs, they're different. Based on the different hyperscalers, they both have different requirements, but effectively, there are test scripts but then we run the products through in some of those in our laboratories. Some of those are as parts of actual real sites so in the wild, so to speak. So those are underway today. And some of those are observed directly here again, and some of those are are in the wild. So we are progressing well there, and we don't see any problems with meeting those requirements. We know these products quite well. As far as your question about the capacity that we've been talking about in the future here, '27, '28 with these hyperscalers, it's a mix of both. We actually -- in one instance, we have hyperscale,a potential hyperscale customer that is telling a specific site build-outs for their sites. And we wanted to overlay our manufacturing capacity kind of globally to see where that could fit in. And so in that instance, with that conversation, it's a lot more pointed around the specifics of what is needed by site and what we could potentially provide because obviously, logistics costs are a big part of the overall bill here, not only in cost but also in time. So trying to match the builds, the build-outs of these data center of the construction activity with our manufacturing production capacity by region is one work stream. With another hyperscaler, it's all about, hey, how many slots can reserve for us. And we're talking about a lot of product. It's -- in fact, it's almost -- it's just difficult for me to get my head around in terms of the size of what we're talking about here in the potential. And in fact, the $1 billion of capacity that I've said we've kind of put ourselves in a position to be in by the end of the year here domestically would not be enough to handle the potential capacity that would be required if we are able to successfully land purchase orders for these hyperscale customers? Because remember, we also have co-locators. We're a preferred supplier to 2 co-locators already. in our backlog and that continues to grow. So just the requirements here are enormous. To answer the last part of your question about our completion of doubling the C&I business over the next 3 to 5 years, if we had to be very honest, that was really a landing on hyperscaler is if we landed one hyperscaler, that would get us to a point of doubling. Is there an opportunity to go higher than that? Of course, -- that would be somewhat obviously gated by our ability to expand capacity and then, of course, supply chain as well. So those are things that we've got to work on yet, so we're not ready to commit higher than that. But I do believe if we can get -- if we can have success with our own capacity and if we can continue to work with our supply chain partners, there is a possibility that we could go higher than that in the future.

Our next question comes from the line of Christopher Glynn with Oppenheimer.

A couple on residential. Just curious about how you're thinking about ASP in the short term related to burn. And I didn't hear any comments on that. And then he could be us new grid resiliency service where you had a nice contribution to the grid operating capacity. How do we think about the revenue and monetization implications for that?

Yes. Thanks, Chris. Good questions. In grid services, it's -- we obviously have invested in that. It's a small piece, though, but it is interesting. We want to keep a toe in that because it's recurring revenue, but also the possibility of the grid to be very frank, grid services programs have been slow to develop slower than we thought, right? Like we acquired Ambala a number of years ago. We've got -- obviously, ecobee with that business came the grid services opportunities there. And that's really where most of the revenue is coming from today is on the ecobee side. Utilities have been just slow to adopt grid resiliency programs. I do think as the grid becomes more constrained and as pressure builds on utilities and grid operators, they will have to turn to nonconventional solutions like virtual power plants and other grid services types of programs. So we definitely want to stay close to it. That's something that we're it's just small, right? But it's recurring and it's a nice piece of growth there, and we're going to continue to stay in bulk. Your question on home standby Fern gave us a nice bump on portables also gave us a nice bump in IHCs, our in-home consultations, and we saw those basically double from where we were expecting them to be for the month. So and up considerably from the prior year, obviously, as you would expect in a period of time that's generally kind of off season, if you will. So what are the prospects for that? I mentioned our new lead distribution system, which we have seen nice results from already. We've seen a nice improvement in close rates coming out of those systems when we do get surges in demand. So we'll let these IHCs mature, and we'll provide a more fulsome update on that but they were high. They were -- there's no dying it [indiscernible]. Yes. And we put something into the guide for it, but do we make enough. We want to see what the close rate looks like. Now we want to see how the rest of the season develops here. We want to see what kind of as we get a better read on the consumer maybe overall, big ticket purchases tied to residential investment, where is that going? So I think we're maybe taking a bit of a more conservative tone there, but we're off to a good start for the year. So that's helpful.

Our next question comes from the line of Praneeth Satish with Wells Fargo.

So the decision to expand to $1 billion per year of diesel genset capacity, you did this before getting signed contracts from hyperscalers. But it makes sense given the amount of demand you're seeing and the industry capacity constraints. But I guess my question is when we look beyond that, beyond that $1 billion I guess 2 questions. One, is it possible at this point to increase capacity above $1 billion in -- and then two, how do you think about expanding for that next tranche with -- in the context of peers that are also expanding capacity for that '27, '28 time frame for that next leg of expansion, would you kind of wait for contracts to be in hand before expanding? Or would you still do it again if you saw enough demand signals?

You're spot on. I mean, we felt good enough about where we were headed here with our discussions with the customers that I've mentioned here that we took -- we're running on a better risk there by going out and buying an existing facility. We bought an existing facility, so we could get it up and running quickly, right? I mean to build something greenfield takes more time frankly, [indiscernible] capital. This, I think, was a much more efficient way to to accelerate our capacity adds. And again, that $1 billion that I mentioned is just the domestic capacity. So we actually have greater than that globally. So we had mentioned $500 million, I think, on a previous call, and that was really our global capacity. So we maybe have a couple of hundred million of additional capacity outside the U.S., and we're looking at ways to expand that as well, by the way. So where does that put us? I think we'll give a more fulsome update. We do have an Investor Day coming up on March 25. So we'll be able to provide, I think, a lot more context there around where we're going from a capacity standpoint for sure. But your question, if we saw opportunities, let's say we wanted to go to $2 billion, right? Like we saw handwriting the wall. I guess it would depend on how strong those signals, those buy signals are. Obviously, we took -- we undertook this first step without having orders in hand. I would tell you it will be I would take greater comfort in trying to double it again if we had hard orders in hand. So it's not that we wouldn't do it. for the right circumstances or if we saw and had the right kind of conversations at the right levels of these customers as well. But we did take that. We took that initial kind of flyer here. and because we feel very good about it. I think that's going to pay off well. That will position us very well, we think, in the context of the other part of your question about the rest of the market and where we are competitively. We think that our lead times are going to remain shorter than the rest of the market, at least for the near term and probably all of 2027, our competitors today are out kind of 2 years on deliveries. And of course, they are investing in capacity adds as well. But the constraints largely for our competitors are in the engines and the engine supply. Our engine partner, we believe, can allow us to continue to keep shorter lead times because of their overall investment in their capacity, which gives us access to to what is the arguably the most critical component in the gen set in terms of long lead time.

Our next question comes from the line of Joseph Osha with Guggenheim Partners.

Just 2 quick ones. First, we've talked a lot about hyperscalers. I'm wondering if you could help us perhaps size the colo opportunity, Aaron, you mentioned it briefly because there's a lot there. And then the second question, we were [indiscernible]. We've talked a lot about diesel today, but we also heard a lot about some of the smaller sparked natural gas machines being used as a time to power solution in some cases. And so I'm wondering if you could comment on whether you're seeing any of that demand.

Yes. Thanks, Joe. Great question. No, I think from from a diesel perspective, that the -- that market continues to grow. Obviously, the co-locator portion of that today is our focus because we haven't gotten to final contract signings with the hyperscalers. And at $400 million of backlog, could you argue that is that 30% of the market. Is that 1/3 of the market? Possibly

[indiscernible]

Yes, there's a lot -- I'll tell you this, it's a longer tail on -- in terms of just the number of customers to talk to there and the number of parties involved, we have been making very good progress though there. I mean that is where we've gotten our first point of traction. And we've been working with those customers to establish ourselves, I think I mentioned just a second ago with another question was we actually are listed as the preferred supplier with 2 co-locators. So where they do sites around the world, we are one of the primary suppliers that they look to for backup power. So those are great opportunities for us and will help us kind of balance out, if you will, reliance on any one customer, but there's no denying that the hyperscalers are. They just have they have -- they carry a lot of cloud, obviously, in terms of the capital they're deploying for data center construction. So they're going to have an outsized impact. Your question [indiscernible] product is a good one. We are seeing certain spark-ignited engines being used in applications kind of behind the meter to power data centers who -- where grid interconnect is not available and where the lead times to wait for maybe a traditional gas turbine or a different solution is just not not possible, right? You want to bring the center -- data center online, so you're seeing [indiscernible] engines, reciprocating gas engines being used. What typically -- what you'll see with those reciprocating gas engines, though, is there they are operating -- not to get too technical here, but they're operated in what's known as a lean combustion cycle mode, which allows them to operate more efficiently to produce power on a continuous basis. The engines themselves are robust off. You could use them in backup -- but the problem you into with lean burn gas engines as configured as lean burn is their response times to outages are poor. Generally, you've got to get those machines. It takes time for them to spool up and get to full power. And we're talking about minutes, which is an incredible amount of downtime data center, if you were to lose power, then we'd have to [indiscernible] -- you'd have to infill that with a lot of batteries, either UPSs, [indiscernible] supplies or raw batteries to be able to cover that gap. So they're not great pure backup assets. In fact, what we're seeing is where you do see [indiscernible] engines and lean burn being used in a prime power configuration, you're still seeing diesel backup generators on the sites because the theory that we've been hearing anyway from customers is that they'll just -- once the site gets connected to the grid, they'll -- they need the backup generators and cat there's a failure with the lean burn machines as they're providing primary power. But then once grid is connected, those gas machines can be picked up and moved to a new site, right? They can be moved to another site that's forward in advance of interconnect and redeployed there. So we believe there's going to still be a market and an opportunity that, that doesn't shrink the TAM at all for backup diesel generators, that you need both effectively is kind of what my point is.

Our next question comes from the line of Vikram Bagri with Citi.

It's Ted on for Vik. I wanted to talk about energy technology. Are you able to share whether revenues where they shook out relative to the $300 million to $400 million range that you previously talked about? And then for this year, is it fair to assume that those revenues would be below the end of that range, if you include the Puerto Rico impact? And then just lastly, could you just confirm whether the focus is still on achieving breakeven EBITDA margins within that business in 2027?

Thanks. Appreciate the question. So last year, 2025, those products ended at the high end of the range, closer to 400, they were about 375. And going forward, they're going to pull back a little bit because of the loss of the DOE program, but actually, they're going to be kind of in between that 300 to 400 range again. PowerMicro launching and ecobee continues to just rip for us. It's a great company, to be honest, great products, great support, and they are becoming much more deeply integrated into this ecosystem we've been building. So in terms of like when you look at the products individually, we are still very fixated on getting to breakeven profitability by 2027 on the products -- in the product set collectively. But what the problem we're going to run into here as we go forward as we build out this ecosystem is that more and more of the operating expense, if you will, the layer that is at ecobee and is that some of the other businesses there that make that group up, they're getting pulled into this -- the build-out of this energy ecosystem. The focus on building out the ecobee thermostat, smart thermostat, turning that into more of an energy hub and deploying and bringing and unifying basically the customer experience on to the single app that [indiscernible] so do you say that that's related to energy technology? Or do you say that that's related to residential. So we'll -- as I said, we've got an Investor Day coming up in late March, and we'll provide some, I think, more detailed color about how we're thinking about talking to this going forward because it is going to get a little bit messy as we integrate more deeply all of these products for this ecosystem concept. But that said, if you were to just peel those products out on their own, we are still highly focused on those getting to breakeven profitability in '27. We're going to make very good progress on that here in 2026. That's our plan.

Next question comes from the line of Keith Housum with Northcoast Research.

Going back to the residential part again here. Aaron, perhaps any thoughts you have in terms of the battery storage market, understanding there's been a lot of products coming out of the past year and potentially the cannibalization of the HSV business, how do you kind of guarantee that does not happen going forward?

Yes. Thanks, Keith. It's a great question, right? I mean it's one of the reasons why we're investing so heavily in battery technology because obviously, battery performance has continued to improve, costs are coming down. The reality is though, we're still a long way off from where a battery could stand in for long-duration outage coverage -- I mean, you can go out, you can buy 5 PWRcell 2s, if you want. But in terms of just the cost per kilowatt hour of coverage, it's really expensive, right? So it's just not equitable today. I think we're batteries in the residential market short duration outage protection, of course, but really as part of an overall strategy for a homeowner who wants to self-generate, right, either on the rooftop with solar or geothermal, some other production method and then having the ability to store some of that power so that they can arbitrage the value of that power back to the grid operator at a time when it makes most sense, either consume it, self-consume, right, when grid rates are high, or to sell it back to the grid at a time when they don't need it and maybe the rates are more appropriate and they can get a return on that. All indications -- again, the market for solar plus storage is going to contract here in the short term. There's no question about it. There was definitely some pull forward into 2025 as a result of the end of the tax incentive for homeowners directly. But as we look forward, all projections are that is energy costs keep going up, energy costs are up on average across the U.S. in the last 5 years, they're up even more dramatically in certain parts of the country like California and they're projected to double. The utility bill for most homeowners today is second only to the rent or your mortgage and it's going to go up. It's going to double again. So homeowners and honestly, like if you're a homeowner, you're frustrated with your power cost rising and you feel like your only way to combat that is to go around the house and turn off turn off lights and turn down the thermostat or turn it up depending on what time of the year it is. If that's the only way you can manage that, I mean that's not a great situation to be in. Homeowners and businesses are going to be looking for ways to cut their power costs. They're going to be looking for ways to save. We think this is the next big leg of residential long term for us. There's always going to be a market for resiliency, and we think that home standby is going to lead that market for a long time just on a raw cost basis, right, in terms of the value proposition of that product line. But over time, as batteries become more -- better from performance and costs continue to come down and utility rates continue to rise, the ability to self-generate and have some amount of storage, again, to play that arbitrage, to get the payback on the system and then have some resiliency. But again, the ecosystem concept where maybe even at a generator to that system. We have customers who are doing that today. bottom was battery. Instead of buying 5 power walls. They buy one power wall or PWRcell 2 and they had a generator. That's a much more cost-effective way to get basically bottomless coverage. And we think that's a great kind of hybridization of backup power in the space. So we see the market being a huge opportunity for us Long term, we're very convicted about obviously, and that's why we've been investing the way we're investing, and we're going to be a significant player in the space as the market grows out.

Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Kris Rosemann for closing remarks.

We want to thank everyone for joining us this morning. We look forward to providing a longer-term strategic update at our upcoming Investor Day on March 25 and discussing our first quarter earnings results in late April. Thank you again, and goodbye.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Thank you for standing by and welcome to Generac Holdings, Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

I would now like to hand the call over to Director of Corporate Finance and Investor Relations. Kris Rosemann. Please go ahead.

Good morning, and welcome to our third quarter 2025 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 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 reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings.

I will now turn the call over to Aaron.

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Home standby and portable generator shipments grew sequentially in the quarter, but were below seasonal expectations as a result of a power outage environment that was significantly below our long-term baseline average and the lowest third quarter of total outage hours that we've experienced since 2015.

On a year-over-year basis, overall net sales decreased 5% to $1.11 billion. Residential net sales declined 13% as compared to the prior year quarter with softness in home standby and portable generators, partially offset by strong growth in sales of residential energy technology solutions. Global C&I product sales also increased 9% during the quarter, led by growth in the domestic telecom and industrial distributor channels as well as international markets, which included the first shipments of our large megawatt generators to data center customers. Our significant momentum in the data center market has continued with our backlog for these products now doubling to over $300 million over the last 90 days, with even greater opportunities developing in our growing sales pipeline.

Now discussing our third quarter results in more detail. Third quarter home standby shipments and activations increased sequentially from the second quarter but shipments decreased at a mid-teens rate on a year-over-year basis as a result of the significantly weaker outage environment in the current year period as well as the strong prior year period that included the benefit of multiple landed hurricanes. The historically low outage activity in the quarter was broad-based with all regions declining as compared to the prior year and resulted in portable generator sales also declining on a year-over-year basis. Home consultations for home standby generators also increased sequentially from the second quarter, but declined year-over-year during the third quarter. Although the seasonally higher levels of IHCs we would have normally seen did not materialize this year, home consultations held a solid baseline level with the ratio of home consultations to outage hours at the highest level since we began tracking these metrics more than a decade ago.

We view the relative resilience of the home standby category as further evidence of continued growing awareness for these products and the underlying demand we continue to see as representative of a new and higher baseline level following the elevated outage environment of 2024 despite the very low level of outages seasonally in the third quarter. Our expanded investments in our marketing and lead generation capabilities as well as our solid execution and optimization of promotional campaigns, also provided important support for the home standby demand during the quarter. Importantly, close rates improved substantially on a sequential basis and came in better than expected during the quarter with strong momentum continuing here in the month of October.

We remain focused on initiatives to support ongoing improvements in close rates such as further increased awareness of financing alternatives and optimize sales tools and training for our partners. We also attribute the recent improvement in close rates to a significant change in our approach to distributing leads to our dealers through the implementation of an enhanced data-driven process that allows our dealers to select or pull which leads they prefer to pursue as opposed to the previous push approach, which distributed leads directly to specific dealers based on certain criteria. The new lead process allows a wider pool of dealers with higher close rates the ability to select which leads they believe they have capacity to address.

We believe the resulting improvement in close rates will further optimize our customer acquisition costs and lead to a broader distribution of sales leads across our residential dealer base. Our residential dealer network continued to expand during the quarter as our dealer count reached nearly 9,400, an increase of approximately 100 from the prior quarter and an increase of nearly 300 dealers over the prior year. We view this continued strength in contractor interest in the product category as evidence of the growing underlying demand for backup power solutions despite the softer outage environment. In addition, our aligned contractor program, which targets contractors that purchase our products through wholesale distribution has also continued to grow and provides for incremental engagement, training and installation bandwidth through this important distribution channel.

Also during the third quarter, we began the initial shipments of our next-generation home standby generator product line, which represents the most comprehensive platform update for the category in more than a decade. The new product rollout will continue in the fourth quarter with our first shipments of the higher end of the product range, including the market's first 28-kilowatt air-cooled home standby generator. This new product line features the lowest total cost of ownership available driven by reduced installation and maintenance costs as well as introducing industry-leading sound levels and the best fuel efficiency of any residential generator on the market today.

The next-generation platform, together with our new Field Pro application also offers a number of important benefits for our channel partners, including significantly lower commissioning times and improved remote diagnostics, enabling operational efficiencies for their businesses and greater uptime and cost savings for their customers.

Moving to Residential Energy Technology Solutions. Sales of these products and services outperformed our expectations once again and grew at a significant rate during the quarter, led by shipments of energy storage systems in Puerto Rico. Our team continues to execute extremely well alongside our partners on this energy grant-related program, which is expected to drive continued strong residential energy technology sales growth into the fourth quarter. Our ecobee team continued to drive that business forward and delivered another profitable quarter with significant gross margin improvement and operating leverage as a result of continued strong sales growth and disciplined cost control.

Additionally, ecobee's installed base grew to approximately 4.75 million connected homes with increased energy services and subscription sales supporting a growing high-margin recurring revenue stream. We expect ecobee to deliver positive EBITDA contribution for the full year, a key milestone for the strategically important part of our business. As we begin launching new energy storage, microinverter and home standby products that are integrated with the ecobee's platform during the second half of this year, we are intent on delivering a premium feature set and user experience, which we believe will be an important differentiator for our growing residential energy ecosystem.

We also made significant progress in our solar and storage product development efforts during the third quarter as we began shipping Power Cell 2, our next-generation energy storage system and introduced Power Micro, our solar microinverter that will begin shipping by the end of this year. As we close out 2025, we are focused on leveraging these new products as well as our distribution and marketing capabilities to drive market share gains and significant sales growth in the future. As appropriate, however, we intend to recalibrate our investment levels to reflect the completion of our energy grant program in Puerto Rico and to adjust for a broader market environment that is likely to contract in 2026 as a result of the substantial reduction in federal incentives for solar and storage technologies.

Although we see this market contracting in the near term, we believe that the secular trends of rising power prices and declining component costs are creating a situation where the economics of residential solar and storage technologies will provide for an attractive long-term market opportunity regardless of the level of government incentives.

Now let me provide some additional commentary on our commercial and industrial product categories, where we continue to see year-over-year sales growth, which accelerated during the third quarter. In particular, sales to our domestic industrial distributor customers increased at a solid rate in the period as we further reduce the lead times for our C&I products. Our teams have been working hard to increase production rates over the last 18 months, by bringing our new facility in Beverdam, Wisconsin online earlier this year. And as a result, we have successfully brought our lead times down to more historically normal levels.

In addition to our operational execution in the quarter, our efforts to further develop our distribution partners, both owned and independent have helped to expand our share of the domestic backup power generation market over the last several years. In addition to the growth in our industrial distribution channel, shipments to national telecomtomers also grew at a robust rate in the third quarter compared to the prior year as part of the ongoing recovery for this important challenge 2025. We continue to expect the growing dependence on wireless communication and additional infrastructure required enhanced reliability to provide a solid backdrop for secular growth in sales of C&I products to our telecom customers into the future.

Mobile product shipments of national and independent rental customers outperformed our prior expectations and increased on a sequential basis, which we view as signaling the beginning of a recovery for this market. We anticipate favorable momentum to continue building in the coming quarters in our mobile products, and we continue to believe we are well positioned for long-term growth given the mega trend around the infrastructure-related investments needed both domestically and internationally that leverage our global portfolio of mobile products.

Internationally, total sales increased 11%, driven by continued strength in C&I product shipments in Europe and the first shipments of our large megawatt generators to a data center customer in Australia. International sales continue to benefit from the favorable impact of foreign currency, which we expect will continue in the fourth quarter. Additionally, international EBITDA margins expanded at a strong rate from the prior year due to favorable sales mix. Our initiative to penetrate the large and rapidly growing data center market continued to gain momentum with initial shipments in international markets beginning during the third quarter. And as we saw our global backlog of large megawatt generators for this important end market doubled to more than $300 million over the last 90 days.

The first domestic shipments of these new large output generators began here in the month of October, and we are projecting strong sequential growth in sales to the data center end market during the fourth quarter. The large majority of our backlog is expected to ship in 2026, providing a meaningful tailwind for overall C&I product growth in the coming year. Importantly, we continue to develop a robust pipeline of new opportunities within the data center market that represents significant upside for our C&I product in 2027 and beyond.

Data center power demand is forecasted to grow at a significant rate for the foreseeable future. And the high uptime requirements of these facilities drives backup power needs in excess of site electricity consumption. Third-party estimates suggest that global data center power demand will cumulatively grow by more than 100 gigawatts over the next 5 years. with the potential for incremental annual capacity additions to double by the end of this decade. Additionally, further global market opportunities exist for large megawatt generators within our traditional end markets, in particular, providing backup power for large manufacturers, cold chain distribution centers, health care facilities and other critical infrastructure that have higher backup power requirements.

Given the existing supply constraints within the high end of the C&I backup power generator market, large megawatt generators represent a massive opportunity for Generac as a long-standing well-known participant in the C&I backup power markets. In addition to our highly competitive lead times, we believe that our strong reputation as an engineering-driven organization that is uniquely focused on backup power with a customer-centric approach and world-class service capabilities will allow us to gain share in the data center backup power market as well as our traditional end markets. Given the momentum in our sales pipeline and the significant incremental market opportunity we see in the future, we have been actively exploring further investments to aggressively expand our competitive positioning and increase our capacity and capabilities for these products.

We expect to undertake several important capacity expansion-related projects and investments during the fourth quarter. to position Generac as a significant producer of these products well beyond 2026 and to support what we believe could be a potential doubling of our C&I prop sales over the next 3 to 5 years. In closing this morning, our third quarter results and our lower residential sales outlook reflect a historically weak power outage environment. However, the mega trends that support our future growth potential remain intact as lower power quality and higher power prices will be an ongoing challenge given the more frequent and severe weather patterns as well as broader electrification trends. And at the same time, the massive increase in data center power data center power demand is expected to further stress the already fragile power grid by amplifying the growing electricity supply demand imbalance.

Additionally, we're entering a period of unprecedented growth for our C&I products. as the expansion of our product line to include large megawatt generators has allowed for our entry into the rapidly growing data center market. As a leading energy technology company, we believe Generac is uniquely positioned at the center of these megatrends that have the potential to drive substantial and sustainable growth in the years ahead.

I'll now turn the call over to York to provide further details on third quarter results as well as our updated outlook for 2025. York?

Thanks, Aaron. Looking at third quarter 2025 results in more detail. Net sales during the quarter decreased 5% to $1.11 billion as compared to $1.17 billion in the prior year third quarter. The combined effect of acquisitions in foreign currency had an approximate 1% favorable impact on revenue growth during the quarter. We believe looking at consolidated net sales for the third quarter by product class. Residential product sales decreased 13% to $627 million as compared to $723 million in the prior year.

As Aaron discussed in detail, a significantly lower power outage environment as compared to the prior year, relative in a decline in home standby and portable generator shipments. This was partially offset by robust year-over-year growth in sales of Energy Storage Systems and Ecobee Home Energy Management solutions. Commercial & Industrial product sales for the third quarter increased 9% to $358 million compared to $328 million in the prior year. Core sales growth of approximately 6% was driven by an increase in shipments to our domestic telecom customers, together with a strong growth in Europe and initial shipments of our new large megawatt generators to a data center customer in Australia, partially offset by continued weakness shipments to national rental accounts.

Net sales for the other products and services category increased approximately 5% to $129 million as compared to $123 million in the third quarter of 2024. Core sales increased approximately 3%, primarily due to growth in ecobee and remote monitoring subscription sales and other installation and maintenance services revenue, partially offset by a reduction in parts and accessory shipments given the lower outage environment. Gross profit margin was 38.3% compared to 40.2% in the prior year third quarter, primarily due to unfavorable sales mix, together with the impact of higher tariffs and manufacturing under absorption, partially offset by increased price realization as a result of price increases implemented earlier in the year to address the impact of incremental tariffs.

Operating expenses increased $20.2 million or 6.7% as compared to the third quarter of 2024 as a result of certain legal and regulatory charges in the current year as disclosed in the accompanying reconciliation schedules. Excluding these items, which are not indicative of our ongoing operations, operating expenses decreased $0.6 million or 0.2% from the prior year. Adjusted EBITDA before deducting for noncontrolling interests as defined in our earnings release, was $193 million, 17.3% of net sales in the third quarter as compared to $232 million or 19.8% of net sales in the prior year. This margin decline was primarily driven by the previously mentioned unfavorable sales mix and the operating expense deleverage on the lower sales volumes.

I will now briefly discuss financial results for our 2 reporting segments. Domestic segment total sales, including intersegment sales, decreased 8% to $938 million in the quarter as compared to $1.02 billion in the prior year, including approximately 1% sales growth contribution from acquisitions. Adjusted EBITDA for the segment was $166 million, representing 17.7% of total sales as compared to $212 million in the prior year or 20.7%. International segment total sales, including intersegment sales, increased approximately 11% to $185 million in the quarter as compared to $167 million in the prior year quarter, including an approximate 3% benefit from foreign currency. Adjusted EBITDA for the segment before deducting for noncontrolling interest was $27 million or 14.8% of total sales as compared to $20 million or 12.2% in the prior year.

Now switching back to our financial performance for the third quarter of 2025 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $66 million as compared to $114 million for the third quarter of 2024. The current year quarter includes an unfavorable Wallbox fair market value mark-to-market adjustment of $5.7 million and a loss on refinancing of debt of $1.2 million related to our Term Loan A and revolver amend and extend transaction that closed in July 2025. Our interest expense declined from $22.9 million in the third quarter of last year to $18.5 million in the current year period as a result of lower borrowings and lower interest rates relative to prior year.

GAAP income taxes during the current year third quarter were $11.8 million or an effective tax rate of 15% as compared to $33.5 million or an effective tax rate of 22.7% for the prior year. The decrease in effective tax rate was primarily driven by favorable discrete tax items in the current year quarter related to certain return to provision adjustments that did not occur in prior year. Diluted net income per share for the company on a GAAP basis was $1.12 in the third quarter of 2025 compared to $1.89 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $108 million in the current year quarter or $1.83 per share. This compares to adjusted net income of $136 million in the prior year or $2.25 per share. Cash flow from operations was $118 million as compared to $212 million in the prior year third quarter, and free cash flow, as defined in our earnings release, was $96 million as compared to $184 million in the same quarter last year. The change in free cash flow was primarily driven by an increase in inventory levels during the current year quarter and lower operating income which was compounded by a decline in inventory levels during the prior year quarter. Total debt outstanding at the end of the quarter was $1.4 billion, resulting in a gross debt leverage ratio of 1.8x on an a reported basis.

With that, I will now provide comments on our updated outlook for 2025. As discussed by -- as discussed in detail by Aaron, the extremely low outage environment in recent months has resulted in lower demand for home standby and for generators and a reduction in our full year 2025 outlook for overall net sales growth. We now expect consolidated net sales for the full year to be approximately flat compared to the prior year, which includes an approximate 1% favorable impact from the combination of foreign currency and acquisitions. This updated outlook compares to our previous guidance of plus 2% to 5% net sales growth over the prior year.

Looking at product classes. We now project full year 2025 residential product sales to decline as compared to the prior year in the mid-single-digit percent range, while C&I product sales are expected to increase as compared to the prior year, also in the mid-single-digit percent range. The resulting sales mix shift is projected to have an unfavorable impact on gross and adjusted EBITDA margins for the year as compared to our prior guidance. Specifically, we now expect gross margin percent for full year 2025 to be approximately flat to slightly down compared to the full year 2024 levels. This represents a nearly 1% decrease from our prior expectation of approximately 39.5% as a result of the previously mentioned unfavorable sales mix and lower manufacturing absorption given the lower residential production volumes, together with incremental new product transition and Siena plant start-up costs, are transitory in nature. Additionally, this gross margin guidance assumes that current tariff levels that are in effect today stay in place for the remainder of the year.

Looking at our adjusted EBITDA margin expectations for the full year 2025, given the factors impacting our gross margins, together with additional operating expense deleverage on the lower sales volumes, we are reducing our guidance for adjusted EBITDA percent to approximately 17%. This is compared to our previous guidance range of 18% to 19%. Additionally, as a result of higher use of cash for primary working capital and capital expenditures, free cash flow conversion from adjusted net income is now expected to be approximately 80% for the full year 2025 as compared to the previous guidance range of 90% to 100%. This would still result in approximately $300 million of free cash flow in fiscal 2025, which provides for near-term optionality to allow for additional investments to drive future growth as part of our disciplined and balanced capital allocation framework.

As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2025. For full year 2025, our GAAP effective tax rate is now expected to be between 20% to 20.5%, down from our prior guidance of 23% to 23.5% due to the lower realized third quarter tax rate. Specifically for the fourth quarter 2025, our GAAP effective tax rate is expected to be approximately 25%. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add-back items should be reflected net of tax using this 25% effective tax rate. We now expect interest expense to be approximately $70 million to $74 million for the full year 2025, assuming no additional term loan principal prepayments during the year. This compares to our previous guidance of $74 million to $78 million and contemplates lower interest rates and outstanding borrowings than previously assumed.

Our capital expenditures are now projected to be approximately 3.5% of forecasted net sales for the full year 2025, a 0.5% increase from prior guidance as a result of incremental CapEx investment for data center capacity expansion expected in the fourth quarter of 2025. Depreciation expense, GAAP intangible amortization expense and stock compensation expense are expected to remain consistent with last quarter's guidance. Our full year weighted average diluted share count is expected to be approximately 59.4 million to 59.5 million shares as compared to 60.3 million shares in 2024. Finally, this 2025 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks.

At this time, we'd like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Tommy Moll of Stephens.

I want to start on the data center market opportunity, Aaron. What all have you learned thus far in terms of the competitive dynamics there the size of the opportunity. I think last quarter, you framed it about $5 billion the deficit next year. And then just in terms of the types of customers where you're seeing some traction what's the nature of the conversation with hyperscale at this point? And any orders there in the backlog number that you gave us?

Yes. Thanks, Tommy. So I mean, obviously, this is just a really unique opportunity for us. The structural deficit of the supply side of backup power for this particular market is as you would imagine, with the foot rate that's ongoing here to put these data center facilities in the ground every single conversation we have with a developer with a hyperscaler, and edge data center provider, all of those conversations are almost the same in terms of just the difficulties in bringing these facilities online because of some of the constraints. The constraints being in the electrical side of the buildings, transformers, switchgear, generators. All of those components are in heavy demand as you expect. And this is, I think, just from a structural standpoint, it feels like this is going to continue for some time. We don't have, in our backlog today any orders reflected from any hyperscalers, but we continue to have very productive conversations there. And we're very optimistic as we work to get added to the approved vendor list for these hyperscalers. They are very eager to have additional supply coming to the market. they're very eager to have us be a supplier to the market.

Again, I think our brand, we're a trusted brand. We've been in the C&I backup power market for over 50 years. And so our expansion to this product line is kind of a -- it's a natural evolution, and it's some fly-by-night supplier coming into the market. It's somebody who's well known, wll capitalized and somebody who is going to be very aggressive, as I said on the call in the prepared remarks, we see a unique opportunity here for us to do something that is kind of generational with the company and with this part of our business. And as I said in the prepared remarks, we will have -- we've got a number of balls in the air here that by Q4 -- here in Q4, we're going to have to pull the trigger on a number of things. We've taken up our CapEx guide range slightly. That's part of the front end of this. That's everything from facilities to equipment.

Our M&A funnel has also expanded where we think we could add capabilities and additional capacity through acquisitions. So we're looking at -- basically, we're not leaving any stone uncovered here, Tommy. It's a -- again, we have to be aggressive. We have to lean forward and we will capitalize on this in a way that I think the market certainly wants us to succeed every conversation we've had is to that effect, and we will succeed. This is going to be an area that's right in our wheelhouse I feel very comfortable and very confident that we can execute on this. Our first shipments, I watched some lot of our factory in Oshkosh, Wisconsin last week, 1.5 weeks ago. Our first shipments went out internationally to a customer here earlier in the month and things are rolling. We've got products online, and we are looking at how can we aggressively expand our capacity with -- by leaning forward with investment in this area of our business.

Our next question comes from the line of George Gianarikas Canaccord Genuity.

Now I know you're not talking about 2026 just yet, but if you could just sort of help us work through all the moving parts here. Clearly, hedges have been weaker a pull from data center generators and there's this -- the roll-off potentially of what's happened so far in Puerto Rico. So how should we sort of think about 2026 broadly with all the moving pieces at play?

Yes. George, thanks for the question. Yes, just kind of -- and again, not giving guidance here, but I think to answer your question, let's start with just from a product category standpoint, our residential products and kind of being down a level deeper there with home standby and portable, it was a crappy season. I mean, let's be honest. The weather was really nice everywhere. We've been doing this a long time. We have not seen many 3Qs where we just didn't have outage. We plan the business around normal baseline outage and we got nowhere near normal. I mean we were literally 75% to 80% below normal for the quarter just in raw outage hours. And that's without, obviously, any major events happening either. And obviously, we're comping against majors last year. So just it looks bad. It feels bad, but it's temporary. I mean we've been through this before, the weather patterns. We don't know what happens with weather, it comes and goes and these outages, structurally, nothing's changed there. I mean just you've got -- in fact, I would point to all the structural things from a megatrend standpoint that we've been talking about only continue to put to less reliability in the grid going forward. So -- and what's really remarkable, I would just put this out, and we said this in the prepared remarks and people can call what they want. But those product categories, home standby and portals were up sequentially over Q2. So like we're holding that baseline of growth that we achieved last year.

It's amazing to me that the underlying kind of the underlying strength of that category. We just didn't see the seasonal lift that we would normally see. So fast forward to 2026 for that category. It's going to grow well, right? I mean if we return again the assumption there, returning to baseline level of outages, now we're going to go to easy comps. Now we're going to have the opportunity to grow that category, and I would also point out, we continue to grow dealer base, right? Our dealer count went up. We added over 100 of the quarter, which I think is indicative of a healthy market. We continue to see lead demand, lead flow. Our customer acquisition costs continue to improve. We've been continuing to use data to refine our lead algorithms and our processes there in a way that we believe is going to impact and had -- we actually saw favorable impact of close rates in the quarter, and we think that's going to accelerate into 2026. So improved close rates next year, broader dealer counts, a return to normal baseline outages.

And we also won shelf space for portable generators coming off the last season's hurricanes. So we've got expanded presence at retail. Those are all -- that's all a really good setup for the categories, those product categories next year. So I put that in the plus for next year. It's going to grow -- it's going to grow very nicely. We also have pricing, the effective pricing, we'll get a full year of that next year. So all of those things are good things for our residential products. Energy Technology is a subset of that. Inside of that, obviously, Puerto Rico, the energy grant program there goes away after this year. We haven't heard that to continue at least at this point. There's a chance it could, but we're not banking on that at all. And obviously, structurally, I think everybody knows that market is going to contract in the market for solar and storage. And that's on the back of the loss of primarily the loss of the 25D tax credit, incentive tax credit for homeowners. That said, when you look at longer term, look at your electricity rates. And George, I know you follow this, I know a lot of folks follow this. Electricity prices are up. They're up in many cases, in many areas, they're exceeding the rates of inflation, and they're only going higher. We're just getting started. That is before we see this wave of AI power demand really impact pricing for electricity rates.

And as rates go up, electricity prices go up, as the cost of the technologies continues to come down for storage and solar, and I would also say that as interest rates come down, structurally, you can say, okay, the market is going to be off. The overall market is going to contract by 20% to 25% next year. I mean I think it's conceivable that we're not going to claw that back, but we've got growth with ecobee. And I think we have these other elements that longer term are still a really good setup for solar and storage. We have a lot of new products just hitting the market. So we feel good about -- it's not going to feel good in terms of the results next year for that segment. I don't think it will be off 20% to 25%. It will be off something because of the loss of the DOE grant program. But again, I think we've -- long term, we feel good about where we're going with that product category. We feel good about the new products, feel really good about ecobee. Ecobee has been an outstanding performer for us within that part of our business. We feel good about that.

And then you move to C&I. And that is just a tremendous story in terms of -- we've got great visibility now. That $300 million of backlog that we've amassed. It's doubled in the last 90 days. Most of that is 2026. As we said before, structurally, we think we can probably go to $500 million from a capacity standpoint in '26. So we still have opportunity to take that pipeline and convert more in '26 to the degree that we have customers who may need product and may need to get their hands on gen sets next year, we think we can provide them. And in fact, we think we can probably go north of $500 million to some degree by stretching capacity by making some of the investments from making right now, I think there's a little bit of upside there for '26 beyond the $500 million. But what we're focused on right now, George, is beyond 2026. We're focused on growing that business, growing our capacity in a way that, again, it's just as I mentioned before on the previous question, it's just unique it's generational. It's -- I don't think we'll ever see this opportunity again, and we've got to go after it aggressively.

Our next question comes from the line of Mike Halloran of Baird.

I think you mentioned it briefly in there, Aaron, but maybe just on the new product launches on the clean energy side, I know early days, how is that tracking? And then maybe more importantly, could you just frame up what you mean or what the latest thought process is in terms of getting back to breakeven in those product categories? And what kind of that iterative process looks like as we work through the remainder of this year, early thoughts on '26 as far as how much of that loss you can reclaim?

Yes. Thanks, Mike. So again, long term, we feel really good about that set of products for us and the market opportunity there, given the structural challenges around energy prices, and I think -- and continue to need for resiliency, right, with that side of the business. We're building out an energy ecosystem is going to be tougher. We mentioned in our prepared remarks, we used the word to recalibrate. We're using that word a lot internally here on how to make sure that as we get to the tail end of our product introduction cycle here with those products, we can ramp down some of the R&D spend associated with that. Now that will shift over into some -- there'll be some hypercare efforts. Those new products are just hitting the market now. Our first shipments of power cell 2 -- we're here in Q4, we're kind of on a lined launch schedule. We're looking to expand it in 2026. Power Micros will start shipping here at the end of this year. So I don't have a ton of data points to offer for the market on the success or acceptance by the market of those products. I can only reiterate what we've been told over the last several years as we've been working on developing these products and that is the market feels that it needs additional suppliers. It's a bit of a duopoly right now on the inverter side.

And honestly, it's kind of a -- I want to say it's a monopoly on the storage side, but obviously, there's a supplier there in Tesla that has -- it provides the lion's share of the market opportunity or the market supply. So we think there's great opportunities for us to be successful -- or kind of north star there is still to be breakeven by 2027. That is our north star. It hasn't changed, even though the market is going to contract. That was our start prior to the loss of federal support, 25D for these products. But we believe, I think given, again, the high -- the continued upward movement in retail electric prices the continued downward movement in these technologies, the cost of these technologies and the potential for a pullback in interest rates.

We think it's a good setup. The paybacks on these systems will improve over time. They'll take a step back here in '26. But for us -- and again, we're going to recalibrate. And we do -- I want to say -- the last thing I was says, we do need to see success in 2026. Even if it's -- we need to see at least share gains for storage and inverters or we'll have to recalibrate further. If we don't see that kind of success, it is not our intention to be in a money-losing business forever. We are not a start-up with unlimited capital backing from investors. We understand and believe me, we treat this as our own money. We don't want to lose money on anything we do, but we see this as an investment in the future as an important market, as an important part of building out an energy ecosystem that we believe will provide a differentiated solution for us to be a market participant over the long haul. And we think it's an important thing for us to do. We're committed to it, but we need to see success and we need to see progress. And we're confident that, that will happen.

Our next question comes from the line of Jeff Hammond of KeyBanc Capital Markets.

Just back on the data center. I think you said you think you could do $500 million or maybe better next year. So one, just as you start to get orders, are all of those kind of contemplated for '26 or people are those longer-dated orders? And then just in terms of like this new capacity you're considering like what would that look like? Is it a plan? Is it expansion? Is it we got to double this thing as soon as we can?

Yes. Thanks, Jeff. So just to clarify, so the $300 million we have backlog, we said that the majority of that -- the vast majority of that is a 2026 shipping schedule. The $500 million or north thereof, that's capacity number. So just to be clear, we haven't subscribed that fully yet, but we have the opportunity to do that. I will say, and I think we said this on the last call, a lot of our conversations we're having today, in particular with hyperscalers, is about 2027 and beyond because they've already -- because of the long lead times for these products, many of them have already got their 2026 plans completed. So anything that -- any incremental above the $300 million that we've talked about here for '26, that's going to come as opportunistic things. Maybe other suppliers who have delivery challenges. And so somebody needs a plan B, we could be a Plan B. Perhaps somebody who wants to accelerate connecting a data center more quickly. We are having those types of conversations where they believe they'll have a facility that's ready to go sometime in the second half of 2026, but they maybe weren't planned to be online until early '27, but they want to move that up. And if we can supply generators, that's obviously an important consideration for bringing any of these facilities online in terms of just having the uptime requirements that could be an opportunity.

So we're going to continue to look to how do we improve our capacity numbers even for '26 above the $500 million we have now. But the substantial change, kind of maybe the second half of your question, the substantial change in capacity, what we're looking at there is how do we increase our capacity. Basically, how do we basically double it again? How do we increase that 50% to 100% more than where we're at today? How do we double that for 2027 and beyond, at least '27 certainly, '27, '28 and that's going to come through -- you kind of we're going to need hard assets like facilities, right? These are big units. They take up a lot of room. So we're going to need facilities, we're going to need space. We have line of sight on a number of facilities that we are in negotiation on here in Wisconsin and in other parts of the U.S. We haven't signed anything yet, but we are in far along in negotiation and diligence around some of those physical areas where we can expand.

Beyond that, we've got equipment ordered with some of the longer lead time elements that we know from the testing equipment to some of the material handling equipment for products of this size, those lead times are also extended, as you would imagine. And we put those bets down here recently. And so we feel like we'll be able to bring that online in time to satisfy late '26, early '27 type of production time lines. We also, as I mentioned in the prepared remarks, we continue to look at our M&A opportunities. Are there other ways that we could accelerate even more quickly, more rapidly, not only in terms of raw capacity, production for these products, but also certain elements where we can -- are there other value streams we can capture in the unit. We don't make the engine. So structurally, we're in a bit of a disadvantage to some of our competitors who actually make the engine, not all of them do, but some of them do.

So where else can we look to add value in these products? And is that an opportunity? Are there other critical components where we've heard of shortages? And can we look to acquisitions to put us in the market to be a more fulsome supplier, not only of the back of equipment, but maybe other elements around the backup systems that go into these facilities. So we're looking at all those things. We've had a very -- as you know, Jeff, you've followed the company a long time. We've got a very active M&A broker team here. Things change there. We've done a lot of M&A over the last 15 years. We're very comfortable doing that. We've got an excellent team here that is working on a number of things that could provide us additional capacity and/or capabilities more quickly as we get into 2026. So all those things are on the table.

I think the point that I want to make, I think, for you and for others is, we have a fantastic position financially, a great -- a really strong balance sheet. We produce a ton of cash flow. We're going to put that to work. We're going to put that to work in our C&I business in a way we have not put it to work before. We're going to put to work going after this opportunity because, again, we feel this is just a unique thing. And so we're going to be aggressive there. We're going to lean in and that's going to have a we believe a material impact to potentially double this business in the next 3 to 5 years. That's C&I business.

Our next question comes from the line of Brian Drab of William Blair.

This is sort of an easy segue to my question. You're talking about the capacity expansion and the idea that you don't manufacture the engine. I'm just wondering, are like what are the biggest challenges? What are your biggest concerns about adding this much capacity that quickly in terms of supply chain or just anything in terms of the manufacturing operation that's going to be challenging. I think people are looking for just that confidence that this capacity can come online smoothly?

Yes. Thanks, Brian. Great question. I would just point to -- we brought it online brought the product line online in our Oshkosh, Wisconsin facility very quickly. We finished our development earlier this year, produced our first line. We made -- by the way, within our CapEx numbers this year, a bunch of upgrades to that facility to allow for the start-up manufacturing in these products. It was part of getting to the $500 million or slightly north of capacity that's available for us in 2026. That's in our run rate, our CapEx run rate this year. We've been working around the clock and in terms of the test cell upgrades, the material handling upgrade, physical upgrades. I mean we're moving walls, we're moving cranes. We're expanding. We're doing things there that are readying us for production.

And as I said, we rolled some of the first units down the line a couple of weeks ago, got those out on truck and shipping about 10 days ago and welding here in the fourth quarter. So I feel very comfortable that like the production side of this, we can do that. That's within our wheelhouse. The supply chain side, our engine partner there has a ton of capacity. And I don't feel like that's going to be a constraint for us, which I think is -- if you look at the market, the broad market today and the structural imbalance that we've talked about on this call and on the previous call, is largely around the engine supply. And so coming into the market with an engine supply partnership like we have with Baldor win, we just -- who has a -- they've made a massive investment that they brought online in these, what they refer to as large bore diesel engines. We feel like we're in a really good position there to be able to supply the market with these types of products. Engines will not be a constraint.

Then you move to the next large component, which is alternators. We're working with multiple alternator suppliers. They are all suppliers we know because we buy from them today for our C&I market. So not a new supply base. This is a very similar supply base to what we see in C&I, where we have great long-term relationships. So we're able to leverage those relationships to work with them to grow that business and to leverage again, our expertise and our -- again, we're known commodities. They're not selling to somebody some flyby net operation or some potential customer here, they don't know. We are not at rent risk. We're not a risk operationally. We're a own commodity. So I think those are all pluses. I think where the physical constraints are going to happen or the constraints are going to happen is physically, right? Just the amount of product that we can build because these things take up space. And then downstream, some of the packaging constraints that could happen. You've got a lot of the -- the industry -- we build the unit up to a certain level and then the product is shipped to -- in our industry, what's known as a packager. The packager then provides the outer housing, the enclosure to the end customer spec and those are unique specifications. So they're really a lot of times, they're engineered to order, and so they're highly configured, and they're built to unique specifications for customers.

We believe there's opportunities there for us to participate and work with some of the packagers. We've lined up a couple of partnerships there to make sure that we've got at least adequate capacity for the orders we have in-house today, but how do we grow beyond that? We don't want that to be a constraint our growth as we're going forward. So we're looking at ways to partner more deeply with those packages so that we can ensure that, that's not a constraint on our growth for this market opportunity. So there's a lot of things that I just said there, and there's a lot of things that we need to do execution-wise. But again, when I look at what this is, it's just not that far afield from what we do today. And again, or what we've been doing for the last 50 years in the C&I industry. And so I just feel like we're -- if there's a place where something is in our wheelhouse and where we can we have the opportunity to really have an impact. It's in this -- not only the data center end of it, but as I said, the traditional market for large backup power is also a great opportunity for us.

We've got a lot of order activity, a lot of pipeline activity there that we're working through as we bring the first products to market on an order basis for that end of the market as well. So a lot of great things ahead for that part of our business.

Our next question comes from the line of Mark Strouse of JPMorgan.

Aaron, you mentioned earlier trying to get on the approved vendor list for some of the hyperscalers. Can you just give a bit more color on what that process really looks like? And is the time line for that kind of more measured in months or quarters? Or anything that you can share there would be great?

Yes. Thanks. Yes, it's different for each hyperscaler. We are just -- I might just point out, I mean, we are the preferred supplier for 2 global co-locators already. So in terms of like what it means to be on the ABL when we're talking about that, we're really referring to the ABL from hyperscalers. We're making really good progress with the co-locators, and we are already listed as a preferred supplier for 2 of them globally. So I feel really good about where we're at there. Back to the hyperscalers. I mean if this is a baseball game, we're not playing baseball here in Milwaukee anymore, unfortunately. [indiscernible] this. But for those that are fans of the game, 9-inning game, not an 18-inning game like the other night, but a 9-inning game, I would categorize our progress there.

First of all, it is measured in months. I think, again, the hyperscalers that we're working with are pushing us to get through their gauntlet and it is a gauntlet. It's just a process. A lot of there's contracts, right? So you've got a lot of back and forth from a legal perspective. You have certificates of insurance, you have entity discussions, right? Like what's their org structure, energy structure. There are high-level management meetings. They want to do face to state, every one of them has a little bit of different approach and there are different boxes to check for each one. We do not see any showstoppers in those processes, they just decide to get through. I would say this is a baseball game back to the reference, we're probably something in the sixth or some inning with most of those hyperscalers, maybe a little bit different one to the other from each one is a little bit different, as I said before. But good progress. We hope to have better updates as we go forward here.

I think the greatest evidence there will be the continued growth in that backlog and actually having a hyperscaler come in and with their trust, give us an opportunity to supply them with product, whether it be in '26 or what is more likely, as I said, towards 2027 and beyond.

Our next question comes from the line of Christine Cho of Barclays.

Just as a follow-up to Mark's question. I understand that your engines are actually coming from France, but are you finding that the Chinese ownership of the supplier is something that is brought up in your conversations with the bigger type of customers? And would you say that you need at least one hyperscaler contract in hand in order to feel comfortable in doubling the capacity?

Yes. Great questions, Christine. So on the supply chain side, with our engine supplier, we've talked through with our customer base, where we're getting our engines from. Obviously, I think if you look at the supply of any of these engines, by the way, from the competitive set, there are components that today are only available in some parts of the world like China. And so our reliance on the supply chain there, that's global in nature, but specific to certain areas of the world, like China in certain countries is not unique. The ownership structure there, I mean, it's something we've talked about. But again, where those engines are manufactured that our partner there has a global base of manufacturing that they are expanding by the way, it's not just going to be France. They've got facilities in India. They've got facilities that they're looking at in other parts of the world. So we believe that over time, it's something that will -- if it's a concern today, I think that's something that we're going to be able to mitigate. There are also potential structures, ownership structures in the future that could look different, right, be the JVs or some other structure there, nothing is off the table.

We don't want that to be a negative on our entry into this market. We don't think it is. And nobody has indicated that it's a showstopper at this point, but something that we want to continue to stay ahead of. I think as far as to answer your question about the doubling of capacity or potential doubling capacity, yes, I would certainly feel better if we had a hyperscale commitment there, that would make me feel better about the long-term usage of that. But I would just say this, the way we're structuring the expansion of capacity there. I want to be clear that we feel it's something that if we needed to be repurposed for something else, we'll use it for that. It could be the next leg of growth in another part of our business, could be -- we lease quite a bit of outside storage space today that could come in-house if we needed to convert some facilities. It's not ideal, but I think the added capacity that we're leaning into, we feel, and we're not getting to a point where, I would say, let's say, that hyperscale business doesn't come to us for whatever reason. And I don't think that will be the case. I think quite honestly, it will be the other way around. But I do think we'd be able to deploy that capacity to our benefit, it would take longer to use up, of course. And I feel more confident, to your point, if we had that commitment. But I do think that's something that we'll be able to talk about here in the months ahead.

There will be growth in the traditional market.

For sure, growth in our traditional markets that we'll need for that as well. .

Our next question comes from the line of Keith Housum of Northcoast Research.

I appreciate it. Staying along the lines of the data centers, Aaron, perhaps you touched on the pricing for these data center generators in like the margin profile and kind of thinking of how that might affect the margins going forward.

Yes. Thanks, Keith. It's a great question. Pricing, ASP on each unit, you're talking about a 3.25 megawatt unit or larger. And by the way, I mean, I would just note, I mean, today, our product line, we've rolled out the first part of the product line up to 3.25 megawatts. The next part of the product line from 3.5 to 4 megawatts will roll out in 2026. But ASPs on these products range from -- depends on the content, it depends on the customer, but it can be anywhere from $1.5 million to $2 million per gen set. So pricing is -- and we're competitive on pricing across the market. I would say the margin profile domestically, margin profile is very similar to our C&I product set here in North America, maybe a little bit below that, but not dramatically so. Internationally, it's a little bit below that. The international markets are always -- when you look at our C&I products, gross margins are not quite as strong international nationally. And that's kind of a legacy that's just structural in terms of the international markets being, I would say, more competitive overall and us being a smaller player internationally. So what kind of leads to that. We're working -- we've made a lot of progress on that, by the way, in our ownership with Pramac over the last decade. They've improved their gross margins dramatically, which has been great, and we're going to continue to work on that. But gross margins for those products I would just say this, I mean, the incremental impact to EBITDA margins is fantastic for the data center market in terms of the -- that overall impact on our C&I product margins. And if you just looked at the incremental impact on EBITDA margins, it will be positive.

Our next question comes from the line of Sean Milligan of Needham & Company.

Was just curious about the margin progression. I know you don't want to really give guidance for next year. But in terms of the framework, the back half EBITDA margins are kind of weaker than what were expected. So just gives and takes into next year, like does core resi HSB get better? Energy Tech, you have some revenue headwinds and then the data center piece. Just trying to kind of think about what that all means for margins moving forward on the EBITDA side.

Yes, Sean, it's York. So yes, I think if you looked at our updated guidance for '25, we're talking more like 17 -- approximately 17% EBITDA margins versus the, call it, 18% to 19% that we were previously guiding. So at the midpoint of the last guide, call it, 1.5% reduction. So maybe obviously, the unfavorable mix with selling less bringing our home standby guidance down, given the outage environment, that's our highest margin product. So I'd say about 1/3 of that 1.5% decline is mix, which to Aaron's point, if you think about 2026 and you revert back to the mean with regards to outages, that mix, we should see a nice pop in home standby that should -- should it help claw back some of that mix decline. So I think on the mix side, there will be some recovery in '26. Obviously, the OpEx deleverage on the lower side is probably the remainder of the 1.5% EBITDA guide. So obviously, as we are talking about a framework for '26 and growing home standby portables and C&I. We're going to be able to leverage our OpEx structure. So we'll be able to improve our EBITDA margins from the 17% we're talking about in '25. There's probably some small price cost impact in that 1.5% decline for '25 that I would say is transitory in nature, which shouldn't repeat in '26. So that's a long-winded way of saying we should see some nice recovery in EBITDA margins of the 17% that we're talking in '25, some due to mix, some due to operating leverage, some due to some of these transitory costs coming through, new product introduction costs plant ramp-up costs, et cetera, pricing. So should see a recovery in those EBITDA margins for '26.

I would now like to turn the conference back to Kris Rosemann for closing remarks. Sir?

We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter and full year 2025 earnings results with you in mid-February 2026. Thank you again, and goodbye.

This concludes today's conference.

Good day, and thank you for standing by. Welcome to the Second Quarter 2024-2025 Generic Holdings, Inc. Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kris Rosemann, Director of Corporate Finance and Investor Relations. Please go ahead.

Good morning, and welcome to our second quarter 2025 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 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 reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our second quarter results exceeded our expectations driven primarily by C&I product sales to our industrial distributors as well as increased shipments of residential energy storage systems. Additionally, adjusted EBITDA margins came in well ahead of our prior forecast for the quarter, as a result of continued strong gross margin performance and better-than-expected operating leverage on the higher shipment volumes.

On a year-over-year basis, overall net sales increased 6% to $1.06 billion for the quarter. Residential product sales increased 7% from the prior year, driven by significant growth in shipments of residential energy technology solutions as well as higher portable generator sales.

C&I product sales increased 5% year-over-year with increases in shipments to our domestic industrial distributors and telecom channels as well as higher European shipments, partially offset by softness in certain other C&I end markets.

Favorable price realization helped gross margins expand by 170 basis points in the quarter, resulting in adjusted EBITDA margins increasing to nearly 18%. We also continue to execute on numerous new product development initiatives during the quarter, most notably the formal introduction of our large megawatt generators for data centers and other C&I backup power applications.

We have experienced very strong receptivity to our initial entry into the data center market, in particular with our global backlog for products serving this important end market growing quickly and now standing at more than $150 million today. Given increased visibility into our full year 2025 financial results, including our second quarter outperformance and lower than previously anticipated tariff-related price increases in the second half, we are narrowing our full year net sales growth assumption and increasing the low end of our adjusted EBITDA margin guidance range, resulting in an increase to our full year adjusted EBITDA outlook at the midpoint of these ranges.

This guidance assumes that currently implemented tariff levels are maintained for the remainder of the year. We will continue to optimize our pricing strategy within the evolving tariff landscape while aiming to fully offset the cost of tariffs in dollar terms. Additionally, we are executing on a number of supply chain and cost reduction initiatives that will help to further offset the impact of tariffs and other cost increases over the next several quarters.

Now discussing our second quarter results in more detail. Home standby sales were flat from the prior year as the category held a new and higher baseline level of demand despite power outage hours being down significantly as compared to a strong prior year period. As expected with lower outages, home consultations decreased on a year-over-year basis given the strong comparable period that included the benefit of severe storms in the South Central region last year. However, home consultations outside of this region were up nicely from the prior year, highlighted by continued strength in the Southeast resulting from last year's high-profile outage events.

Close rates improved sequentially in the second quarter, and we continue to expect further improvement as we move through the remainder of the year, with strong signs of recovery here in the month of July. Importantly, activations or installations of home standby generators increased modestly from the prior year, also driven by the strength in the Southeast region.

We ended the second quarter with roughly 9,300 industrial dealers in our network, an increase of approximately 400 over the prior year. Our growing dealer network is an important competitive advantage and continues to support a new and higher baseline of consumer awareness to the home standby category, and we remain committed to investing heavily in growing and developing our dealer base.

Additionally, we have had continued success in expanding our aligned contractor program, which targets electrical contractors that purchase our products through wholesale distribution and drives incremental engagement and training within this important distribution channel. Collectively, these efforts represent a critical element of unlocking the growth potential for the home standby category by expanding our sales, installation and service bandwidth.

Additionally, we continue to work towards the upcoming launch of our next-generation home standby generator line, representing the most comprehensive platform update for the product category in more than a decade. In addition to the introduction of the market's first 28-kilowatt air-cooled generator, the new home standby generator line features a lower total cost of ownership lower installation and maintenance costs as well as quieter operation and improved fuel efficiency.

The new platform also offers a number of benefits for our channel partners, including lower commissioning times and improved remote diagnostics, enabling operational efficiencies for their businesses and greater uptime and cost savings for their customers.

Portable generator sales increased at a robust rate from the prior year despite the year-over-year decline in outage activity. This growth was primarily due to market share gains resulting from our team's success in driving increased shelf space with key retail partners. While we expect these recent wins to support greater baseline demand for these products going forward, the second half of 2025 will face a challenging comparison to the prior year as our guidance does not assume any major outage events in the second half of 2025.

Moving to Residential Energy Technology Solutions. Shipments for these products and services exceeded our expectations and grew at a significant rate during the quarter. Our team continued to execute extremely well on our Department of Energy project in Puerto Rico for our energy storage solutions and combined with a record quarter for ecobee sales resulted in strong outperformance for this part of our business in the second quarter.

Our ecobee team continued to add to their recent strong sales momentum and drove significant margin improvement compared to the prior year, resulting in positive EBITDA contribution through the first half of 2025. Additionally, the connected homes count for ecobee devices increased to more than 4.5 million residences during the quarter, with energy services and subscription attach rates also continuing to grow, contributing to a rapidly expanding high-margin recurring revenue stream.

We view ecobee's premium feature set and user experience as a key differentiator within our growing residential energy ecosystem and further integration of our residential solutions with the ecobee platform will continue with every new product we launch. Importantly, we continue to expect ecobee to deliver positive EBITDA contribution for the full year as the team further scales these products and solutions.

Shipments of our energy storage systems also increased at a dramatic rate during the second quarter. We are very pleased with the progress we've made in Puerto Rico through the first half of 2025 as this has enabled us to build strong relationships on the island, which is the second largest storage market in the U.S. behind California.

In addition to our success in Puerto Rico, we began taking orders in the second quarter for [ Power Cell 2], our next-generation energy storage system with first shipments of these products beginning earlier this month. We are also making very good progress towards the launch of [ Power Micro], our new microinverter product line, which we anticipate will begin shipping during the second half of this year.

The impact of the one big beautiful Bill Act on residential solar and storage markets has been well documented over the last several weeks. Despite the policy-related changes that will reduce or eliminate incentive structures for these products, we continue to view these technologies as important elements in the residential energy ecosystem we are developing that is focused on providing the kind of resiliency and energy savings that homeowners are increasingly demanding.

The secular trends of rising power prices and declining component costs within the solar and storage markets provides an attractive long-term backdrop for these markets to further develop and grow as the overall economics improve, absent the incentives. That said, we believe the residential solar market in particular, will contract in the years ahead. And as a result, we are evaluating the adjustments necessary to recalibrate our level of investment in these technologies as we are laser-focused on significantly improving the adjusted EBITDA contribution from the residential energy technology portion of our business in the coming years.

Now let me provide some commentary on our commercial and industrial product category. Sales to our domestic industrial distributors increased again during the quarter given resilient end market demand and strong operational execution that drove further reduction in C&I product lead times.

Project quoting activity and win rates in this important channel also increased on a year-over-year basis during the first half of the year. We do expect, however, year-over-year shipment declines to develop in the second half of the year given the continued reduction in backlog resulting from our accelerated production output in recent quarters.

Shipments to our national telecom customers grew at a strong rate from the prior year during the second quarter as this channel continues to recover and is expected to deliver robust growth for the full year 2025. The telecom market remains a long-term growth opportunity for Generac given the secular trends of expanding global power and network hub counts and increasing reliance on wireless communications that require much higher power reliability.

Replacement opportunities within the telecom channel are also becoming more relevant given our large installed base of product and our long history of serving this market. As expected, shipments to our national and independent rental equipment customers remained soft during the quarter and we continue to anticipate weakness throughout the second half of the year.

Despite the current cyclical softness with our rental customers, we believe that this end market has substantial runway for growth. Given the critical need for future infrastructure-related projects that leverage our products sold into the rental equipment channel.

Internationally, total sales increased 7% from the prior year due to higher intersegment sales and C&I product shipments in Europe, partially offset by softness in other international markets. Adjusted EBITDA in our International segment increased at a robust rate from the prior year, given the solid sales growth and favorable price cost dynamics in certain markets. We expect the combination of recent order trends across multiple C&I product categories and the favorable impact from foreign currencies to drive continued year-over-year sales growth in the second half of the year.

We also anticipate an incremental benefit beginning in the third quarter from the initial shipments of our new large megawatt generators to international data center customers. With respect to the important development project around our new large megawatt generators, these products are expected to enable a very significant incremental opportunity for the global C&I part of our business, particularly within the large and growing data center market.

These mission-critical solutions are a necessary part of the substantial investment in data centers, which are enabling the accelerated adoption of artificial intelligence. Given the tremendous power requirements of increasingly large data center campuses, demand for backup power for these applications is expected to continue to grow at a dramatic rate for the foreseeable future. This rapidly growing demand for data center power infrastructure has resulted in market supply constraints for backup power equipment.

Our highly competitive lead times and the strength of our reputation in the power generation industry contributed to the strong initial response to our formal entrants into this market during the second quarter, and we have quickly built a global backlog of more than $150 million for these applications, with momentum continuing to build around a growing and significant pipeline of new opportunities.

We expect global shipments of these products to begin in the second half of the year with a large majority of our existing backlog to be realized in 2026. Additionally, further global market opportunities exist for these products within our traditional end markets. In particular, providing backup power for large manufacturers, distribution centers, health care facilities and other critical infrastructure that have higher backup power requirements.

As we continue to ramp our capabilities for large megawatt generators with our expected annual production capacity sitting well above our current backlog, we believe that we are well positioned to take share in this market over time given our unique focus which allows us to provide customized sales, engineering and aftermarket support, while also providing data center customers with a robust service network to ensure uptime for these critical applications.

In closing this morning, our second quarter results reflect strong execution in a dynamic operating environment with broad-based strength across our product categories. We will continue to lean into our core corporate value of agility as we navigate evolving market and policy conditions while maintaining focus on the significant growth opportunities that exist as we further execute on our enterprise strategy.

The megatrends of lower power quality and higher power prices are being further supported by numerous underlying trends, providing incremental avenues for future growth in our business, and we firmly believe our portfolio of products and solutions is uniquely positioned to deliver value and protection to homes, businesses and institutions around the world. I'll now turn the call over to York to provide further details on our second quarter results and our updated outlook for 2025. York?

Thanks, Aaron. Looking at second quarter 2020 results in more detail. Net sales during the quarter increased 6% to $1.06 billion as compared to $998 million in the prior year second quarter. The combined effect of acquisitions in foreign currency had a slight favorable impact on revenue growth during the quarter.

Briefly looking at consolidated net sales for the second quarter by product class. Residential product sales increased 7% to $574 million as compared to $538 million in the prior year. This growth in residential product sales was driven by a strong increase in shipments of energy storage systems and ecobee home energy management solutions.

Portable generator shipments also contributed to the sales growth, while home standby generator sales were flat with the prior year. Commercial and industrial product sales for the second quarter increased 5% to $362 million as compared to $344 million in the prior year.

Core sales growth of approximately 4% was driven by strength in shipments to our domestic industrial distributors and telecom customers, as well as strong growth within Europe, partially offset by weakness in shipments to national rental accounts and other international markets.

Net sales for the other products and services category increased approximately 8% to $125 million as compared to $116 million in the second quarter of 2024. Core sales increased approximately 6%, and primarily due to growth in aftermarket service parts and accessories, ecobee remote monitoring subscription sales and other installation and maintenance services revenue.

Gross profit margin was 39.3% compared to 37.6% in the prior year second quarter, primarily due to favorable pricing and lower input costs, partially offset by unfavorable sales mix. The favorable price/cost dynamics were partly due to the timing differences between the realization of recent price increases and the higher tariff related input costs. In addition, gross margins exceeded expectations for the quarter partially due to a lower tariff impact relative to our previous guidance.

Operating expenses increased $33 million or 12% as compared to the second quarter of 2024. This growth in operating expenses was primarily driven by higher variable costs due to higher shipment volumes, increased employee costs to support future growth across the business and ongoing operating expenses related to recent acquisitions.

Adjusted EBITDA, before deducting for noncontrolling interest, as defined in our earnings release, exceeded expectations at $188 million or 17.7% of net sales in the second quarter as compared to $165 million or 16.5% of net sales in the prior year.

I will now briefly discuss financial results for our 2 reporting segments. Domestic segment total sales, including intersegment sales, increased 7% to $884 million in the quarter as compared to $827 million in the prior year, which included approximately 1% sales growth contribution from recent acquisitions.

Adjusted EBITDA for the segment was $158 million, representing 17.9% of total sales as compared to $140 million in the prior year or 16.9%. International segment total sales, including intersegment sales, increased approximately 7% to $197 million in the quarter as compared to $185 million in the prior year quarter, including an approximate 1% benefit from foreign currency.

Adjusted EBITDA for the segment before deducting for noncontrolling interests was $30 million or 15% of total sales as compared to $25 million or 13.6% in the prior year. Now switching back to our financial performance for the second quarter of 2025 on a consolidated basis.

As disclosed in our earnings release, GAAP net income for the company in the quarter was $74 million as compared to $59 million for the second quarter of 2024. Our interest expense declined from $23.3 million in the second quarter of 2024 to $18.2 million in the current year quarter as a result of lower borrowings and lower interest rates relative to prior year.

GAAP income taxes during the current year second quarter were $15.4 million or an effective tax rate of 17.2% as compared to $19.6 million or an effective tax rate of 25% for the prior year. The decrease in effective tax rate was primarily driven by a favorable [ discrete ] tax item related to an immaterial business disposition in the current year quarter.

Diluted net income per share for the company on a GAAP basis was $1.25 in the second quarter of 2025 compared to $0.97 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $97 million in the current year quarter or $1.65 per share. This compares to adjusted net income of $82 million in the prior year or $1.35 per share.

Cash flow from operations was $72 million as compared to $78 million in the prior year second quarter, and free cash flow, as defined in our earnings release, was $14 million as compared to $15 million in the same quarter last year. The change in free cash flow was primarily driven by higher working capital and capital expenditures, causing a greater use of cash during the current year quarter, partially offset by higher operating earnings.

We expect working capital to be a use of cash again in the third quarter as we continue to replenish portable generator inventories for storm season and prepare for our next-generation home standby product launch later this year. Additionally, we opportunistically repurchased approximately 393,000 shares of our common stock during the quarter for $50 million.

There is approximately $200 million remaining on our current share repurchase authorization as of the end of the second quarter. On July 1, we amended and extended our existing Term Loan A and revolving credit facility resulting in a new maturity date of July 1, 2030. This agreement updated the Term Loan A outstanding principal balance to $700 million and reduced the revolving facility borrowing capacity to $1 billion. In addition, the amendment eliminated a 10 basis point credit spread adjustment that was included in the previous agreement and also resulted in a more favorable pricing grid based on our leverage ratio.

Quarterly principal payments on the Term Loan A will begin in October 2026, with a lump sum due at maturity in July of 2030. Total debt outstanding at the end of the quarter was $1.4 billion, resulting in a gross debt leverage ratio of 1.7x on an as-reported basis. With that, I will now provide further comments on our updated outlook for 2025.

As disclosed in our press release this morning, we're updating our full year 2025 outlook given our first half actual results driving increased visibility to expected full year 2025 net sales. As a result of our second quarter outperformance being mostly offset by lower pricing assumptions in the second half of the year, primarily due to lower-than-expected tariffs, we are narrowing our net sales growth guidance range while holding the midpoint of that range.

In addition, we are increasing the low end of our adjusted EBITDA margin guidance range and raising our free cash flow conversion guidance for the full year 2025. This guidance includes the following important assumptions: we're assuming that current tariff levels that are in effect today stay in place for the remainder of the year. This includes 30% tariff levels for China compared to 145% assumed in our previous guidance and 20% tariff levels for Vietnam compared to 10% previously assumed. We continue to assume 10% reciprocal tariffs on all other countries and the continued qualification of U.S. MCA for Mexico and Canada, consistent with our prior guidance.

Incremental tariffs have also been levied against steel and copper imports since our previous guidance update, and we have assumed higher market prices for these metals in the second half of the year as a result. Finally, consistent with our historical approach, this outlook assumes a level of power outage activity for the remainder of the year, in line with the longer-term baseline average and does not assume the benefit of a major power outage event in the second half of the year, such as a major landed hurricane or major winter storm.

Considering all these factors, we now expect consolidated net sales for the full year to increase between 2% to 5% over the prior year which includes an approximate 1% favorable impact from the combination of foreign currency and acquisitions. This compares to our previous guidance of 0% to 7% net sales growth over the prior year.

We now project full year 2025 residential product sales to be slightly lower compared to our previous expectation, given lower assumed tariff-related pricing in the home standby category. We also now project full year 2025 C&I product sales to be modestly higher compared to our previous expectation, given second quarter outperformance and favorable foreign currency rates relative to our prior forecast.

As a result, we now expect Residential Products and C&I products net sales growth to be more level loaded for the full year 2025 relative to our prior expectations. From a seasonal pacing perspective, we expect third quarter overall net sales to be slightly ahead of the prior year with fourth quarter overall net sales approximately flat versus the prior year. Recall that the prior year periods included the benefit of multiple major outage events, which results in a strong prior comparison, in particular for residential products.

Looking at our updated gross margin expectations for the full year 2025. We now expect gross margin percent to increase approximately 50 to 100 basis points compared to the full year 2024, coming in at approximately 39.5% at the midpoint. This represents an increase from our prior expectation of approximately 39.0% due to our second quarter outperformance and lower tariff assumptions related relative to the prior guidance.

Turning to our adjusted EBITDA margin expectations for the full year 2025. Given the factors I outlined in our net sales and gross margin update, we are increasing the lower end of our guidance range for adjusted EBITDA percent to approximately 18% to 19% compared to our previous guidance range of 17% to 19%.

In line with normal seasonality, we expect third quarter adjusted EBITDA margins to improve 150 to 200 basis points sequentially from the second quarter given the projected significant operating leverage on seasonally higher sales volumes. Additionally, we are raising our free cash flow conversion forecast given the impact of the one big beautiful Bill Act on our federal income tax payments.

Given the favorable tax impact of immediate expensing of research and development costs, and bonus depreciation on certain capital expenditures, we now expect free cash flow conversion from adjusted net income to be approximately 90% to 100% for the full year 2025 as compared to our -- the previous guidance range of 70% to 90%.

Importantly, this would result in over $400 million of free cash flow in fiscal 2025, which provides for further near-term optionality within our disciplined and balanced capital allocation framework. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2025.

For full year 2025, our GAAP effective tax rate is now expected to be between 23% to 23.5%, a modest decrease from our prior guidance of 24.5% to 25% due to the second quarter outperformance. Our GAAP effective tax rate for the remaining 2 quarters of the year is expected to be approximately 25%. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add-back items should be reflected net of tax using our expected effective tax rate of approximately 25%.

We continue to expect interest expense to be approximately $74 million to $78 million for the full year 2025 and assuming no additional term loan principal prepayments during the year. This contemplates a lower interest rate due to our recent amended an extend transaction mostly offset by modestly higher outstanding borrowings.

This guidance is a significant decline from 2024 interest expense levels due to a decrease in outstanding borrowings and the full year impact of lower sulfur interest rates. Our capital expenditures are still projected to be approximately 3% of our forecasted net sales for the full year, in line with historical levels.

Depreciation expense, GAAP intangible amortization expense and stock compensation expense are also expected to remain consistent with last quarter's guidance. Our full year weighted average diluted share count is expected to be approximately 59.4 million to 59.5 million shares as compared to 60.3 million shares in 2024.

Finally, this 2025 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

[Operator Instructions]. And our first question will be coming from Tommy Moll of Stephens.

Aaron, on the recent entry into the data center market, it sounds like things have gone pretty well so far. But I just wanted to ask for anything else you can give us there when could these revenues start to be meaningful? Are the lead times for some of the incumbents that are still as extended as they have been in recent years? What have you learned so far?

Yes. Thanks, Tommy. So Yes. I mean that -- this has been something we've been talking about for the last few quarters, the entry into this market and something, frankly, we've been working on for a couple of years. We haven't been talking about it much because we wanted to get to the finish line. But it will begin to impact revenues this year in the second half.

Our initial shipments in the international market will start in Q3. And then very late this year, we'll start to get our first domestic shipments out to those customers. But not much of an impact this year. It's really a 2026 story right now. What we're being told, and this is just kind of -- to kind of size the opportunity for us anyway because I think this is, by far and away, one of the biggest needle-moving opportunities that I've seen in my time here in my 3 decades with the company.

Just both in the size of the market opportunity, the data centers, in particular, present, but also obviously, the growth rate there. And the fact that this feels like something that's going to go on for a long time. You combine that with the structural deficit in the availability of these backup power products.

In our early conversations here over the last several months, nearly every data center developer operator owner and customer has told us that there are 2 major components that they worry about in the lead time for construction of new data centers. The first is transformers and the second is backup generators. And so what we've learned, to answer your question, is that we believe, based on our conversations that there appears to be about a structural deficit just in 2026 of something on the order of maybe 5,000 machines based on current capacity in the market and based on current construction completion time lines for the projects that are underway for data centers.

So obviously, 5,000 machines is a lot of machines. If you -- if you look at kind of on the high side, every single copy of every machine would be about $1 million all in. So it's a huge -- one, it's a huge market just being served on an annual basis today, much greater in size than anything that we've ever approached. And two, the structural deficit that's there, I think, will allow for a pretty rapid entry for us into the market.

I'm shocked at the over $150 million that we've already booked in hard orders and the size of the pipeline that we're cultivating in this market. We've been very well received with the -- not only just the product, but I think our brand, our reputation, the quality of our distribution, the quality of our balance sheet, frankly, the ability to stand behind these products in these very critical applications, I think we've been very well received initially here. Now we've got to deliver, and we've got to execute.

So it's not -- we're not -- this isn't a layup by any stretch of the imagination, but we're taking this very seriously. We do have good capacity to grow in the next year or so. But given the kind of situation that this market is facing from a structural deficit standpoint in terms of supply versus demand, we believe that based on our early -- the early learnings here and then our early success, we are going to have to make some potentially bold moves around additional capacity if we want that to be available for 2027 and beyond.

We think we're in really good shape for '26 and really probably even for parts of '27. But given the size of the deficit that 5,000 machines just for next year, we think there's real opportunity for us if we lean into this and be aggressive. Again, like I said, I've never seen something that can move the needle like this.

I think if we do things the right way, I think this part of our business, which has always been a good solid business, right, over -- call it, a $1.5 billion opportunity today. That's our -- that's the size of the C&I products part of our business. That's something that I think can grow dramatically in the next several years. And this -- we could be in a situation in several years where the C&I products are larger than the rest of the company.

And so I think it's -- this is just an exciting time and something that we're going to lean into and it's a global opportunity. And it's a global opportunity. I think that's the other exciting piece of that, [indiscernible].

And one moment for our next question, which will be coming from George Gianarikas of Canaccord Genuity.

I'd like to concentrate on some of the comments you made around ecobee and the solar market opportunity at least to me, it appears to be a little bit of a change in tone here around your willingness to continue to invest in the inverter market over the long term over the medium term. I was wondering if you can sort of paint a broad brush and help us understand a little bit around how you might be changing your philosophy around those markets. And maybe just update us on what the dilution was from the clean type business during the first half of the year.

Yes. Thanks, George. So I don't know if it represents a change in tone, perhaps maybe that's the right way to characterize it. Let me say what hasn't changed. And I think the comments we wrote the specific commentary was we're laser-focused on reducing the drag on earnings from this business, i.e., we want to get it to be in positive territory. We will get it to be in positive territory.

Now we have to obviously recalibrate if the overall market size for solar, in particular, if that's going to decrease in the years ahead, and it's likely that it will. The question is how much, right? I think there's still some things that need to be vetted and understood as the one big beautiful Bill kind of now moves from it being passed the legislation into kind of interpretation by treasury and what happens there in terms of the actual impacts to the market.

But clearly, the market is going to contract for solar. It's just -- is it going to contract 20%? Or is it going to contract 50%. So but take a range, maybe it's 20% to 50%. We believe that, that market, if you just step back, has been heavily impacted, obviously, by the incentive structures over the years. It's been distorted. That's the word we keep using internally here.

It's a market that's been, frankly, this is one of the major problems you run into in terms of distortions that can happen in markets when you have subsidization for as long as you've had with this market. And the changing kind of time lines around those subsidization, the change in quantums of those subsidization, we actually believe the elimination of subsidies for solar is a good thing for the market. In the long run, it will help this market grow, structurally grow in a way that normal markets grow.

Right now, it doesn't look anything like a normal market. In fact, you can look at how a typical solar system is transacted. That transaction almost looks like nothing else on the planet in terms of how it's structured, the financial engineering, the craziness around it.

And I think a lot of that has had a negative effect actually on the underlying structural integrity of the market in terms of -- it had kind of a distorted effect on the overall ASP for a project. I think the ASPs for projects are higher. There's a reason that they're considerably higher here in the U.S. than they are in Europe.

And I think a lot of that has to do with the -- just the amount of subsidization, the amount of incentives that go into that and the structures that come out of those transactions with tax equity structures and other elements. I think if we get rid of all of that. Over time, what will be laid there is a market that can work. You can see what's going on in Europe. It works.

Power prices are going up. You can look at your own power bill, look at your neighbor's power bill, look at power bills across the country. This is, without a doubt, a story that's underreported. We can talk about power outages all we want. But at the end of the day, the cost of power is going up and there's lots of reasons. People can pick their reason and it differs by utility, it differs by region, it differs by type of customer.

But at the end of the day, your power cost, my power costs have gone up over 30% in the last 5 years and are expected to double in the next 10 or greater. You're already seeing this play out in parts of the country. As power costs increase and as the cost of these technologies, i.e., solar, storage, energy management, all of these technologies continue to come down rapidly in cost. They have done that over the last couple of decades, and they will continue to do so.

You can get to economic outcomes there that are very beneficial to homeowners and businesses by installing solar even without the incentive structures. And that, I think, is where this ultimately lands. Now there's going to be a couple more years of noise here as the incentives taper off, you're going to have some pull forward of demand with safe harboring maybe in the second half of this year. And all of that has to wash through the system.

But for us, we think that solar and storage are still important technologies in a residential energy ecosystem. And parts of that. Now they're not the only parts, okay? We believe EV charging is going to be an important kind of play an important role. We believe that energy management with the ecobee products are going to play an important role. We believe generators are going to play an important role in the energy ecosystem.

All of this linked together is how we're going to keep homeowners and businesses resilient. And we're going to help them save money on their power bills. We're going to give them a lot more independence going forward. It's going to take time to build that out, but we are not going to continue to lose money on this business in perpetuity. We've said that -- the drag on this, I think, York, for the first half of the year, it was about --

That 300 to 400 basis points. But overall, for the year, it's, call it, 300 to 350.

Yes, that's our expectation. For the full year, but continuing to improve. We've seen that improvement already in ecobee, and we're going to continue to see that in the rest of the business.

Now we'll adjust our spending, right? If the market is smaller, we're going to have to adjust the level of our investment, recalibrate our investment. We've got a lot of new product coming to market this year. We won't have a lot of that new product cost, if you will, the development costs we'll start to taper, and we'll go more into a sustaining mode on those new products going into 2026.

So I think we're in a good place to make the recalibration that we need to make there. But we are still committed to this being part of an energy ecosystem, we think, is an important element for us to plant the flag in going forward here at the company.

Our next question will be coming from Mike Halloran of Baird.

Aaron, can you just continue that train of thought then, what is the next, call it, 12, 18 months look like as far as the iterations go for how you get that back to kind of a neutral profitability level, the clean energy piece?

What are the types of things you're thinking internally? What's that time line look like? And is this the clean energy piece specifically? Or does that include ecobee, which -- correct me if I'm wrong, but that is already at a profitable level. So is that the net of the 2? Or is that exclusive of --

So yes, no, correct, Mike. Ecobee is profitable year-to-date, and we expect it to be fully profitable for the year. It's done -- that team has done an outstanding job. And the growth rate there is been fantastic. It's a huge part, obviously, of our whole energy technology business when you look at it together.

The big kind of drag remains in what we refer to as our clean energy products, which are the storage products, the solar products where we've had very heavy development cycles ongoing to bring these new products to market. And as I said, kind of on the previous commentary, those new product cycles of new product introduction costs in those cycles should start to taper as we get these new products in the market.

So [ Power Cell 2], which is our new storage device, just started shipping here earlier in July. And our [ Power Micro], our new microinverter product line is going to hit the market later this year. So the development cycles are starting -- we're getting in the final innings of the development cycles, and that's where a lot of the spend has been.

Now transitioning that spend over to support, right, and sustaining efforts is -- was kind of the next phase anyway. And so that was already kind of in the plan. And obviously, though, if the market is smaller, you won't need as much support, you won't need as much in terms of sustaining in theory. And so I think there's an opportunity there to look at recalibrating that, depending again on where we think the market is going to be.

The answer to your question directly over the next 12 to 18 months is difficult because we don't know where the market is going to be over the next 12 to 18 months. That's a piece that we're still kind of -- we're vetting out -- we want to get a very clear understanding where it's going to go. We know it's going to contract from current levels. And by the way, current levels are depressed.

I would just point out that current levels are also depressed, though because of 2 factors. One, you had the change in the net metering rules in California from net metering 2.0 to 3.0, which had an impact -- a negative impact on the market. Now that's largely started to wash through.

But the second kind of effect that's been depressing the market is high interest rates. And I think it's -- you could make a case that it's more likely than not that interest rates are going to go down as opposed to up in the future, which should provides a backdrop for a bit stronger market dynamics, all things equal in these -- in the clean energy types of products.

So I do think the market is going to contract. There's no doubt we're going to recalibrate spending. We are still targeting. We had said at our Investor Day a couple of years ago that by 2027, this was a profitable area for us. That's still our focus for the company. We think that we've got to find a path to do that. Ecobee certainly has done their part. They are well underway.

In fact, I would say they're ahead of plan in terms of where we're coming out there, which is great. Now we've got to turn our attention to the rest of that part of the business. And again, like I said, we're super excited about the new products we've got coming to market and the receptivity we've had with our early discussions with the solar channel in particular. And we've got to see where the market kind of shakes out here. The overall market in terms of a forecast for 2026 in particular, but also as we think about the next 3 years.

Our next question will be coming from Jeff Hammond of KeyBanc Capital Markets.

This is David Tarantino on for Jeff. Maybe on home standby, could you give us more color on the underlying trends here and how we should expect the category to progress through the rest of the year particularly around what the dealers are telling you around the demand after glow from the outage events last year and how inventories look in the channel?

Yes. Thanks, David. So home standby is pretty -- what's really amazing about home standby is outages have been kind of light here in the first half of the year. We had a great second half of the year, obviously, in terms of outages, very active. Not great, of course, if you experience those and some of the reasons why you experienced them.

But we're there to help our customers with our products -- and we had a very active second half of last year. That -- as we would normally expect, right? We've always said 6 to 12 months of afterglow, if you will, from those big events. And that's really kind of played out here. In the first half of the year, installations of products are up year-to-date, which is great. They were up in the second quarter.

So they -- we're kind of holding on to that new and higher baseline. We continue to add dealers, which I think is always one of those things that we watch very closely is the pace at which we continue to add dealers has remained robust.

IHCs were down in the quarter, but you would expect that with lower outages Seasonally, the second half of the year is really important, right? So no doubt, we're watching with great attention to what happens in the second half of the year. We don't have -- just remember, we don't put any major events in our guide, which -- so we're guiding our -- that business, that part of our business. We're guiding to a baseline level of outages, which is generally significantly lower, particularly in the back half if you do get major outages.

So I would tell you that it's almost like there's a free option there on home standby if we do get some kind of event in the second half. And we've always said those events are between $50 million and $100 million impact. We saw that play out pretty much on point last year. And we would say that, that would probably be the situation again this year.

I might say the only difference might be we've done a really nice job in portable generators. We've got a new team there that's leading that business. that part of our business, those products. And they've done a great job getting some really major wins at some incredible retailers and expanding our shelf space.

So we're feeling really good about where we sit from a market share standpoint in portable gens. So if we were to get some major outages, we might actually have a nicer tailwind there. We're going to be set from an inventory standpoint. It's a little bit of the cash flow in the quarter in terms of our working capital needs in Q2 were driven by kind of replanning portables a heavy storm season from last year, but also getting ready for this year's storm season and the fact that we've got increased placement with our -- in the retail channel with those products.

So what the market is telling us around home standby though, is -- and it's always been kind of a regional story. So the Southeast remains pretty robust, right, coming out of last year, the activity there is great. There are other parts of the country where it's weaker because we haven't had the outage activity.

But I think if you stand back and you look at it on a hole and you look at kind of the home standby business or the products there as a segment as a group, it's been incredible how it continues to grow. And after every one of those major events like we had last fall, it holds on to that higher baseline level, and it grows from there.

Now it might be slower growth for a little bit of time here until we see another inflection point with more outages, but it's an incredible part of our business in terms of the ability to grow that business on the back of outage, high-profile outage events and then to hold on to that growth and move from there. So really pleased with kind of how that business has continued to pace.

Our next question will be coming from Brian Drab of William Blair.

Can you just -- can you just talk about pricing and so we had the 7% to 8% increase, I guess, in March and you said that it had some positive impact on gross margin. But how was that received overall in the market, any effect on demand? And how are you adjusting your plan for pricing on the new product line, given how tariffs have evolved?

Yes. Thanks for the question, Brian. So pricing, obviously, dynamic environment we're in, we're all kind of glued to the 24-hour news cycle here on where these trade agreements are coming out. It sounds like the administration is making progress here. It's slow going.

Obviously, these are major deals, and it takes time to get these deals put together. But I think in the end, we put price into the market in response to what we understood the tariff environment to be. Those were effective. I think at the beginning of April, that was roughly the 7% to 8%, Brian, that you referenced there, that's -- and I'm talking specifically now about the home standby impact there.

Did not see much material impact on demand. We did just -- to remind you, we had -- our updated guidance at the time did contemplate some demand destruction on higher price for the remainder of the year. So there is some demand destruction that we built in -- and I think we've largely based on our results, I think it's kind of played out the way that we saw it playing out.

The second part of your question, kind of where are we going from here. So we have a new product line coming out in the second half of the year. It's our next-generation home standby product line, which is -- it's phenomenal. Actually, the product itself is just so far advanced from even the existing platform and so far ahead of where the market is at today. We're super excited about that.

There is a bit more cost in that product with some of the feature sets that we've added, which is which is good, but that will require some additional pricing adjustments. And of course, we've got some new -- we've got additional knowledge on the tariff -- the trade deals that have been inked so far and where we're sitting.

So there's probably as we release product into the market, we just announced the availability of our new 14-kilowatt and 18-kilowatt units. That's the first part of the new product line to be released. Those just went on order here this week. As a matter of fact, early this week.

The order book opened on those, and we'll begin shipping those next week. And those contain a price increase somewhere in the -- depending on the SKU in the mix, 5% to 7%, call it, of additional price that will go in related to that kind of, again, mostly because of the additional feature sets that we're including with the products, but there's a little bit of kind of rebalancing with some of the tariff information that's now known that wasn't known back when we did the last round of pricing in April.

We still have a good chunk of the product line to be released here in the second half of the year, our larger nodes. So everything from the 20-kilowatt nodes, all the way to the 28-kilowatt nodes, which represent an important part of that product offering and so we haven't released pricing on those nodes yet. So we'll continue to watch the tariff environment.

We may have to go back and touch pricing again on the 14s and '18 as something changes, but probably not material at this point. It's probably small. So we feel pretty good about where we're sitting with respect to pricing. And again, the demand destruction, if you want to call it that, that may have occurred. We think that played out largely in line with our guidance.

Our next question comes from Mark Strouse of JPMorgan.

A couple of questions. Going back to the data center opportunity. Can you just kind of talk about the backlog that you have so far in the initial conversations that you're having, are those with kind of larger hyperscaler type data centers? Are they more traditional data centers? Any color there you can provide?

And then going back, Aaron, to your comments about potentially expanding capacity, can you just talk about kind of looking at your footprint, looking at your supply chain, other factors that go into that. How I don't want to use the word easily, but how quickly can that be done? And can you talk about the CapEx requirements if you're going to double capacity, triple capacity, whatever it ends up being, how we should be thinking about that?

Yes. Thanks, Mark. So just on the pipeline, our opportunities include both the, I would call it, traditional data center owner operators as well as hyperscalers. But the -- where we're getting traction is with the hyperscalers because they are -- their power needs are greater. And frankly, that's where the biggest part of the deficit in the market seems to exist is around those, but it's a market-wide deficit in terms of supply versus demand. So we're seeing those opportunities manifest across the board.

But we are having, I would say, some of our more interesting conversations are with the hyperscale side of the business. And we're not just talking about 2026 planning with these customers. We're talking about '27 and beyond at this stage because they're planning out -- obviously, they're trying to lock up supply further out. And they're out '27, '28, some cases, 2029, the conversations are out.

So then the second part of your question on footprint. So we have 9 facilities around the world that are capable of producing commercial and industrial products. And so we have 3 here in the U.S. We have 1 in Mexico, 1 in Brazil, 1 in India, 1 in China. We have a facility in Italy and a facility in Spain. I think that's fine, if I did my math right.

And so those facilities are capable of producing C&I products. Not all of them are capable of producing the large megawatt products. But what I would say is by expanding capacity in the midrange of our products, we're able to create additional capacity opportunities for large megawatt. I'll give you an example.

Here in North America or here in the U.S., we just opened a new plant here in Wisconsin. Our biggest plant in the U.S., 345,000 square feet in Beaverton, Wisconsin. We just commissioned that plant back on April 1, cut the ribbon on it locally here just this past last week. And so that plant is operational.

What that plant allows us to do is focused on our mid-range gen sets up to basically up to 1 megawatt. And so that's going to be more of our traditional market, end markets like telecom and some of our traditional backup markets. But what it allows us to do is take a product that we are currently manufacturing those higher output products that we're currently manufacturing in one of our other facilities nearby Oshkosh, Wisconsin and free that facility up to be focused not quite 100%, but close to the opportunities that exist with these large megawatt units.

And so by the very nature of that, we've added a lot of capacity in the system by bringing this new plant on even though the new plant wasn't maybe aimed directly at the large megawatt product. That plant that we just brought online is about a $65 million to $70 million investment all in. So as we think about -- and it took us about 15 months to bring the plant, 12 to 15 months depending on -- it's pretty -- actually closer to 12 months than 15 to bring it up to speed and to get it constructed and get it going.

So as we think about the future, and again, 2026, we're fine. We have plenty of capacity. We're well over the $150 million backlog we've got, and we're going to get orders of magnitude over that in terms of what our raw capacity is globally for these large systems. But when we think about the opportunity that exists for '27, '28 and beyond, I want to get ahead of this, and I want to get ahead of it now.

And so we're going to have to take and make some big bold bets on additional capacity. And that could come through organic efforts. We could build some factories, we could buy some buildings. We can do some things there that are, frankly, in our wheelhouse in terms of -- again, I referred to this in my prepared remarks, but our core corporate agility, one of them is -- our core corporate value is agility.

We just moved fast at the company. We know how to do that. We're comfortable with that. It's a legacy of serving kind of -- honestly, it comes from our residential side of our business. It's a legacy of being able to react to exogenous events that happen. We think that our supply chain, we've got great partnerships built in the supply chain for these large megawatt units, and they are prepared -- they've got a lot of capacity already. They're prepared to add more.

What we need to do is continue to look at all elements of the value chain there end-to-end to make sure that there are not other constraints that exist. And if there are, how do we solve for them. So this is going to be an all-out effort by the company to figure out how we grow this segment of our business very, very quickly in the years ahead. And it's going to come -- we're going to need to invest. The good news is we've got a really great balance sheet. We generate a lot of cash flow. We generate $400 million -- $400 million this year.

We've got a head of steam.

And we got ahead of steam. Yes, in terms of our momentum going forward here. So with our backlog. So we feel like we're well positioned to maybe you want to call it a rotation of investment. Somewhat out of some of the energy technology things we've been focused on and into the C&I opportunity, which we just want to -- we just think we can win there with our approach. So super excited about that.

And our next question will be coming from Keith Housum of Northcoast Research.

Hoping you guys could perhaps just dimensionalize a little bit the current industry capacity for these data centers. You mentioned a deficit of about 5,000 devices. How much can the market do today? And then perhaps what is your capacity? Is it $300 million, $400 million, as you guys [indiscernible]?

Yes. Thanks, Keith. So the overall market size, again, there's a lot of moving pieces there, but it's significantly above the 5,000 deficit, obviously, but it continues to evolve. And a lot of that is going to be -- it's going to be defined by how quickly the data centers can come online.

One of the challenges that still has to be solved by the data centers is the ability to connect to the grid, right? So what we're seeing, and I think what you -- for those of you who track some of the companies in the marketplace that provide different solutions for what we refer to as [ Bridge ] power, right?

Maybe unique solutions, individual solutions that can create a somewhat independent, almost microgrid, if you will, for a data center site so that they can operate independent of the grid and they can stand up that data center and bring it online more quickly. Those solutions are also -- there's capacity constraints within those solutions as well.

So a lot of the overall size of the market is being dictated by how quickly can these data centers be put into service, either by connecting to the grid or through their self-sufficiency with some kind of bridge power solution until they can connect to the grid. So it's a moving number. It's a moving target.

Again, the 5,000 deficit that we referenced is kind of based on what the individual market participants have told us that they believe and not market participants in terms of gen set participants with the customers for data centers, what they believe it to be a deficit in the market. So they're not telling us how big the whole thing is. They're just saying they believe there's -- there are thousands and thousands of units short here even for 2026.

Our own capacity, just kind of looking at what we think we can do in terms of capacity for next year, I think it's easily north of $500 million in terms of what we have as capacity today. Based on the 9 facilities we have, based on bringing Beaver Dam online here this year and also some expansion that we're doing, investing in some areas in some of our other plants to allow them to do even more, to expand their capacity of large megawatt product, in particular, either through additional test capacity, which is generally the constraint or through some of the other production capacity.

What we need to do is size that with our supply chain as well. We think right now, our supply chain could keep up with that. But this is where I think real quick -- very quickly, you think about $500 million. I mean that's 1/3 of our entire C&I business today.

So I mean, it's -- again, I keep using the term needle moving because that is truly a needle-moving opportunity. But the good news is we've got good capacity in place. We've got, as York mentioned, momentum with our backlog and we're willing to commit to additional capacity as the market grows and as our participation grows alongside of it.

Our next question will be coming from Dimple Gosai of Bank of America.

I appreciate the time today. You raised EBITDA margins to 18% to 19% from 17% to 19% previously. My question is what's driving the confidence in margin expansion, right? How much of this is due to structural improvements, say, in input costs or temporary tailwinds from mix pricing as opposed to uplifts from tariffs, right? And how sustainable are these margins into 2026?

Yes. No, I think we've been -- our gross margin performance has been quite strong, I would say, for the last 4 quarters. So we've demonstrated that we can execute on strong gross margin. So that alone gives us confidence that, that can continue on. Now from a tariff standpoint, the market has absorbed the pricing. And you can see from our Q2 performance that we were able to withstand that.

We believe in the second half. We'll continue that. We've got confidence that the impact of tariffs will get offset by price, and that will allow us to hold those strong margins. And I think the increase from our prior outlook is just a function of holding those margin dollar levels on slightly lower sales and slightly lower pricing. So that alone will drive your margins up. But what we've seen today is we believe we can offset those tariff impacts.

I would say -- I would add to that, Dimple, that when you think about longer-term margins, again, as we continue to focus on reducing the drag from some of the energy tech products that we talked about earlier. And then if we -- as that C&I business begins to rapidly grow the leverage that we're going to get from that growth is going to also be, I think, a positive overall for our margins.

So the combination of those 2 factors as well gives me confidence longer term that our margins have opportunity to continue to expand. I mean we had laid that out also at our last IR event. We were targeting higher margins even than where we're operating today. We believe that, that is still very achievable. And that's even kind of before we get to some of the potential opportunities within the data center market that we've been talking about this morning.

Definitely on the EBITDA line -- on the EBITDA the operating leverage on the EBITDA line will be large.

Our next question will be coming from Sean Milligan of Janney.

In terms of the data center piece, you just kind of hit on it, but I was trying to understand how we should think about margins for that book of business. Are they -- I guess, both from a gross and EBITDA side within the C&I piece? Like are they going to drag that margin profile higher over the next couple of years also?

I think at the gross margin line, if you just looked at those projects on their own, they don't look tremendously different than our C&I product margins. There may be a little bit softer basis, but actually, they're quite a bit stronger than our initial business case going into this market presented.

We thought that those percentages would be more challenging, and they would be potentially dilutive at the gross margin line. I don't necessarily see it happening that way with C&I products now given where -- because of the structural deficit in the market, pricing of those products to the market has gone up from our initial business case and is putting us in a place with gross margins on those products that look a lot more like our traditional C&I products.

And as a result, and even if we were to do the business case that we -- if we were talking about the business case we originally had, we were going to see accretion on the EBITDA margin line because of that leverage. We're going to see -- it's going to work out even better now because the gross margins also will be stronger than we had initially planned for and you'll get the leverage on the operating leverage at the EBITDA margin line.

So net-net, Sean, I think it's -- this is again where kind of my previous answer to Dimple's question, why I've got confidence that our EBITDA margins can continue to expand in the future is in particular, on the back of what we're looking at doing here in data centers.

Even on a consolidated basis.

Even on a consolidated ...

Maybe dilutive about the gross margin line on a consolidated basis, but accretive to ...

Some accretive on a consolidated basis, EBITDA margin for sure.

One moment for our next question, which will come from Joseph Osha of Guggenheim Partners.

I'm wondering if you could talk a little bit about your diesel sourcing strategy. I'm wondering whether for starters, that supply chain is showing some signs of stress as well, given how busy data centers are and also how you're thinking about where you might procure in particular what your opportunities are outside of China.

Yes. Thanks, Joe. It's a great question because, obviously, at the heart of every one of those machines is what we refer to as a large board diesel engine that produces the kind of output that is required in each of these machines. And these are engines that -- they've been around a long time, but they've been traditional and they've been used in power generation in the traditional market sense.

But typically, you see them in rail. You see them in mining. You see them in marine in those larger power applications. When you look across the planet, there are a handful of manufacturers of these large diesel engines. And a couple of them are very well known. Caterpillar, Cummins, and they also have very well-known power generation divisions or groups that are leading the charge forward on kind of serving the data center markets but that's where the constraints lie. And for them, they both -- both [ CAT ] and Cummins have announced expansion plans for capacity in those diesel engine -- in the diesel engine production capacity that will come online in the next several years.

And that's somewhat unique for them because normally, those markets, the primary markets of rail, marine and mining can be cyclical, right? And in the past, I think the reticence to add capacity in those large bore diesel engines for manufacturing capacity, it's expensive. And so it's a capital intensive a bit expensive to add capacity.

So typically, they've kind of, I think, held the line on doing that and just waited for markets to roll over. in terms of cycles. But this time, I think they all view it differently. I think -- which is actually a very bullish sign. I think overall that there's a belief that this part of the market is going to run for a lot longer and is going to be relevant in a big way going forward and is worthy of making that next level of capacity investment.

That said, our supply chain, Generac, we've worked very hard over the last few years to put a deal together with a supplier there that is not new to the market, but maybe new to the U.S. market. And so we've been working with that partner to get those products qualified for U.S. certification. They were qualified last year for use in Europe, and that's why our European team is maybe a quarter or 2 ahead of where we're at here in the U.S., and the products are now qualified for duty here in the U.S. market.

It's a world-class manufacturer, and they have a tremendous amount of capacity and they have a very large appetite for additional investment. So we feel that we're paired there with a very competent supplier and one that is going to give us a lot of room to run in terms of -- with this initial foray into the market, one of the major reasons why we've been successful is we've been able to quote considerably shorter lead times and where the market's at, maybe half the lead time of the market today and that's great.

But that's not what you build the business on. We've got to build the business on a reputation that's stated by our performance as well. Performance to the equipment itself, but also the uptime of the equipment and our ability to serve and support those customers in a way that we think we know how, given our long history in serving some areas like telecommunications as an example, on a direct basis.

So we think our supply chain is in really good shape there, Joe. We think we've got the right partner. And again, I think we're poised for some significant growth.

I would now like to turn the conference back to Kris for closing remarks.

We want to thank everyone for joining us this morning. We look forward to discussing our third quarter 2025 earnings results with you in late October. Thank you again, and goodbye.

And this concludes today's conference call. Thank you for participating. You may now disconnect.