GENERAC HOLDINGS INC 2026 Q3 Earnings Call

You may begin. Good morning, and welcome to our third quarter 2026 earnings call.

I would 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 a 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 third quarter results reflect continued momentum in our C&I segment, with revenue from products sold into the data center market leading to a 28% increase in C&I segment net sales on a year-over-year basis. Additionally, in the quarter, our residential segment returned to strong growth, with net sales increasing 9% from the prior year, driven by the lower power quality megatrends that continue to support sustained demand for backup power solutions. Overall net sales increased 16% during the quarter to an all-time high record for Generac, and robust margin expansion helped deliver a 33% increase in adjusted EBITDA compared with the third quarter of 2025, exceeding our prior expectations and resulting in the increase in our adjusted EBITDA margin guidance for full year 2026.

The third quarter also marked a tremendous step forward in solidifying our position as a leading supplier to the data center market as we entered a long-term supply agreement with Amazon for data center backup power generators. Initial deliveries in this agreement are expected to be a combined $2.4 billion in 2027 and 2028, driving the increase in our backlog for products sold to the data center market to approximately $4.5 billion, nearly tripling from just 90 days ago. The agreement with Amazon provides for up to approximately 1.7 million common warrant shares, with future vesting of the warrants linked to a total of $8 billion in backup generator purchases over the seven-year term of the deal.

This warrant structure provides for incremental strategic alignment, as well as creating a material incentive for Amazon to continue leveraging Generac as a supplier well beyond the initial deliveries expected in 2027 and 2028. We believe this long-term strategic collaboration validates our status as a top-tier supplier of C&I backup power generators and provides continued confidence in the durability of demand for our products in the data center market. In addition to the significant demand from our hyperscale customers, our updated backlog also reflects continued momentum with both new and existing non-hyperscale customers, which continues to expand geographically as well, with new orders across multiple continents. We believe this growing customer base across an expanded geographical footprint helps to create an increasingly diversified business as the global data center investment cycle matures.

Additionally, our previously announced capacity expansion plans remain on track and will allow us to serve this accelerating demand with our new large megawatt generator production facility in Sussex, Wisconsin, as initial production began at the end of the third quarter and build rates are expected to ramp significantly in the fourth quarter. This ramp is expected to support strong sequential revenue growth in the fourth quarter of 2026, resulting in full year 2026 data center revenue of nearly $500 million, an increase from the approximately $450 million previously expected. As we look toward a year of dramatic growth ahead for data center-related revenue in 2027, we continue to invest in our large megawatt production facilities and are working towards tripling our global production capacity. We expect to achieve significantly higher levels of output from our existing facilities through added production lines and an increase in manufacturing staffing levels.

The relatively small incremental investment needed to ramp capacity further highlights the capital-light nature of our business and the incredibly strong ROI that we expect to realize from these investments. We also continue to invest in deeper vertical integration across our C&I product portfolio, highlighted by the outfitting of our new packaging facility in Belvidere, Illinois, which is expected to come online in early 2027. We view this additional packaging capacity as a key strategic advantage to protect our highly competitive lead times as end market demand surges, while also expanding our share of value-added content and improving overall profit margins for large megawatt generators. We believe that the vertical integration of highly customized packaging solutions is an important and unique factor in our ability to continue to win in the data center market.

Internationally, we are also investing in additional manufacturing capacity for large megawatt generators as data center demand continues to grow rapidly around the world. This includes expansions in Europe, Asia, and Latin America to help serve demand we have secured from these customers in those regions. In addition to manufacturing capacity, we are also increasing our service and support footprint in these local markets where these new projects will be sited. As a result of our recent wins, current backlog, capacity expansion efforts, and our track record of strong execution, we believe we have excellent visibility to dramatic growth in the data center market in the years ahead. Specifically for 2027, we now expect revenue from products sold to the data center market to well exceed $2 billion.

Now looking at our overall C&I segment results for the quarter, net sales growth remained robust, led by more than $100 million of revenue from products sold to the data center market. This significant sales increase versus the prior year period supported strong adjusted EBITDA margin expansion in the quarter, a trend that we expect to continue into 2027 as C&I segment growth dramatically accelerates further. Mobile product sales to national and independent rental equipment customers also grew again during the third quarter as compared to the prior year. Recall that in January, we announced the acquisition of Allmand, a mobile products company based in Nebraska that we have now fully integrated into our existing mobile equipment offering. The resulting combined scale we now have in mobile products has allowed us to increase our market share with our rental customers.

Specifically, the Allmand business has outperformed our prior expectations for both sales and profitability. As we continue to see healthy rental fleet demand driven by a significant pipeline of large construction projects, we anticipate continued strong growth in 2027 for our mobile products. Shipments to our domestic industrial distributor channel grew sequentially in the quarter but declined versus the third quarter of 2025 as the prior year included a tougher comparison related to our drawdown of backlog. In addition, lead times for products shipped to these customers grew longer in the quarter, driven primarily by the execution of the final phase of our project to relocate manufacturing of these products to our new facility in Beaver Dam, Wisconsin. We expect lead times to return to more normal levels in the first quarter of 2027 as production ramps at Beaver Dam.

Order rates from our domestic industrial distributors remained robust with the third quarter marking another record from industrial distributor customers and positioning this channel for continued growth in 2027. We also continue to see healthy quoting activity for our large megawatt generators in the non-data center applications through this channel, providing an incremental and diversified source of demand for these products. Shipments to our telecom channel slowed during the quarter, primarily due to certain customers working to reduce their backlog of site deployments. Although demand for backup power for telecom customers can be variable from quarter to quarter, we continue to view the telecom channel as an attractive long-term opportunity supported by ongoing network hardening investments and growing interest in data center adjacent applications from our telecom operators.

International C&I net sales, excluding shipments to data center customers, increased during the third quarter when compared to the prior year as a result of broad-based regional growth. The European region, our largest international market, experienced solid sales growth from the prior year, while sales to emerging markets such as Latin American and the Middle East returned to strong growth in the quarter. This diversified geographic growth is encouraging considering the current geopolitical environment, and we continue to evaluate opportunities to expand our presence in other regions to serve more local markets around the world. Additionally, global shipments of our control solutions increased at a robust rate during the quarter, providing further evidence of the stronger conditions in the global power generation market. Looking ahead, we expect overall C&I segment net sales to increase in the low 30% range for the full year 2026.