Generac Holdings Inc. Q4 FY2025 Earnings Call

Hello, and thank you for standing by. Welcome to Generac Holdings, Inc. fourth quarter and full year 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. We ask that you limit yourself to one question only. I would now like to hand the conference over to Chris Roseman. You may begin.

Chris Roseman 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 Erin Yagfeld, President and Chief Executive Officer and York Reagan Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation, as well as other information provided from time to time by GenRAC 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 In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these 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 Fourth quarter adjusted EBITDA margins of 17% were in line, however, with our expectations expectations despite the weaker outage environment and unfavorable mix shift. We made significant progress with our efforts in the data center market as momentum accelerated during the fourth quarter and into early 2026. We further developed partnerships in the quarter with multiple hyperscalers, including progressing to the pilot phases of our relationships with two specific customers as we prepare for potential significant volumes in 2027 and 2028. These developments provide incremental visibility and support for our continued investments in ramping our manufacturing capacity for large megawatt generators as we position ourselves to be a key supplier for this rapidly growing end market. Additionally, we are making progress with other data center co-locators and developers as our existing backlog has increased to approximately $400 million as a result of additional orders from these customers. We expect our order intake will accelerate over the next several quarters as we continue to progress through the qualification and contract stages with various data center customers, providing a path to doubling our CNI product sales in the years ahead. To ensure that we can serve this accelerating growth and demand, we have made significant investments that further improve our positioning as an important supplier to the data center market, including the purchase of an additional manufacturing facility in Wisconsin in December, as well as ongoing investments in our existing CNI facilities globally. As a result of these investments, we expect that our domestic manufacturing capacity for large megawatt generators will surpass $1 billion by the fourth quarter of this year, and we will continue to evaluate additional capacity across our entire global 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, PowerCell2, 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 EcobeeSmart thermostat platform, helping to strengthen our home energy ecosystem through deep integrations with all of our residential products. These solutions are specifically designed to help our end customers solve the energy challenges presented by the megatrends of lower power quality and higher power prices. In addition to the well-established impact on power quality from severe and volatile weather, significant load growth is expected to further drive grid instability and raise power prices well into the future, as power demand accelerates as a result of massive CapEx investments being made for the build-out of data centers. According to the North American Electric Reliability Corporation's 2025 Long-Term Reliability Assessment, nearly half of the U.S. population lives in a region that is at a high risk of seeing its power supplies fall short of established reliability criteria in the next five years. NERC attributes this expected instability to the combination of escalating demand growth, with the peak demand growth rate nearly doubling as compared to the prior year's projection, and increase in intermittent generation sources, which carry lower reliability factors, and the uncertain pace of grid infrastructure development. Most regions within NERC's high-risk category are expected to also see a substantial increase in data center investment in the coming years. Significant load growth is contributing to power demand shortfalls, with third-party estimates suggesting that supply and transmission capacity investment growth rates would need to increase six-fold as compared to the rate seen over the last five years to match the anticipated higher demand. The investments required are likely to further increase the prices for electricity, adding to the affordability challenges that U.S. residential electricity customers already are experiencing, as average power prices have increased nearly 40% over the last five years. And expectations for power prices are to double again in the next decade. And these continued increases underpin the need for energy technology solutions as home and business owners look for ways to reduce their increasingly higher energy costs. At the same time, the continuing trends around lower power quality highlight the long runway of growth that we anticipate will exist for our core backup power products and solutions given that the home standby category is only 6.75% penetrated at the end of 2025, with each incremental 1% of penetration representing an approximately $4.5 billion market opportunity. As a result of our continued innovation and investments in product development, we believe Generac is uniquely positioned to help our customers solve the energy challenges they are facing with increasing power outages and rising energy costs. At the same time, we believe we are well positioned to capitalize on the massive growth opportunity presented by the supply shortage of mission-critical backup power generators for the data center market. Now, discussing our fourth quarter results in more detail, global CNI product sales grew 10% year-over-year in the quarter, primarily due to revenue from products sold to data center customers, including continued shipments internationally and our initial large megawatt generator sales in the domestic market, as well as an increase in global shipments for our controls, products, and solutions. Project quoting activity and orders in our domestic industrial distributor channel continued to grow during the quarter as end market activity remained robust. However, as expected, shipments to this channel declined in the quarter from a strong prior year comparison, resulting from the reduction of lead times in the prior year fourth quarter. Throughout 2025, as we further increased production rates across our existing facilities, and with our new plant in Beaverdam, Wisconsin, coming online in the second quarter of 2025, we continued 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%. 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 5th, we further strengthened our position in the market for mobile products with the acquisition of Almond, a market-leading mobile power equipment manufacturer located in Nebraska. In addition to broadening our customer base and increasing our exposure to the growing market for these products, this acquisition provides additional capacity and flexibility within our domestic manufacturing footprint as we continue to invest in doubling our C&I product sales in the years ahead. International core total sales, which excludes the benefit from foreign currency, increased 5% during the fourth quarter, primarily due to revenue from products sold to data center customers and higher global shipments of our controls, products, and solutions. Favorable sales mix and improved price-cost realization resulted in significant adjusted EBITDA margin expansion to 16.1% total sales, an all-time record level for our international segment adjusted EBITDA margin. As previously discussed, we have made important investments that further strengthen our position as a key global supplier of backup power for the data center market. And our current backlog for these products has now grown to $400 million, giving us improved visibility for the current year as the majority of this backlog is expected to ship in 2026. We expect 2026 will be an inflection point for Generac in this end market as we anticipate the addition of significant volumes to our backlog over the next several quarters from a number of hyperscaler and co-locator customers. We believe that our strong reputation as an engineering-driven organization with a unique focus on backup power, a customer-centric market, a customer-centric approach, and global production capabilities will allow us to become an important supplier to the data center market. Additionally, these large megawatt solutions will help expand our reach into our traditional end markets, as they have significantly expanded our served addressable market to include applications that have higher backup power requirements. Now I want to switch gears and discuss our residential product category in more detail. Fourth quarter home standby shipments decreased 25% compared to a strong prior year period, which benefited from multiple major landed hurricanes. Home consultations also declined year over year, as power outages in the second half of 2025 marked the lowest level of total outage hours in a decade. Activations, or installations, during the quarter also decreased from the elevated prior year period. While key market indicators such as home consultations, activations, and close rates remained resilient despite the continued softness in outage activity, channel partner sentiment was negatively impacted by the weak second half outage activity and the transition to our next generation home standby platform, which resulted in lower than expected shipments during the quarter. However, we believe the home standby category is well positioned for healthy growth in 2026 as outages return to more normal levels and as the market fully transitions to our next generation product line. Our residential dealer network grew modestly during the fourth quarter and now includes over 9,400 dealers, an increase of nearly 300 dealers from the prior year. Our aligned contractor program, which leverages our strong positioning with wholesale distributors to provide tighter relationships with contractors that purchase our products through this channel, has continued to grow as well, providing important additional capacity and territorial coverage for sales, installation, and service of home standby generators. In January, although not a major event for the industry, the impact of Winter Storm Fern resulted in elevated and extended power outage activity across a number of regions in the 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 aligned contractors with higher close rates to select the sales leads from a pool of home consultations they believe they have the capacity to address. The remaining leads are then distributed to other dealers to ensure customers are contacted more quickly after requesting a home consultation. We believe data-driven process enhancements such as this will continue to support improvements in dealer close rates and customer acquisition costs over time. Given the improved home consultation performance in January and assumed return to more normal outage levels for the second half of the year, together with higher price realization for the category year over year, we expect full year 2026 home standby generator sales to increase at a mid-teens rate over 2025. Helping to offset the softness in the fourth quarter for our home standby and portable generator products, we saw strong sales of our energy storage products year over year alongside continued robust shipments of our Ecobee products and solutions in the quarter. Net sales for Ecobee grew at a mid-teens rate and hit a new all-time record for the full year with significant gross margin expansion driving continued improvement in profitability as we finished 2025 with positive EBITDA contribution from Ecobee's products and solutions. We expect profitability of these solutions to further improve in the future alongside continued strong sales growth. Ecobee's connected home count grew to approximately 5 million residences in the quarter with increased energy services and subscription sales supporting a growing high margin recurring revenue stream. Ecobee's solutions remain central to our developing residential energy ecosystem, with our PowerCell2, 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 Power micro are expected to contribute to overall residential product sales growth for the full year. As we've previously discussed, we remain focused on continuing to improve profitability for our residential energy technology products and solutions as we continue to recalibrate the level of investment in this part of our business, given the expected challenging near-term market conditions resulting from reduced federal incentives for the residential solar and energy storage market. In closing this morning, as we look to the full year 2026, we believe 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 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 percent to 1.1 billion as compared to 1.2 billion in the prior year fourth quarter the net effective acquisitions and 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 sales decreased 23 percent to 572 million previously discussed continued weakness and power outage activity resulted in lower shipments of home standby and portable generators residential energy technology sales increased year-over-year driven by to 400 million as compared to 363 million in the prior contributions from acquisitions and the impact of foreign currency had a 3% favorable impact on sales growth during the quarter 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 related to the residential product, especially offset by continued growth in Ecobee services, 40.6% in the prior year fourth quarter. This decrease is 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. Operating expenses increased to 400. The increase was prior later for the settlement of a portable generator product as disclosed in the accompanying reconciliation schedules. Additionally, lower incentive of compensation was offset by adjusted EBITDA before deducting for non-controlling interest or 17% of net sales in the fourth quarter adjusted EBITDA before deducting 16 million or 17% of net sales as compared to 789 million or 18.4% in the prior year. I will now briefly discuss domestic segment total sales including intersegment sales decreased 17% to 889 million in the quarter as compared to 1.07% which included a slight favorable adjusted EBITDA for the segment with 15% of total sales as compared to 243.25 sales decreased 4% over the prior year to 3.49 billion which included a slight favorable 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. Adjusted EBITDA for the segment before deducting for non-controlling 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, 70, approximately 1% sales. Adjusted EBITDA margins for the segment for the full year 2025, before deducting for non-controlling interest, or 15.1% of total sales, compared to 13.2%. Now, switching back to our financial performance for the fourth quarter of 2020 basis. As disclosed in our earnings release, the gap 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 of 13.4% of 27.3% of 18.9% for the prior. The lower effective tax rate of certain favorable discrete tax items and their impact on a lower pre-tax income. The net loss per share for the company on a gap basis was $0.42 in the fourth quarter of 2025, compared to net income per share of $2.15 in the prior. Adjusted net income for the company, as defined in our orange release, was $95 million in the current year quarter. This compares to adjusted net income of $168 million in the prior year, which was $189 million in the current year quarter. The change in free cash flow was net working capital in the prior year which did not repeat and lower operating income in the current year partially offset by lower cash point three three billion resulting in a gross debt leverage ratio at the end of the fourth which is within our target gross debt leverage range of one to two times adjusted EBITDA for the full year oh again as defined 168 million as compared to 624 totaled 170 million or 4% of net sales as we invest in an additional production capacity and other capabilities to support future CNI growth in addition we opportunistically repurchased approximately 1.11 million shares of our common stock during the full year for 148 million dollars at an average price of 133 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 on the previous program we will continue to operate within our discipline and balanced capital allocation framework as we evaluate future studies this morning. We are initiating 2026 net sales guidance for the full year period. Sales for the full year to increase at a mid-teens rate, which includes a favorable impact of approximately 1% from the net combination of foreign currency and 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 up breaking this down by product sales to increase in the plus 10 percent range as compared to 2025 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 cop in the second half of 2025 in addition we expect higher price realization for home standby generators the launch of power micro and continued growth at ecobee to contribute to this strong residential product 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 CNI products to data center customers. In addition, the acquisition of Allman is expected to contribute approximately one quarter of this year-over-year growth, with the remainder coming from modest organic growth in our traditional CNI products and channels. Additionally, in January, we complete the divestive services category, resulting in an approximate 10% year-over-year decline for this product class in 2026 from a seasonality first paid net sales to be approximately in line with normal seasonality resulting in overall net sales in the first half being approximately 46 percent weighted 54 percent weighted specifically for the first quarter we expect overall net sales to increase in the plus 11 to 13 percent range the winter storm fern and significantly higher revenue from expectations for the full year 2026 we expect the full-year realization of price increases to be fully offset by resulting in approximately flat gross margins compared to the prior year in the 38 to 39 percent 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 percent range in line with normal seasonality gross eventually into the second half of the year given the increasing mix of higher margin home standby 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 non-controlling interest are expected to be approximately 18 to 19 percent for the full year 2026 compared to 17 percent in 2025. At the midpoint of the sales growth and margin rate ranges this would result in an approximate 25% increase in EBITDA dollars in 2026 compared to 2025. To follow normal seasonality and improve 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 improve sequentially throughout the year, reaching approximately 20% for the second half of the year. This sequential improvement is most margin mix improvements together with significant operating expense leverage on the seasonally higher sales providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2026 importantly expected to be between 24 to 25 percent as compared to the 18.9 percent full year gap tax rate for 2025 we expect interest expense to be approximately 65 to 69 million for full year 26 term loan principal prepay this is a decline from 25 active lower sulfur is are projected to be approximately 3.5 percent of our forecasted net sales for the year as we continue to invest in incremental capacity and execute other projects to particularly for CNI product depreciation expenses to 108 million in 26 gap intangible amortization proxy 108 112 million during the year stock compensation expense is expected to be between 54 to 58 million for the year operating a free cash flow generation is expected to be weighted toward the second half of the year in 26 resulting in projected free cash flow generation of approximately 350 million expected to increase modestly and be between 59.5 to 60 million shares 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. Thank you.

Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 1-1 on your telephone, then wait for your name to be announced. To withdraw your question, please press star 1-1 again. We ask that you limit yourself to one question only. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tommy Mall with Stevens. Your line is open.

Good morning, and thanks for taking my questions.

Hi, Tommy.

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 and 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 thank you yeah thanks Tommy so yeah that's largely correct and the backlog with 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 you know we began shipping product and Q4 and here also started Q1 so good order flow again you know 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. The second part of the question in terms of the progression there, the pilot programs are in flight. We are in deep negotiations with two 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 at 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 two 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 the second half of the year. And we could respond to potential for additional orders from those hyperscale customers in 26 should we be able to work through the successful completion of the contract negotiations and the pilot phases. But we feel very good about where we're at. You know, 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, you know, for 2026. You know, the addition of that facility and some other tweaks we've made just to our domestic capacity, we believe we're now over a billion dollars here domestically uh 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 thank you our next question comes from the line of george geronarchus with canaccord your line is open hi good morning everyone and thank you for taking my questions hey george 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 entrance into it thank you yeah thanks George so as it relates specifically to diesel generators large megawatt diesel generator backup the market is is you know has has not changed in terms of participants at this point other than our entry into it you 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 production investment needed for tooling and the manufacturer of those types of products. So, you know, 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. Our supply chain, we're building out the rest of our supply chain. Obviously, it's not just an engine. There are alternators. There are cooling packages. You know, 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 on the supply chain. It's not just the investments we're making in our own production environment. We can go out and buy a plant, and we can buy the equipment and hire the people to tool up a plant, but we need to make sure the supply chain is ready for those higher volumes. Fortunately, this is something we do really well. We're taking a page out of our residential side of our business where we've been very agile over the years in 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 it's part of our DNA, and I think it's going to serve us quite well in this new market.

Thank you. Our next question comes from the line of Mike Holleran with Baird. Your line is open.

Hey, good morning, guys. Good morning, Mike. Maybe just a thought about how you're thinking about directionally the TAM or the growth profile for the data center markets over the next three, five 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?

Yeah, thanks, Mike. It's a great question. And obviously the numbers around the size of the prize, right, in terms of how much market, what is the TAM for just specifically the data center element there in this market for diesel, large megawatt diesel backup generators, It keeps changing because a lot of that is tied, 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%. You know, 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 three to five years. So that would be the addition of another $1.5 billion. Just with 10% share. Just with 10% share. So now, if the market's bigger, maybe that number grows. If the number is smaller because of the, you know, potential cycle, you know, cyclical nature of, like, all markets, you know, there are cycles, you know, we're going to be measured about that. I will say this. In addition to just, you know, obviously the discussion here this morning is heavily focused and weighted on data centers, but, you know, we basically are starting from zero with our traditional market, which already existed. You know, 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, you know, call it $3 to $4 billion. And so just getting a portion of that, we believe, you know, is going to be supportive of the growth that we're seeing. And for the record, you know, 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, you know, that's a recent product launch. You know, we launched with the data center focused sets first, and we started quoting now in the traditional markets. So that's an opportunity for us on a go-forward basis that we'll, I think, be able to talk more about as we go throughout 2026 here.

Thank you. Our next question comes from the line of Jeff Hammond with KeyBank Capital Markets. Your line is open.

Hey, good morning, guys. Maybe shifting gears to residential, I wanted to just better understand what you think the whole is for the Puerto Rico wrap and then, you know, how you're thinking about, you know, 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 and energy technology, 26 versus 25, you know, bringing that loss down, you know, towards your target.

Yeah. All great questions, and 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 soft for 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 a hundred million dollars of energy storage that you know that's a hole that we've got to make up now we we do have you know our next generation power cell products uh in market and then as we noted on the call in our prepared remarks you know power micro which is an exciting you know the micro inverter market's an established market for residential solar and even though you know the the uh incentives and support at the federal level for uh you know residential solar and maybe even storage you can make the argument is going to be is is is gone for intensive purposes at least at the homeowner level it can it still exists for third party operators tpos but we do think that you know that market while it will compress in the short term uh you know year or two uh all the forecasts are that as energy costs continue to rise the need for you know um these types of products is uh there's going to be a demand for them at the residential level for sure and certainly at the like commercial level which you know we'll focus on eventually long term as well so you know there's a hole there you know that's going to be offset by power micro not fully I will also be offset by ecobee growth not not fully so when you look at just those products storage microinverters and our ecobee products you know that's going to be down but then you know obviously good growth on our core residential products with home standby and port generators. You know, in terms of like where that's coming from next year, you know, 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 ESP, a bit higher ESP, 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, you know, unit volume that would accelerate based on a return to a more normal, you know, the assumption that we return to a more normal outage environment. More in the second half. More in the second half of the year, of course. So, that's kind of how if you unpack it, but still, you know, kind of exciting that even in spite of kind of having a, you know, 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, you know, dealer counts, you still get our dealer counts all the things that we watch very closely you know 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 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 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.

Thank you. Our next question comes from the line of Brian Drabb with William Blair. Good morning.

Thanks for taking my question. 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, but 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?

Yeah, Brian, this is York. Yeah, 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'll be some startup costs. We're seeing around mid-teen EBITDA margins or contribution margins for these projects in 2026. High-teens margins in the 27, 28 range in the data center space. So basically in line with pretty close to corporate average E3.

Yeah, and I would say the upside there potential, Brian, would be as we look to bring in-house more elements, it's 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 margin profile even further. So, yeah.

Thank you. Please stand by for our next question. Our next question comes from the line of Stephen Gengaro with Stiefel. Your line is open.

Thanks. Good morning, everybody. Good morning, Stephen. I was just wondering about the home standby generator business. And just as you sort of observe 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 a growth rate you would expect over kind of a multi-year period and kind of a sort of smooth outage, you know, normalized outage activity market?

Yeah, Stephen, great question. I think the challenge in answering the question, of course, we haven't really had much of a quote-unquote normal outage environment. We talk about that on the averages, of course, and, you know, that helps smooth things out. And I guess to answer your question, you know, today we're only 6.75% penetrated, you know, and every 1% of penetration is a $4.5 billion market opportunity. Our share 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, you know, 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, you know, the 20% range, right? We're 23, 24% in states like West Virginia and Maine, not huge states, right? But you look at, you know, other states like Michigan, you know, Michigan for us is a 17% pen rate. So can we get the 17% pen across the U.S.? I mean, there's, you know, California is low, so there's opportunities there. You know, Texas, which is a massive market, is only really right at the median now. Florida is really kind of right at the median. So, you know, 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, you know, I would say, you know, we're saying residential products in total are going to grow, you know, in the mid-teens. Home standby is a component of that and obviously a driver, a major driver of that. So the 10% of that. So, you know, 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, you know, as Americans, we deal with outages more than any other, you know, 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, you know, kind of driving 70% of those We are seeing a change. We're seeing a change in basic kind of math around supply and demand and shortfalls in You may have heard my comments, you know, the National Electric Reliability Corporation calling out that half of all Americans are, you know, at risk for significant outages over the next five 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, you know, 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 know, you've got periods of peak demand. Very hot days, very cold days are going to present significant challenges to grid operators in 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.

Thank you. Our next question comes from the line of Dimpo Gosai with Bank of America. Your line is open.

Yes, thank you. So good morning, Erin, York, Chris. Just to clarify here, when you say you've progressed to the pilot phase with two hyperscalers, what does the pilot mean in practice? Is that based on performance validation? And then, you know, 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 site bills or more to a general capacity reservation for future expansion, right? I'm trying to confirm here what we can anticipate in the CNI profile. I think last quarter you maybe spoke about CNI doubling in the next few years. And was that kind of based on just a one hyperscaler award here? Because now we're talking about two. So trying to get more clarity around this in general.

Temple, thanks. Those are great questions. And the pilot programs, they're different based on the different hyperscalers. They both have different requirements, but effectively there are test scripts that then we run the products through. And some of those are 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 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 a potential hyperscale customer that is telling us specific site buildouts 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, you know, 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 you reserve for us? You know, and we're talking about a lot of product. You know, 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 and the potential. You know, and in fact, you know, the billion dollars of capacity that I've said we've kind of put ourselves in 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 two co-locators already in our backlog that's in and that continues to grow so you know just the the requirements here are enormous to answer the last part of your question about you know our our contemplation of doubling the CNI business over the next three to five years you know if we had to be very honest that was really it landing one hyperscaler is you know 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 you know 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 you know if we can get you know if we can have success with our own capacity and if we can continue to work with our supply chain partners I you know there is a possibility that we could go higher than that uh in the future thank you our next question comes from the line of christopher glenn with oppenheimer your line is open all right yeah thanks uh a couple couple

on residential um curious about uh how you're thinking about hsb in the short term related to fern and i didn't hear any comments on that um and then he could be his new grid resiliency service where you had a nice contribution to the grid operating capacity, you know, how do we think about the revenue and monetization implications for that?

Yeah, thanks, Chris. Good question. I mean, grid services, it's, you know, 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, you know, Now, the possibility of, you know, the, you know, as grid, to be very frank, grid services programs have been slow to develop, slower than we thought, right? Like we acquired Mbala a number of years ago. We've got obviously Ecobee with that business came, the grid services, you know, 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, you know, 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 non-conventional solutions like, you know, virtual power plants and other grid, you know, grid services types of programs. So we definitely want to stay close to it. You know, that's something that, you know, we're, you know, it's just small, right? But it's recurring and it's nice. It's a nice piece of growth there and we're going to continue to stay involved. Your question on home standby, you know, Fern gave us a nice bump on portables, also gave us a nice bump in, you know, IHCs, our in-home consultations, and we saw those basically, you know, double from where we were expecting them to be for the month, 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? You know, 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. There's no denying it. Yeah, and we put something into the guide for it, but did we bake enough? We want to see what the close rate looks like, and we want to see how the rest of the season develops here. We want to see what kind of, you know, as we get a better read on the consumer maybe overall, you know, big ticket purchases tied to residential investment, where is that going? So I think, you know, 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.

Thank you. Our next question comes from the line of Pranice Satish with Wells Fargo. Your line is open.

Thank you. So the decision to expand to a billion dollars per year of diesel genset capacity, you did this before getting signed contracts from hyperscalers. But, you know, 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 one billion, I guess two questions. One, is it possible at this point to increase capacity above a billion in 2027? And then, two, how do you think about expanding for that next tranche in the context of peers that are also expanding capacity for that 27, 28 timeframe? 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?

Yeah, thanks, Pernice. 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, you know, we're running out of a bit of 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, takes more capital. This, I think, was a much more efficient way to accelerate our capacity ads. And, again, that billion dollars 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, you know, we maybe have a couple hundred million of additional capacity outside the U.S., and we're looking at ways to expand that as well, by the way. So, you know, where does that put us? You know, I think we'll give a more fulsome update. We do have an investor day coming up on March 25th, so we'll be able to provide, I think, a lot more context there around, you know, where we're going uh from a capacity standpoint for sure but you know your question if we saw you know opportunities let's say we wanted to go to two billion right like we saw the handwriting the wall i guess it would 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 you know it would be you know i i would take greater comfort in trying to double it again if we had, you know, hard orders in hand. So, you know, 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, you know, 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. You know, 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 two years on deliveries. And of course, they are investing in capacity ads 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 what is arguably the most critical component in the genset in terms of long lead time.

Thank you. Our next question comes from the line of Joseph Osha with Guggenheim Partners. Your line is open.

Hi, guys. Thanks for fitting me in. Just two 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, you know, there's a lot there. And then the second question, you know, we were at PowerGen. We've talked a lot about diesel today, but we also heard a lot about some of the smaller spark-fired 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.

Yeah, thanks, Joe. Great questions. You know, I think from a diesel perspective, you know, 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 a backlog, you know, could you argue that, you know, is that 30% of the market? You know, is that a third of the market? Possibly.

We have a long list of people we're talking about.

Yeah, there's a lot – I'll tell you this, a longer tail 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, you know, we actually are listed as the preferred supplier with two co-locators. So, you know, 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, you know, us, you know, kind of balance out, if you will, reliance on any one customer. But there's no denying that the hyperscalers are, they just have, you know, they have, they carry a lot of clout, obviously, in terms of the capital they're deploying for data center construction. And so they're going to have an outsized impact. Your question on Spark Ignited product is a good one. You know, we are seeing, you know, certain Spark Ignited engines being used in applications, you know, kind of behind the meter to power data centers where grid interconnect is not available and where the lead times to wait for maybe a traditional gas turbine or a different solution is not, you know, just not possible, right? They want to bring the data center online. So you're seeing reset engines reciprocating gas engines being used what typically what you'll see with those reciprocating gas engines though Is there they are operated 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 enough You could use them in backup But the problem you run 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 for a data center if you were to lose power and we have to fill you'd have to infill that with a lot of batteries either UPS is under air pro power supplies or raw batteries to be able to you know to cover that gap so they're not great pure backup assets in fact what we're seeing is where you do see re-sip 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 once the site gets connected to the grid, they need the backup generators in case 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. 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. You need both effectively is kind of what my point is.

Thank you. Our next question comes from the line of Vikram Bakri with Citi. Your line is open.

Hi, it's Ted on for Vik. Thanks for taking the questions. I wanted to talk about energy technology.

Are you able to share whether revenues in 2025, where they shook out relative to the $300 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?

Thank you. I appreciate the question. So last year, 2025, those products ended at the high end of the range, closer to, you know, closer to 400. They were about 375. And, you know, 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. Power Micro. Yeah, with Power Micro 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 break even profitability by 2027 on the products, on the products 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, you know, the operating expense, if you will, the layer that is at Ecobee and is at, you know, some of the other businesses there that make that group up, they're getting pulled into this, you know, 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 onto the single app that is Ecobee. So do you say that that's related to energy technology or do you say that that's related to residential? So as I said, we've got an investor day coming up in late March and we will 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 break-even profitability in 27. We're going to make very good progress on that here in 2026. That's our plan.

Thank you. Our next question comes from the line of Keith Halsam with North Coast Research. Your line is open.

Good morning, gentlemen. Thanks for getting me in here.

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 or two and potentially the cannibalization of the HSV business. How do you kind of guarantee that does not happen going forward?

Yeah, 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, you know, 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 five PowerCell 2s if you want. But in terms of just a 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, you know, 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, you know, arbitrage, you know, 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 25D tax incentive for homeowners directly. But as we look forward, all projections are that as energy costs keep going up, Energy costs are up 40% on average across the U.S. in the last five 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 and 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 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 a 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, you know, better performance and costs continue to come down and utility rates continue to rise, the ability to self-generate and have some amount of storage, you know, again, to play that arbitrage, to get the payback on the system and then have some resiliency. But again, the ecosystem concept, or maybe even add a generator to that system. We have customers who are doing that today. They get a bottomless battery. Instead of buying five, you know, Powerwalls, they buy one Powerwall or Powercell 2, and they add a generator. That's a much more cost-effective way to get basically bottomless coverage. And we think that's a great, you know, 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 it, 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.

Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Chris Roseman 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 25th 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.