Generac Holdings Inc. Q2 FY2026 Earnings Call

portions of our customer base.

We remain focused on our disciplined approach to operating expense investments in the residential segment and we continue to expect significant year-over-year EBITDA margin improvement for this segment in 2026. In closing, our second quarter results and our updated 2026 outlook reflect the tremendous momentum in the CNI segment and the resiliency of our residential segment. The significant growth in our data center backlog with both hyperscale and non-hyperscale customers provides further confidence in our ability to serve this massive and still rapidly growing market. Additionally, the visibility to our multi-year growth outlook is clearly exceeding our previous expectations, representing a generational growth opportunity that is within the core competencies of our business. Given the mega trends around AI infrastructure, lower power quality, and higher power prices, we believe we are extremely well position to success for success through continued disciplined execution of our powering a smarter world enterprise strategy. With that, I'll turn the call over to York to walk through our second quarter financial results and our updated outlook in more detail. York.

Thanks, Aaron. Looking at second quarter 2026 results in more detail, overall net sales during the quarter increased 11% to $1.17 billion as compared to $1.06 billion in the prior year second quarter. The net effect of acquisitions, divestitures, and foreign currency had an approximate 2% favorable impact on revenue growth during the quarter. Commercial and industrial segment total sales increased approximately 29% to $556 million from $431 million in the prior year quarter, including an approximate 6% net favorable impact from the combination of acquisitions, divestitures, and foreign currency. The core total sales growth for the segment was primarily driven by ramping revenue from products sold to the global data center market. In addition, increased shipments to rental and telecom channel customers were more than offset by a decrease in shipments to the domestic industrial distributor channel as we were improving lead times to these customers in the prior year quarter. Residential segment total sales decreased approximately 2% to $621 million as compared to $635 million in the prior year quarter. This slight sales decrease was primarily driven by lower energy storage system shipments in the quarter due to the Department of Energy program in Puerto Rico, which was completed at the end of 2025. In addition, we also saw a decline in portable generator shipments compared to the prior year, given the lower power outage environment. Partially offsetting these declines, home standby generator sales returned to solid growth during the quarter, primarily due to increased price realization and slightly higher volumes. As disclosed in our earnings release, our second quarter results included an approximate $71 million pre-tax impact, which is reflected in gross margin, net income, adjusted net income, and adjusted EBITDA. overall gross profit margin on a consolidated basis was forty four point five percent compared to thirty nine point three percent in the prior year second quarter the increases primarily driven by tariff refunds which contributed approximately six percent to gross margin growth during the quarter additionally unfavorable sales mix and higher input costs were partially offset by favorable price realization all operating expenses increased six point 4 million or 2% compared to the second quarter of 2025 the increase was primarily driven by increased operating expense investments to support future CNI growth and higher intangible amortization partially offset by lower legal expenses in the quarter in the current year quarter we continue to expect operating leverage to be an important factor over the long term helping to drive adjusted EBITDA margin expansion as we remain focused on investments and key growth opportunities while realizing operational efficiencies across the overall adjusted EBITDA before deducting for non-controlling interest as defined in our earnings release was 291 million or 24.8 percent of net sales in the second quarter as compared to 188 million or 17.7 percent of net sales the significant increase in adjusted EBITDA margins versus prior year was primarily driven by a six percent impact from tariff refunds When excluding the impact from tariff refunds, adjusted EBITDA margins increased by approximately 1% from the prior year due to strong operating leverage on higher sales volumes, partially offset by unfavorable sales mix given higher C&I sales. Adjusted EBITDA for the commercial industrial segment before deducting for non-controlling interest was 81 million, or 14.6% of C&I total sales, as compared to 53 million, or 12.4% of total sales in the prior year. This margin increase was primarily driven by the impact from tariff-free funds of approximately 2%, as well as the net favorable impact of acquisitions and divestitures and improved operating leverage, offset by an unfavorable sales mix shift and strategic operating expense investments to support future growth. Adjusted EBITDA for the residential segment was $215 million, or 34.7 percent of total residential sales, as compared to $146 million in the prior year, or 23.1 percent. This significant margin increase was primarily driven by tariff-free funds, which impacted margins by approximately 9 percent, as well as favorable sales mix and operational efficiencies resulting in lower operating expenses. Now switching back to our overall financial performance for the second quarter of 2026 on a consolidated basis. As disclosed in our earnings release, gap net income for the company in the quarter was $143 million, as compared to $74 million for the second quarter of 2025. Gap income taxes during the current year's second quarter were $46.7 million, or an effective tax rate of 24.6%, as compared to $15.4 million, or an effective tax rate of 17.2% for the prior year. The increase in effective tax rate was primarily related to a non-recurring, favorable discrete item in the prior year period related to a business disposition that did not repeat in the current year period. Diluted net income per share for the company on a GAAP basis was $2.40 in the second quarter of 2026, compared to $1.25 in the prior year. The current year quarter includes an approximate 90-cent impact from tariff refunds on an after-tax basis. Adjusted net income for the company, as defined in our earnings release, was $174 million in the current year quarter, or $2.91 per share. this compares to adjusted net income of 97 million in the prior year or a dollar 65 per share cash flow from operations was 121 million in the current year quarter as compared to 72 million in the prior year second quarter and free cash flow as defined in our earnings release was 63 million as compared to 14 million in the same quarter last year this strong increase in free cash flow during the quarter was primarily driven by higher operating earnings cash receipts from tariff refunds and lower cash tax payments in the current year quarter these items were partially offset by a greater use of cash for working capital as compared to the prior year period total debt outstanding at the end of the quarter was approximately 1.33 billion resulting a gross debt leverage ratio at the end of the second quarter of 1.5 times on an as-reported basis which is within our target gross debt leverage range of one to two times 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 maintaining our full year 2026 outlook for overall net sales as our growing backlog for data center customers is offsetting the impact of a modestly lower residential outlook. As a result, we continue to expect consolidated net sales for the full year to increase in mid to high teens percent range as compared to the prior year which includes an approximate two percent favorable impact from the net effect of foreign currency acquisitions and divestitures given the momentum in our data center business as well as ongoing strength in the domestic rental channel more than offsetting the impact of an immaterial divestiture we are increasing our cni segment net sales growth guidance to the low 30s percent range compared to 2025. This is an increase from our previous guidance in the mid to high 20s percent range. As Aaron discussed, given the lower baseline power outages in the second quarter, the current macro environment driving affordability concerns, together with a small divestiture that closed during the second quarter, we are modestly lowering our previously expected residential segment net sales growth outlook for the second half of the year. We now expect full-year residential segment net sales to increase at a high single-digit rate as compared to the prior year a relatively small reduction from the previous guidance for growth in the 10% range the high single digit rate growth for residential is expected to be driven primarily by the home standby category given the combined impact of higher price realization compared to 2025 and higher volumes against an easier prior year comparable period for the second half of the year due to the very low outage environment in 2025 consistent with our historical approach, this 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. From a quarterly pacing perspective, net sales growth is expected to accelerate in the second half of the year for both residential and C&I segments. Overall, third quarter net sales is expected to grow in the high teens range, with further acceleration expected in the fourth quarter of the year as data center revenue continues to ramp and the prior year comparable period for residential segment sales eases further this will result in a more level loaded second half for residential segment sales and a rapid sequential improvement in cni segment sales data center capacity looking at our updated gross margin expectations for full year 2026 excluding the tariff recovery impact burdens to be near the low end of our previous guidance range of 38.5 to 39.5 percent given the higher sales mix of cni segment sales in our forecast including the 71 million of tariff refunds that are reflected in the second quarter we expect gross margins for full year 2026 to be in the 40 range from a seasonality perspective we expect the second half gross margins to be level loaded across the third and fourth quarter in line with the full-year gross margin guidance excluding tariff refunds. This assumes that further tariff recovery will be fully offset by higher tariff levels that could potentially get enacted in the second half of the year. In regards to operating expense guidance, we now expect lower operating expenses relative to our previous guidance as a result of the two small divestitures that closed during the second quarter, as well as continued operational discipline in the residential segment. This lower operating expense forecast fully offsets the lower gross margin forecast, excluding tariff recovery, resulting from the higher mix of CNI sales. As a result of these factors, excluding the 150 basis point impact from tariff refunds, we are maintaining our previous guidance range for full year 2026 adjusted EBITDA margins of 18.5 to 19.5%. When including the impact from tariff refunds, our full year 2026 adjusted EBITDA margin guidance range moves to 20 to 21 percent. From a seasonality perspective, we expect third quarter EBITDA margins to be similar to Q2 levels, excluding the tariff recovery, and expect fourth quarter EBITDA margins to improve from there given significant operating leverage. In practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for full year 2026 importantly to arrive at appropriate estimates for adjusted net income and adjusted earnings per share reflected net of tax using our expected effective tax rate for full year 2026 our gap effective tax rate is still expected to be between 24.5 to 25 percent we now expect interest expense to be approximately 65 to 69 million for full year 2026, compared to approximately 65 million previously expected, assuming no term loan principal prepayments during the year. Higher expected interest rates are the primary driver of this modest change in interest expense guidance. Capital expenditures are now projected to be approximately 4.5 percent of our forecasted net sales for the year, which now includes the purchase and outfitting of our new packaging facility in Belvedere, Illinois, and expanded investment levels in our other global large megawatt generator facilities depreciation expense is still expected to be approximately 108 to 112 million gap intangible amortization expense in 2026 is now expected to be approximately 118 to 122 million during the year up from 112 to 116 million previously expected primarily due to updated assumptions around recently closed acquisitions our compensation expense is still expected to be between 54 to 58 million for the year Consistent with prior guidance, free cash flow generation is still expected to be approximately $350 million for the full year 2026, as tariff refunds help to offset the incremental CapEx required to support future C&I growth. Our full-year weighted average diluted share count is still expected to be between 59.5 and 60 million shares in 2026. And finally, this 2026 outlook does not reflect potential additional acquisitions, divestitures, or share repurchases. 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.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In the interest of time, please limit yourselves to one question only. Our first question will come from the line of Mike Holleran. A Baird, your line is open, Mike.

Hey, morning, everyone. So, hey, Aaron, can you just talk about the capacity conversation? You know, that's a tripling of capacities. At least having line of sight to that is a pretty big number. And so maybe talk about how that works out from your perspective. Is this more, you know, what you're doing today, which is more on the assembly side? to just contemplate some sort of arrangement with your engine manufacturer and doing something more joint, and how are you thinking about, you know, what you need to see from commitments to start reaching those large numbers?

Yeah, thanks, Mike. It's obviously a central question here. You know, we've been focused on this $1.25 billion, a billion of that domestically, the $250 million internationally by the end of this year, and definitely on path for that. In fact, I would argue we're running higher towards even where we'll end the end of the year in terms of what our theoretical capacity could be. But this pathway to tripling, as I mentioned, over the next 12 months, to be clear, it's only with relation to our generator assembly and our packaging capacity. It does not include anything with engines or any other upstream components at this point. Although those things are currently, as we've talked and as we've discussed in the past, you know, those things are on the table. But today, the tripling of capacity is strictly for our own packaging and our assembly needs. You know, when I say we're on a path to it, maybe to put a finer point on it, you know, that path is one that we're already walking down. In fact, I would say we're running down it. You know, we've been speeding up our efforts to outfit the Sussex facility to bring that online quicker. We were intending to bring that online at the end of this year. We're going to be online here actually in Q3. We've got our first product we'll be running down a line in August as we kind of prove out the line and then finish out the testing capabilities of that facility. And by the end of Q3, we will be starting our production ramp there. So that's about a quarter ahead of where we thought we'd be, which is really encouraging. And kudos to our team that is just working like crazy to figure this out. Furthermore, we've identified a number of things that we can do to increase capacity in our existing facility footprint, both domestically and internationally. So Sussex, as an example, we're going to add a second line. And we've made that decision and made those capital commitments already. That's reflected partially in the CapEx Elevated, the Elevated CapEx Guide from this morning, taking that up to about 4.5% of sales, which is up about, call it $50 million over our previous guide just in raw dollars. And then, you know, there'll be some more dollars going into that next year. But again, you know, I don't see us getting, we're not going to get over our skis here where suddenly, you know, CapEx is going to be 10% of sales or anything like that. It's not, that's not going to happen. You know, I think we'll stay comfortably below, you know, kind of 5%, you know, and guiding back towards that as our top line grows in particular, guiding back towards our historical range, you know, at some point in the future. But, you know, we've identified a way to get more out of Sussex. We've identified a way to get more out of our Oshkosh facility. We've identified ways to get more out of our international facilities. We have a facility in Asia. We have a facility in Europe. We have a facility in India where these products are manufactured. We'll actually be standing up some production capability in Brazil and in Mexico. So the combination of all of those ads plus what we're doing to add capacity for packaging, that's through the Enercon acquisition, and then also this new facility that we just closed on in Belvedere, Illinois, northern Illinois, that will help us expand our capacity for packaging. So we won't quite be able to satisfy that full tripling of assembly capacity with packaging, but we'll be somewhere, you know, call it 70% of that number, and then we'll have to augment that with third-party packaging beyond the assembly capacity. So, you know, it is a full-court press. It's an aggressive plan. Our team is executing against that plan. So when I say we're walking that path, we're running along that path, and we're actually executing against it. Now, obviously, the agreement with the second hyperscaler that we announced this morning is a big part of why we decided to pull that forward in Sussex and to accelerate our capacity expansions. We believe that that agreement is going to be at least as big as the first hyperscaler agreement that we announced or bigger. And we're also talking about 27 and 28 simultaneously here with that new customer. And we're just working through the final product schedules that are addendums to the master agreement that we signed in late June. So really excited about it. I think all systems are green. All systems are go. And, you know, we're pushing very hard to make that a reality.

And our next question will be coming from the line of George Genaricas of Canaccord Genuity. Your line is open, George.

Hi, everyone.

Thank you for taking my question. um it's more of a strategic question you know as your revenue mix shifts more towards commercial and data center applications relative to residential how are you broadly managing the operational transition like when you're trying to optimize capital allocation sales channel capabilities supply chain commitments um how do you preserve your return on invested capital profile given the longer sales cycles and the lumpier nature of large enterprise projects Thank you. Yeah, thanks, George. Great question. So, you know, obviously the growth in the CNI business has been aggressive. It's stark. And it's going to, you know, change, I think to the point of your question, it's going to change the face of the company, you know, in terms of the, you know, a lot of things. We'll get to the heart of your question, which is, you know, return on invested capital and kind of the profile, the financial profile of the company. You know, big projects obviously bring different sales cycles, as you said, longer sales cycles. You know, we're working through how to match the customer deposits that are parts of these big projects alongside, you know, how we, you know, cash flow to our supply chain. So it does have ramifications along all of those things. I would say that initially here, the thing that we are observing is that all of the investment level that we've been making, and that's inclusive of not only the CapEx but also some of the M&A we've done, the payback is remarkable. I mean, based on the volumes that we're projecting, it's very rapid. It's very quick. You know, I think it's – even with the longer sales cycles, you know, this isn't a dramatically CapEx-intensive part of our business. You know, there's obviously capital to be deployed, and these are bigger pieces of equipment to move around and to manufacture and to package. But in the end, you know, they're bigger copies of what we've been doing for a long time. We know how to do that very well. And, yes, the projects get bigger. The products get bigger. But I would say, based on the math that we've laid out, the reward gets bigger. And the paybacks are, look, you know, again, look stunning in terms of, you know, we used to always say when we looked at our residential side of our business, you know, when we expand capacity there, you're wanting the clock back a couple years when we added the Trenton facility down in South Carolina. And that payback on that facility was inside of, you know, I think it was inside of 12 months. It's remarkably, this looks really good relative to that. this investment would be, payback would be inside 12 months. Exactly. You could argue the same is true of the investments we're making today for large megawatts. So it's just with our current backlog, just with the current backlog we have. So that's not even, you know, adding in some of the additional opportunities that we have in front of us, which are massive. So we feel good about it. You know, managing that, of course, maybe to kind of hit the second part of your question, or maybe it's the first part, but managing all of that is, you know, we have separate teams and separate, you know, our organization is structured such, along the lines of the two segments that we have for reporting, reportable segments here, we have completely separate management teams. We have a corporate structure that serves those teams, and we've had to beef up elements of that corporate structure around our advanced manufacturing teams and others who are supporting, you know, the rapid build-out of capacity for our industrial business, our C&I business. But right now, we feel like, you know, we're peddling fast. That business is going to grow. You know, we set out a target to more than double our CNI business in three years. We set that target out at our investor day in late March, and all indications are we're going to crush that, and we may crush it by next year at the rate that we're headed. So, you know, we think that this is a, as we keep calling it, a generational opportunity. We believe that deeply, and we're not going to let that go by without giving it our best shot to see how many points we can put on the board here. And we are very laser-focused on maximizing not only our opportunity, but maximizing the return on that opportunity as well.

And our next question will be coming from the line of Jeff Hammond of KeyBank Capital Markets, Inc. Your line is open, Jeff.

Hey, good morning. This is David Tarantino on for Jeff. Maybe just following up on the supply agreements, could you just put a finer point on the scale and scope of each of these deals and how much of the $1 billion in orders in the quarter was from the first agreement, and then maybe give us some color on the degree of visibility you have now that these deals are done.

Yeah, David, thanks. So to be clear, the billion dollars of orders that we've taken in the last 90 days included in that number is about $700 million, approximately $700 for the first hyperscale customer that we announced, and that's all for deliveries in 2027. So just to be clear, the $1.6 billion in backlog we have, if you do the math, on the $450 million of data center business we're going to do here in 2026, $250 million is going to ship in the second half out of that $1.6 backlog. So we'll have about $1.35 billion, and all $1.35 billion right now is scheduled for deliveries in 2027. So our backlog does not contain at this point anything for 2028. Now, with respect to future visibility, as I just said, the second hyperscale agreement that we're talking about is actually as big or bigger, frankly, than the $700 million for the first hyperscaler. And we are talking about more definitively both 2027 deliveries as well as 2028. And I think also putting a finer point on it, that second hyperscale agreement contemplates deliveries on a global basis for those, at least for 27 for sure, potentially for 28 as well, depending on the schedule of development for that hyperscaler. So very exciting for us, and I think it's based on our global footprint, we felt we We were in a very good position to be able to execute that, and it gives us a lot of confidence around the capacity investments that we just talked about, but we don't have any of that second hyperscaler at all in the $1.6 billion at this point, so we'll provide an update to the market when we finalize the product-specific terms, much like we had a notice to proceed with the first hyperscaler, so we had a little bit more to go on, but But this second hyperscaler doesn't – they don't operate in that fashion, so they don't – you know, they hadn't given us anything that we could share with the market. So we'll provide that detail additionally when it becomes available, and we hope that that's going to be, you know, over the next several weeks.

Great. Thanks, guys.

Question will be coming from the line of Brian Drob. So, William Blair, your line is open, Brian.

Yeah, thanks for taking my question. I guess I'll just ask for, you know, at this point, you've been put through the paces by two hyperscalers. You've got a ton of data regarding the capability of the larger format product. You know, how are you comparing with the competition in that segment of the market? And also, how are your lead times right now compared with the competition?

Yeah, thanks, Brian. That's a great question. So just from a specification standpoint, the product that we are offering in market is very competitive on all specs with products that are in market today for our competitive set. I would even say that at certain particular nodes, our product, at least this is from the feedback we've received from our hyperscale customers who have tested the product fully, and they've tested it with respect to how it performs against other competitive products on spec. And we have at a couple of nodes we're actually performing better, they tell us. And that makes sense because the core engine offering that we're using there is, frankly, it's a next-generation engine. It's the most contemporary engine design in market today relative to the competitive set. And so you would expect that you're going to get, from a horsepower standpoint and a power density standpoint in terms of power output, we're getting better values than some of our competitors at certain ratings. So that's encouraging. And, in fact, you know, the ability for the product to take load inside of the 10-second startup requirements is very good. So all signs point to, you know, we are on market or better in terms of product specifications. In terms of lead times, Brian, you know, our lead times remain in that 40- to 45-week range for the products today. in spite of the, you know, the backlog that's grown here. And that really is a testament to not only our growing capacity, but also the supply chain that we've been nurturing here over the last 18 months as we've been working to build that out. We're adding secondary sources to key components where we believe there could be constraints in the future. And we're starting to take control over the packaging element, which, again, is that, you know, it's not only about adding value to improve the overall margin profile of the products, But it's also about controlling those lead times because we're seeing lead times stretch out, you know, for these overall systems, 70, 80 weeks, you know, in some cases, some cases, two years, depending on the node, depending on the competitor. And some of that is related to packaging constraints. And so it's one of the major reasons why we're investing heavily in packaging is because we want to make sure that that, even if we have shorter lead times on the bare gen set as assembled, that doesn't help us if third-party packagers have long lead times. That equation won't work. So we want to control lead times overall for the products, And that includes, you know, a deepening of our packaging capabilities as we go forward.

Okay, thanks very much.

Next question will be coming from the line of John Windham. WBS, your line is open, John.

Thanks, everyone. Appreciate taking the questions and great results. Rightfully so, there's been a lot of focus on the data center side of the business. But I was wondering if you could just comment a little bit about where you think the residential side of the business can go. So, obviously, interest rates aren't being helpful right now. New housing starts are not great. You've obviously been very successful taking market share over the last decade. You know, what are the self-help levers that you can control to maybe get that business back on a growth trajectory?

Yeah, it's a great question, and I appreciate, by the way, the question on the residential business, because we haven't been getting many of those questions, and it's a great business for us. You know, it was down in the quarter, as we said in our prepared remarks, mainly on the back of our portable generator sales and also, you know, the clean energy business, but really the storage business being down because of the challenging comp from last year when we had the Department of Energy program in Puerto Rico. That ended last year. So take that away. And then power outages were more than 30 percent below the long-term baseline average in the quarter, and that really hampered our portable generator shipments near term here. Longer term, though, maybe to get at the heart of your question, I continue to be shocked at the resilience of home standby generator sales. They were up again in the quarter in spite of the lower power outage environment. Now, you can point to we did have some winter storm activity in Q1 that I think was helpful for Q2 shipments of home standby. But Q2 outage environment was weak. So, you know, we thought it prudent to kind of reflect that in the back half of the year, and that was a little bit of a recalibration of bringing down the outlook. You know, and it's a modest adjustment there, but a slight adjustment to that. But, you know, what can we do, to answer your question, what can we do to get that category to grow? We can't wait for housing starts. We certainly can't wait for Mother Nature. We can't wait, you know, for some of these other macro things to turn when it comes to interest rates. I think what we can do is continue to pound the table on awareness. The category is still only in 6.5% of U.S. households, single-family homes. So the upside is 93.5% of the households that don't own the category today. Power outages and power outage activity, even though near-term here it's been softer than the long-term average. In fact, the last four or five quarters have been below the long-term average. So it's actually been quite soft. That'll return, we believe, to the, you know, the long-term average here. That's just how weather patterns work. But in the near term, we're looking very hard at a couple of things. One, what can we do to continue to promote improved financing offerings? We know that the consumer is, you know, that there is some fatigue with consumers. There's some concern about inflation. There's concerns about the overall economic conditions. And, you know, when it comes to large ticket purchases, we're seeing softness in other parts of the economy. Our customers tell us this, you know, in terms of the retail customers we deal with. You know, we see this in some of the other sectors where, you know, our contractors and our dealers provide products. We're seeing weakness. And, you know, I think it's really important for us to continue to focus on, you know, getting in front of potential buyers when they experience an outage. Even though outage activity is down, there's still a lot of outage activity. You know, you look across the board and every single day we track outages and track the outage hours. And, you know, there at any point in time, there are 50 to 100,000 households in the U.S. without power. Now, it's not because of a hurricane. It's not because of an ice storm. It's not because of some other large format type of outage event. It's from the thunderstorm rolling through the Midwest. It's from, you know, a, you know, it's from a winter event. It's from, you know, maybe high temperatures on a particular day that have caused equipment failure, accidents, things like that that cause outages. They have been increasing those everyday outages. And as we become more dependent in our lives on, you know, a digital format in our households, right? We're working more from home. We're learning more from home. we're doing a lot more from home. And those were trends that were long-standing. They accelerated certainly during the pandemic, and they're not nearly where they were during the pandemic, but they're certainly higher than they were prior to the pandemic. And all of those trends point to a need for continuous power. And we're seeing great interest still. We said our in-home consultations were actually up in the quarter. We're focusing our advertising and marketing efforts on, you know, we're sharpening our ability to go after that. We're sharpening our algorithms. We've changed, and we talked a little bit more about this last year and at our investor day, but we changed the way we generate leads and the way we allocate those leads. We've changed the systems for those. We continue to invest in the platforms there and the teams there. We continue to invest in the products. You know, our next generation product line that we introduced late last year is a material step forward and I think puts us, you know, leagues ahead of other competitive product that's available in market. So we're the clear leader there. We have the responsibility to grow that market, to create that market, and we take that responsibility seriously. There are a lot of headwinds that are working against us, but in spite of that, home standby generator sales grew. And that, I think, is a testament to just the resilience and the importance in that category and why we can't lose focus on it. We have to stay focused on growing that category because it's such an important, an important thing for us as a company.

And our next question will be coming from the line of Tanner James of Jefferies. Your line is open.

Hi, good morning, team. Congrats on the new contracting momentum. Maybe to that point, can you discuss how you're approaching the funnel for non-hyperskill data center activity and maybe how you're matching order intake to the potential capacity ramp timing, given there's going to be some dedication of future capacity to the hyperscalers? And what degree you can or would wish to manage the growth versus profit mix dynamic between the two classes? Thanks.

Yeah, thanks, Tanner. I mean, those are important questions. Maybe I'll tackle the first one or your last question first, the last part of your question first. You know, there is a, you know, there's a difference between hyperscale business and the non-hyperscale business. And, you know, it's not unlike anything in business, right? I mean, if you have a customer who is going to buy in larger quantities than another customer, typically you will see, you know, the benefit of scale, right? It should read through in, you know, a sharper price point for that customer, right? Oftentimes what happens up happening, though, is, you know, you tend to see margin profiles of larger customers that are lower than that of our non-hyperscale customers. They're not dramatically different. I will say that. Now, the contract terms can be different. And of course, the timing and the scale, as I said before, is different. So we're focused on having a healthy blend. I would just say that first. That said, the addition of the second hyperscaler is going to throw that kind of mix to be obviously more heavily weighted towards hyperscale business versus non-hyperscale business in the near term. But we are very focused on continuing to add new business through existing co-locator customers as well as courting new ones. There are a lot of people in this space that are opportunistic for us to go after, and we're still the new kid on the block. I mean, our competitors who have been in market for the last 18 months or two years selling these products are well-established, well-known, and as I said, they have lead times, which are longer than ours. So we have an advantage today to use our shorter lead times to get an opportunity to show these non-hyperscaler customers and the hyperscale customers what we can do as a company, how we perform. And so we're moving into that phase of our relationship. Now, in terms of kind of – I don't want to use the word allocation because it makes it sound like we're at a fixed, finite level of capacity. And we're saying hyperscalers are going to get X percentage of that capacity and non-hyperscalers are going to get Y capacity. Today, we're growing capacity. And obviously, we're talking about tripling our capacity from the $1.25 billion to something closer to approaching $4 billion. in, you know, in the next year, year and a half. That, you know, we don't have that filled up today, but we are, you know, courting customers who have needs, if they have projects, that they want to bring online faster. In some cases, what we're hearing in particular from this particular customer set is that they have projects that if they could get backup power, they could turn the project on quicker because of the lead times of, you know, the backup industry today. We can help them with that. If they want to shift those orders to us, we'll give them our slots for 2027 and into 2028 to help them bring those data centers online faster. Those are the kinds of conversations we're having today, and we're getting success there. Included in our backlog is another large co-locator that we landed in the quarter, and it's new for us. It's a new co-locator. So really excited about that. We continue to grow our existing co-locator relationships, getting new projects there. But the funnel, if you look at the whole funnel of opportunities, it's massive. I mean, it's just, it's embarrassingly, yeah, a lot of interest. It's embarrassingly large in terms of the total number of projects we're quoting and the total number of conversations we're having, both hyperscale and non-hyperscale.

Thank you.

And our next question will be coming from the line of Praneet Satish. good morning good morning thank you I guess just just high level here when we think about in your conversations with with hyperscale customers you know how are they thinking about backup generation for behind the meter data centers I mean usually for the front of the meter grid connected sites it's usually a one-to-one ratio but I guess is that still the right framework for behind the meter deployments and or any of the sites that you're bidding on or contemplating shipping to are they behind the meter or are you kind of

primarily focused on front of the meter yeah it's a great question pretty and so you know that the front of the meter grid connected customers you know that's an easy one they need to have backup power behind the meter you know prime power generated self-generated power it depends on the power format I would say, you know, what we've done is we've, as we've talked to the addressable market as we've defined it, and as we defined it in our investor day, we excluded some parts of the, you know, behind-the-meter power generation that's going on there, in particular where a customer may be deploying certain technologies like fuel cells. You know, they believe that there's not a need, particularly for our type of product, a backup, a reciprocating engine-driven backup gen set. But those projects are far and few in between today. There are other types of behind-the-meter technologies, behind-the-meter power generation technologies. You know, you've got turbine technologies, you know, well-known technologies. In some cases, there is backup power required there because you could just as easily lose a turbine. Now, maybe you have N plus 1 redundancy in the way that the turbine array is constructed. So maybe you don't feel like that developer or customer base doesn't feel like they need 100% backup or 120% backup, I think, at least today, I think what's – this is my thesis, and, you know, people can take and apply this logic if they want or they can use their own logic. There are certain of these behind-the-meter technologies, turbines being one of them and where they're using re-sip gas engines in particular. Those technologies are bridge technologies. They're a bridge to an interconnect to a grid. They are not permanent technologies, simply because from a cost of energy standpoint, to produce power on site with those technologies, it's going to be more expensive than it will be to secure grid power. In particular, the risk that comes with producing your own power in terms of hedging the cost of the fuel stock, the input, the natural gas in this case, and most of those technologies. So my point there is that we believe that longer term, as grid interconnects catch up, and as that queue, you know, shortens instead of lengthens, as it's doing today on the grid interconnect, there could be more opportunities for backup power to present. It just may happen later when the grid interconnect timeline becomes clearer. So, you know, today, we've, you know, as I said, we've kind of adjusted our total addressable market to take out certain behind the meter power generation capabilities where certain data centers are going to do that on their own. I do know we have a couple of projects we're involved with where we're supplying some backup power into some sites where they are going to generate their own power on site with certain technologies. I don't have the specifics of that, but I do know there are some projects that exist today, where they're taking backup generators, because they still need them. You could still have a turbine go down. You could still have part of your RECIP engine array go down. You could lose those technologies, and you need to back them up, nonetheless, even if they're bridge power.

This question will be coming from the line of Manish Samaya of Cancer. Your line is open.

Thank you, and thank you for fitting me, and congratulations on all the wonderful announcements. A couple of questions. One, I guess, Aaron, is there a hyperscale customer number three, and how far is that customer behind number two? That's my first question. And then just related to that, I think you talked about some of the capacity constraints. And from my perspective, I'm also a little bit more focused on the supply chain as it relates to generator assembly, alternator, switch gears. I think you discussed the packaging part, but perhaps if you can just give us a sense of what's going on with the context that I just provided.

Yeah, thanks for the question, Manish. So maybe I'll start there with the supply chain. And, you know, yeah, the supply chain capabilities. We can talk about how we want to triple our capacity, but if our supply chain can't keep up with it, it's kind of an all for naught. And if we believed that that was going to be a real problem, it would be difficult for us to make the case that we should be investing in tripling our capacity. So I would tell you that alongside of tripling our capacity, we have a deep roadmap around how we can also triple our supply chain capacity. And that, you know, as you get into kind of the second-order componentry that you listed, some of those components around alternators, there are cooling packages, there are some of the structural elements of the generator with base tanks and frames. Some of that we're going to undertake internally. We're going to, you know, kind of a make versus buy type of analysis. We're going to have to augment some of that with external purchases as well, and then the canopy components that go into the packaging and some of the other elements. You know, there are some of the after-treatment systems that go into the diesel systems where we're seeing emissions levels, you know, where you've got either local codes or you've got local permitting requirements that are calling out best available technology for the after-treatment of these products. Those also require additional components. All of those areas, we have second and third sources identified, and we're in deep negotiations with those for supply starting in 2027. So at this stage of the game, we feel like we have a roadmap both for our own internal consumption, our capacity, that tripling of capacity internally, as well as with our supply chain. Now, there's a lot of work to do, both for our, you know, tripling our capacity internally here, but also with our suppliers to make sure that they're going to be capable to deliver at those rates. And of course, they're being handed to and tested by, you know, the growth here in the global market for data centers. But at this stage of the game, we feel like we were in a really good spot. You know, if it was a 100-meter dash before we were on the 99th meter of that 100-meter Dash with Hyperscaler 2. With any future hyperscalers at this point, those are just discussions, and they're very early if we're having them. So I wouldn't bank on anything coming anytime soon there. Obviously, we're a big focus of our pipeline is building out the non-hyperscaler portion of that as well. We want to create better balance there. And those conversations are very robust, and that funnel is very robust. And we continue to get wins there. And I would assume that a good chunk of our backlog growth in the future here is going to be from the firm orders we get from hyperscaler two, once we are ready to announce those, and then additional non-hyperscaler orders as we work through our funnel and we progress through the sales cycle on that side of our business.

Okay, fantastic. Thank you so much.

Our next question will be coming from the line of Keith Housen of North Coast Research. Your line is open, Keith.

I appreciate the opportunity. Hey, Erin, just as we think about the data centers, and obviously it's important to everybody here on the call, as you think about the marketplace, it seems like a lot of the emphasis has been on domestic hyperscalers, understanding that the second hyperscaler has some international business. But does your product appeal to international hyperscalers as well? and is that just a little bit further along to develop or is there a difference where that market may not be as open to you guys?

Yeah, it's a great question, Keith. I would say that there are areas of the world where I think we're going to be very competitive. As an example, outside the U.S., first of all, just to level set, the U.S. market for data centers is the biggest market in the world, bar none. It's orders of magnitude larger at this point than almost every other region in the world. But that said, we have really interesting opportunities in Europe that, you know, because we're based in Europe, products are manufactured in, you know, we have a manufacturing facility in Italy where the products are of this size range are manufactured. We're seeing opportunities within, you know, the European theater where I think we can be very competitive. Some of our first projects were in Australia and they were delivered out of our, you know, we have a factory in China. They were delivered from that Chinese factory down to Australia. You know, head-to-head in certain markets, like, let's just go there, but the Chinese market for data centers, right, the domestic Chinese market for data centers, probably going to be very difficult for us to serve that market competitively. There are a lot of producers of gensets in that range in the Chinese market, and, you know, I don't think that the things that we bring to the table for a data center owner operator developer such as you know our brand uh the strength of our balance sheet uh our ability to serve our ability to have a you know a uh an international footprint or a global footprint um yeah i don't think they're as well appreciated perhaps in certain markets like china so i wouldn't expect that we're going to be announcing a bunch of Chinese data center wins. But you get outside of China, India is a growing market. We have a facility in India to serve that market. The South American continent, you get Mexico and so central South America. We have a big facility in Mexico that serves the Mexican market and can serve the South American market. We have a facility in Brazil that can serve the Brazilian market. That footprint gives us an advantage. And for those data center developers that want to make sure that they're buying a product from a company that's going to be around to support that product. And, you know, look, people, there's a low bar for people to bolt these things together. There's no question that like the, and this has been the case in generators in general, it's not just large generators, it's smaller generators. What you have to wrap around that, right, is the service network. What you wrap around that is the support capabilities. What you wrap around that is the certainty of a warranty and the certainty of the ability to get somebody to a facility or on site when there's a problem because uptime is absolutely critical. And so for developers who take uptime seriously and understand the bit of a premium that they may have to pay for that, we're going to do well. And we are doing well. We're seeing that in the domestic market. We're seeing it in Australia. We're seeing that in Europe where we've got project wins already.

Consistent global processes. They covet that.

But, yeah, consistent global process, as York was just saying, one of our hyperscale customers, they are absolutely laser fixated on how do we replicate the processes that they validated here in our U.S. factories? How do we replicate those in other factories around the world if we're going to produce product for them for other site deployments? So, you know, I just – I think that the international market is a good opportunity. Last point, you know, we obviously – we have an exclusive arrangement with our engine supplier here in the U.S. market. We don't have that same exclusivity outside the U.S. So, you know, that does have, that does probably play a role as well, where we can be competing against other packagers using that same engine package outside the U.S. So, you know, that's going to have an impact on, you know, the overall market dynamics and our ability to succeed in some of those other markets. Again, the closer you get to the Chinese market, I think it's going to be more challenging for us in Asia to be successful outside of perhaps India, if you think about that as part of Southeast Asia.

Great.

Next question. We'll be coming from the line of Vikram Bagri of Citi. Your line's open.

Good morning, everyone. I wanted to understand if you're seeing difference in inference data centers attaching more sort or less capacity, backup capacity versus, let me rephrase that. Our understanding is that the training data centers will have less than one-to-one backup capacity versus incidents will have more than one. If you've seen that, I was also trying to understand if the increase in hypersale one order from initial expectation of $600 million to $700 million is a function of that, or you're gaining market share from another supplier to these hyperscale customers. And related to that, you currently have a significant lead time advantage over incumbents in large capacity generators. Do you think there is a premium in pricing for quick delivery right now? And if so, is there a way to frame how much that premium is for, you know, sort of speed to delivery? Thank you.

Yeah, thanks, Victor. I appreciate the questions. Maybe I'll start backwards with your question there. Obviously, the lead time advantage we have, I would say that today the market overall is higher on a price per kilowatt than actually than we framed the opportunity when we put the business case together to go into the large megawatt genset market. We put that business case together three-plus years ago now, almost four years ago. And we were, you know, the market at that point, you know, was on a lower price-per-kilowatt basis. Now there's inflation and some other things that have driven that up, but I think it's primarily being driven by the fact that there's a supply-demand imbalance there. You know, structurally, you know, we're taking advantage of that, obviously. with our shorter lead times, we're able to supply that market that is paying more for access. I don't know that I can put like a number on the premium there. I would tell you that even though we have shorter lead times, the customer base there is not willing to pay more than market, even though we can produce the products and deliver them in a shorter time frame. You know, I don't think we're getting an above market premium today versus our competition on a per kilowatt basis, you know, slight, if anything. I think all that we're doing is we're able to capture some share here very quickly because of that shorter lead time. That's, you know, that's kind of our assessment of the situation. You know, I think that could that change over time? That's probably the bigger question. Like, what does the price per kilowatt do over time? My experience, you know, in markets where you have supply, demand, imbalance, led price escalation. Oftentimes what you'll see is the growth of price slow, but you won't see it go back down. Price rarely goes in reverse, especially if it's a non-commodity type business, commodity-based business. You're not going to see price go in reverse. I think you'll see the growth of price probably slow, meaning I think these products probably will stay priced in the range that they're at here for the foreseeable future, which is good for us because it's well above, as I said before, kind of how we framed our business case. Now, the first part of your question on inference use data centers versus non, the agentic, you know, we do see different approaches based on the use cases for the data center. So you will see a greater percentage of coverage for certain data centers where you're talking about, you know, cloud connected versus, you know, where they're doing inference or learning model type of training data centers where maybe, you know, uptime, they have different levels of uptime requirements. They actually get very precise, depending on the customer, they can get very precise about what that uptime number is, depending on the use case of the facility, and then dependent on that uptime number, that's how they size the backup requirement. So if that uptime number is greater, it's five nines per se, or even more than five nines, you're going to see a greater percentage of coverage to the total potential consumption consumption power power consumption for the data center if it's less on the uptime scale because the data center is perhaps doing things that can be viewed in the context of non-critical and there are differences you know beyond just inference and non-inference but that lower uptime statistic then would lead you to a lower coverage rate so it really is data center dependent it's customer dependence because they all have their different views on what the right uptime statistic is. But today, you know, we're seeing a healthy coverage of at least 100%, and in some cases, up to 125 to 130% of the power consumption of the facility, depending on the customer and depending on the use case of the data center.

Our next question will come from the line of Christine Cho of Barclays. Christine, your line is open.

Good morning. Thank you for squeezing me in. I just wanted to ask about, you know, your engine supply. I know you've mentioned that, you know, the supply has no problem growing with you, and that will never be a constraint. But as we think about you tripling capacity in the U.S., would that require your engine supplier having to add or maybe diversify their manufacturing capacity in places like the U.S. or Europe? And if so, should we think that the mixed shift could impact gross margins in the future if it's skewing towards more expensive manufacturing regions with the cost of engines going up? You know, you talk about being priced competitively, and I think you've also talked about how your cost structure is very attractive. So just curious if you think you'll be able to raise pricing in that case and maintain margins, or would that impact demand?

Thanks, Christine. It's a great question. Our engine supplier, they have indicated to us that capacity is not an issue. You used the word never. I'm not sure I'm ready to say it's never going to be an issue. But they've told us that based on, and we're sharing, by the way, our capacity. We had a team that was just over working with our engine supply team here just last week, as a matter of fact, working through some of our kind of forecasting for 27, 28, and where we think volumes could go. And all indications are that based on their current footprint and the additions they are making, by the way. So they are making investments and additions to capacity. They have in particular a facility in France that they are adding a lot of capacity to because we have some customers that want to have engines that are going to come out of the European theater as opposed to coming out of Asia. So they've requested that specifically. There's a bit of a premium to that, to your point maybe, around what that looks like in terms of the – but we've been able to roll that through with higher pricing. If that's what the customer is requesting, we've made it clear that that could mean a higher price based on that decision. Now, there are maybe offsets for that. If the customer is going to locate those products in Europe, as an example, there might be lower logistics costs for them, right? So it's lower packaging costs for them. So there's kind of an overall economic kind of model that they have to run through to understand whether our price increase on the genset, because they want an engine that's coming from a higher cost region of the world, that that works in their economic model overall. I suspect that that's going to be the case where our engine supplier is going to be increasing capacity in other regions of the world, potentially the U.S. as well. We've said this before. They continue to evaluate that, and we're evaluating it alongside of them to see what we can do to help them with that should they require that. But they are a very competent company. They have a lot of really great talent within their company and a very aggressive stance on their ability to produce these products wherever they need them on the planet. it. And so, you know, they, right now, you know, they are working through their kind of footprint for the future. I can't speak too detailed about that. It's their footprint. So they would really need to speak to that. But I can tell you that in the one example we have, where we have customers who might want engines out of a different region, we've said that the price is higher. So we're trying to maintain our economics. And, you know, at least that's how I think we would treat it going forward. I don't have an idea of what a cost structure would look like in the U.S. We haven't gotten that far yet, so I don't know how to assess that, but obviously there'd be a tariff offset there in that instance, right? So there's a lot of moving pieces with that, and the tariff environment continues to move as well. So, you know, we're going to continue to watch it and put together the right economic models, and if we need to adjust pricing, we will, and if, you know, if our supplier there, if they, you know, if we need to work harder with them to make sure the cost structure stays competitive, we'll continue to do that too. But I have no doubt that our supplier is going to be cost competitive. They are laser focused on being a leader in their cost structure for these types of products.

Thank you. And I would now like to turn the call back to Chris for closing remarks.

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

And this concludes today's conference call. Thank you for participating. You may now disconnect.