Earnings Call Transcript
GENERAC HOLDINGS INC. (GNRC)
Earnings Call Transcript - GNRC Q3 2025
Operator, Operator
Thank you for joining us for Generac Holdings Inc.'s Third Quarter 2025 Earnings Conference Call. I would now like to turn the call over to Kris Rosemann, the Director of Corporate Finance and Investor Relations. Please proceed.
Kris Rosemann, Director of Corporate Finance and Investor Relations
Good morning, and welcome to our third quarter 2025 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation, as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.
Aaron P. Jagdfeld, President and CEO
Thanks, Kris. Good morning, everyone, and thank you for joining us today. Home standby and portable generator shipments grew sequentially in the quarter, but were below seasonal expectations as a result of a power outage environment that was significantly below our long-term baseline average and the lowest third quarter of total outage hours that we've experienced since 2015. On a year-over-year basis, overall net sales decreased 5% to $1.11 billion. Residential net sales declined 13% as compared to the prior year quarter with softness in home standby and portable generators, partially offset by strong growth in sales of residential energy technology solutions. Global C&I product sales also increased 9% during the quarter, led by growth in the domestic telecom and industrial distributor channels as well as international markets, which included the first shipments of our large megawatt generators to data center customers. Our significant momentum in the data center market has continued with our backlog for these products now doubling to over $300 million over the last 90 days, with even greater opportunities developing in our growing sales pipeline. Now discussing our third quarter results in more detail. Third quarter home standby shipments and activations increased sequentially from the second quarter, but shipments decreased at a mid-teens rate on a year-over-year basis due to the significantly weaker outage environment in the current year period as well as the strong prior year period that included the benefit of multiple landed hurricanes. The historically low outage activity in the quarter was broad-based, with all regions declining as compared to the prior year and resulted in portable generator sales also declining on a year-over-year basis. Home consultations for home standby generators also increased sequentially from the second quarter but declined year-over-year during the third quarter. Although the seasonally higher levels of in-home consultations that we would have normally seen did not materialize this year, home consultations held a solid baseline level with the ratio of home consultations to outage hours at the highest level since we began tracking these metrics more than a decade ago. We view the relative resilience of the home standby category as further evidence of continued growing awareness for these products and the underlying demand we continue to see as representative of a new and higher baseline level following the elevated outage environment of 2024, despite the low level of outages seasonally in the third quarter. Our expanded investments in our marketing and lead generation capabilities as well as our solid execution and optimization of promotional campaigns also provided important support for the home standby demand during the quarter. Importantly, close rates improved substantially on a sequential basis and came in better than expected during the quarter with strong momentum continuing here in the month of October. We remain focused on initiatives to support ongoing improvements in close rates such as further increased awareness of financing alternatives and optimize sales tools and training for our partners. We also attribute the recent improvement in close rates to a significant change in our approach to distributing leads to our dealers through the implementation of an enhanced data-driven process that allows our dealers to select or pull which leads they prefer to pursue, as opposed to the previous push approach, which distributed leads directly to specific dealers based on certain criteria. The new lead process allows a wider pool of dealers with higher close rates the ability to select which leads they believe they have capacity to address. We believe the resulting improvement in close rates will further optimize our customer acquisition costs and lead to a broader distribution of sales leads across our residential dealer base. Our residential dealer network continued to expand during the quarter as our dealer count reached nearly 9,400, an increase of approximately 100 from the prior quarter and an increase of nearly 300 dealers over the prior year. We view this continued strength in contractor interest in the product category as evidence of the growing underlying demand for backup power solutions despite the softer outage environment. In addition, our aligned contractor program, which targets contractors that purchase our products through wholesale distribution, has also continued to grow and provides for incremental engagement, training, and installation bandwidth through this important distribution channel. Also during the third quarter, we began the initial shipments of our next-generation home standby generator product line, which represents the most comprehensive platform update for the category in more than a decade. The new product rollout will continue in the fourth quarter with our first shipments of the higher end of the product range, including the market's first 28-kilowatt air-cooled home standby generator. This new product line features the lowest total cost of ownership available driven by reduced installation and maintenance costs as well as introducing industry-leading sound levels and the best fuel efficiency of any residential generator on the market today. The next-generation platform, together with our new Field Pro application, also offers a number of important benefits for our channel partners, including significantly lower commissioning times and improved remote diagnostics, enabling operational efficiencies for their businesses and greater uptime and cost savings for their customers. Moving to residential energy technology solutions. Sales of these products and services outperformed our expectations once again and grew at a significant rate during the quarter, led by shipments of energy storage systems in Puerto Rico. Our team continues to execute extremely well alongside our partners on this energy grant-related program, which is expected to drive continued strong residential energy technology sales growth into the fourth quarter. Our ecobee team continued to drive that business forward and delivered another profitable quarter with significant gross margin improvement and operating leverage as a result of continued strong sales growth and disciplined cost control. Additionally, ecobee's installed base grew to approximately 4.75 million connected homes with increased energy services and subscription sales supporting a growing high-margin recurring revenue stream. We expect ecobee to deliver positive EBITDA contribution for the full year, a key milestone for the strategically important part of our business. As we begin launching new energy storage, microinverter, and home standby products that are integrated with ecobee's platform during the second half of this year, we are intent on delivering a premium feature set and user experience, which we believe will be an important differentiator for our growing residential energy ecosystem. We also made significant progress in our solar and storage product development efforts during the third quarter as we began shipping PowerCell 2, our next-generation energy storage system, and introduced PowerMicro, our solar microinverter that will begin shipping by the end of this year. As we close out 2025, we are focused on leveraging these new products as well as our distribution and marketing capabilities to drive market share gains and significant sales growth in the future. As appropriate, however, we intend to recalibrate our investment levels to reflect the completion of our energy grant program in Puerto Rico and to adjust for a broader market environment that is likely to contract in 2026 as a result of the substantial reduction in federal incentives for solar and storage technologies. Although we see this market contracting in the near term, we believe that the secular trends of rising power prices and declining component costs are creating a situation where the economics of residential solar and storage technologies will provide for an attractive long-term market opportunity regardless of the level of government incentives. Now let me provide some additional commentary on our commercial and industrial product categories, where we continue to see year-over-year sales growth, which accelerated during the third quarter. In particular, sales to our domestic industrial distributor customers increased at a solid rate in the period as we further reduce the lead times for our C&I products. Our teams have been working hard to increase production rates over the last 18 months by bringing our new facility in Beaver Dam, Wisconsin online earlier this year. And as a result, we have successfully brought our lead times down to more historically normal levels. In addition to our operational execution in the quarter, our efforts to further develop our distribution partners, both owned and independent, have helped to expand our share of the domestic backup power generation market over the last several years. In addition to the growth in our industrial distribution channel, shipments to national telecom customers also grew at a robust rate in the third quarter compared to the prior year as part of the ongoing recovery for this important channel during 2025. We continue to expect the growing dependence on wireless communication and additional infrastructure required enhanced reliability to provide a solid backdrop for secular growth in sales of C&I products to our telecom customers into the future. Mobile product shipments to national and independent rental customers outperformed our prior expectations and increased on a sequential basis, which we view as signaling the beginning of a recovery for this market. We anticipate favorable momentum to continue building in the coming quarters for our mobile products, and we continue to believe we are well positioned for long-term growth given the mega-trend around the infrastructure-related investments needed both domestically and internationally that leverage our global portfolio of mobile products. Internationally, total sales increased 11%, driven by continued strength in C&I product shipments in Europe and the first shipments of our large megawatt generators to a data center customer in Australia. International sales continue to benefit from the favorable impact of foreign currency, which we expect will continue in the fourth quarter. Additionally, international EBITDA margins expanded at a strong rate from the prior year due to favorable sales mix. Our initiative to penetrate the large and rapidly growing data center market continued to gain momentum with initial shipments in international markets beginning during the third quarter. And as we saw our global backlog of large megawatt generators for this important end market doubled to more than $300 million over the last 90 days. The first domestic shipments of these new large output generators began here in the month of October, and we are projecting strong sequential growth in sales to the data center end market during the fourth quarter. The large majority of our backlog is expected to ship in 2026, providing a meaningful tailwind for overall C&I product growth in the coming year. Importantly, we continue to develop a robust pipeline of new opportunities within the data center market that represents significant upside for our C&I product in 2027 and beyond. Data center power demand is forecasted to grow at a significant rate for the foreseeable future. And the high uptime requirements of these facilities drives backup power needs in excess of site electricity consumption. Third-party estimates suggest that global data center power demand will cumulatively grow by more than 100 gigawatts over the next 5 years, with the potential for incremental annual capacity additions to double by the end of this decade. Additionally, further global market opportunities exist for large megawatt generators within our traditional end markets, in particular, providing backup power for large manufacturers, cold chain distribution centers, healthcare facilities, and other critical infrastructure that have higher backup power requirements. Given the existing supply constraints within the high end of the C&I backup power generator market, large megawatt generators represent a massive opportunity for Generac as a long-standing, well-known participant in the C&I backup power markets. In addition to our highly competitive lead times, we believe that our strong reputation as an engineering-driven organization that is uniquely focused on backup power with a customer-centric approach and world-class service capabilities will allow us to gain share in the data center backup power market as well as our traditional end markets. Given the momentum in our sales pipeline and the significant incremental market opportunity we see in the future, we have been actively exploring further investments to aggressively expand our competitive positioning and increase our capacity and capabilities for these products. We expect to undertake several important capacity expansion-related projects and investments during the fourth quarter to position Generac as a significant producer of these products well beyond 2026 and to support what we believe could be a potential doubling of our C&I product sales over the next 3 to 5 years. In closing this morning, our third quarter results and our lower residential sales outlook reflect a historically weak power outage environment. However, the mega-trends that support our future growth potential remain intact as lower power quality and higher power prices will be an ongoing challenge given the more frequent and severe weather patterns as well as broader electrification trends. And at the same time, the massive increase in data center power demand is expected to further stress the already fragile power grid by amplifying the growing electricity supply/demand imbalance. Additionally, we're entering a period of unprecedented growth for our C&I products as the expansion of our product line to include large megawatt generators has allowed for our entry into the rapidly growing data center market. As a leading energy technology company, we believe Generac is uniquely positioned at the center of these mega-trends that have the potential to drive substantial and sustainable growth in the years ahead. I'll now turn the call over to York to provide further details on third quarter results as well as our updated outlook for 2025.
York Ragen, Chief Financial Officer
Thanks, Aaron. In the third quarter of 2025, net sales declined by 5% to $1.11 billion, down from $1.17 billion in the same period last year. Acquisitions and foreign currency had an approximate 1% positive impact on revenue growth this quarter. Analyzing consolidated net sales by product class, residential product sales fell 13% to $627 million from $723 million the previous year. As Aaron detailed, a significantly lower incidence of power outages compared to last year led to decreased shipments of home standby and portable generators, though this was somewhat balanced by strong year-over-year sales growth in energy storage systems and ecobee home energy management solutions. Commercial and Industrial product sales rose 9% to $358 million, up from $328 million last year, with core sales growth of about 6% driven by increased shipments to domestic telecom customers, solid growth in Europe, and the initial shipments of our new large megawatt generators to a data center customer in Australia, despite ongoing weakness in shipments to national rental accounts. Sales in the other products and services category rose about 5% to $129 million from $123 million in the third quarter of 2024, with core sales increasing approximately 3% mainly due to growth in ecobee and remote monitoring subscription sales, as well as other installation and maintenance service revenues, partially offset by a decrease in parts and accessory shipments due to the lower outage environment. The gross profit margin decreased to 38.3% from 40.2% in the prior year's third quarter, primarily due to an unfavorable sales mix, along with the effects of higher tariffs and manufacturing under absorption, though this was partially mitigated by increased pricing from previous price hikes to combat the impact of added tariffs. Operating expenses rose by $20.2 million or 6.7% compared to the third quarter of 2024 due to certain legal and regulatory charges this year. Excluding these non-indicative items, operating expenses slightly decreased by $0.6 million, or 0.2%, from last year. Adjusted EBITDA before accounting for noncontrolling interests was $193 million, making up 17.3% of net sales, down from $232 million or 19.8% in the previous year. This margin decline was mainly due to the unfavorable sales mix and operating expense leverage loss stemming from lower sales volumes. Now, turning to our financial results by segment. Domestic segment total sales, including intersegment sales, fell 8% to $938 million from $1.02 billion last year, with an approximate 1% sales growth contribution from acquisitions. Adjusted EBITDA for this segment was $166 million, representing 17.7% of total sales, compared to $212 million in the previous year or 20.7%. International segment total sales rose roughly 11%, reaching $185 million, compared to $167 million last year, with about a 3% benefit from foreign currency. Adjusted EBITDA for this segment before noncontrolling interest stood at $27 million or 14.8% of total sales compared to $20 million or 12.2% in the previous year. Returning to our consolidated financial performance for the third quarter of 2025, GAAP net income was $66 million compared to $114 million for the third quarter of 2024. This year's quarter included an unfavorable Wallbox fair market value adjustment of $5.7 million and a $1.2 million loss on refinancing debt related to our Term Loan A and revolver amend and extend transaction completed in July 2025. Interest expenses decreased from $22.9 million in the last year's third quarter to $18.5 million this year due to lower borrowings and interest rates. GAAP income taxes for the current year's third quarter amounted to $11.8 million, reflecting an effective tax rate of 15%, down from $33.5 million or 22.7% in the prior year. The decrease in the effective tax rate was mainly driven by favorable discrete tax items this year related to certain adjustments not present in the previous year. For diluted net income per share on a GAAP basis, it was $1.12 in the third quarter of 2025 compared to $1.89 last year. Adjusted net income for the company was $108 million in the current quarter or $1.83 per share, compared to $136 million or $2.25 per share in the previous year. Cash flow from operations was $118 million, down from $212 million last year, while free cash flow was $96 million compared to $184 million the same quarter last year, primarily due to rising inventory levels and lower operating income, aggravated by a drop in inventory in the prior year. Total debt at the end of the quarter was $1.4 billion, resulting in a gross debt leverage ratio of 1.8 times on an as-reported basis. Now, I will discuss our updated outlook for 2025. As Aaron mentioned, the very low outage environment recently has led to reduced demand for home standby and portable generators, prompting us to downgrade our full-year 2025 expectations for overall net sales growth. We now anticipate consolidated net sales for the full year to remain approximately flat compared to the previous year, including about a 1% positive effect from foreign currency and acquisitions. Previously, we had guided for net sales growth of 2% to 5% over the last year. For product classes, we now forecast a decline in full-year 2025 residential product sales in the mid-single-digit percentage range, while C&I product sales are expected to rise in the same mid-single-digit percentage range compared to last year. This shift in sales mix is likely to negatively impact gross and adjusted EBITDA margins for the year compared to our earlier guidance. Specifically, we now project that gross margin for the full year 2025 will be about flat to slightly lower than the 2024 levels, which is nearly a 1% decrease from our prior expectation of around 39.5%, reflecting the unfavorable sales mix and lower manufacturing absorption due to reduced residential production volumes, as well as transitional costs associated with new product introductions and C&I plant startups. Furthermore, this gross margin outlook assumes that current tariff levels remain unchanged for the rest of the year. Regarding our adjusted EBITDA margin expectations for the full year 2025, considering the factors affecting our gross margins along with additional operating expense leverage loss on lower sales volumes, we are lowering our guidance for adjusted EBITDA margin to approximately 17%, down from the prior range of 18% to 19%. Because of increased cash utilization for primary working capital and capital expenditures, we now expect free cash flow conversion from adjusted net income to be around 80% for the full year 2025, compared to the earlier guidance of 90% to 100%. Nevertheless, this will still yield about $300 million in free cash flow for fiscal 2025, which allows for near-term options to pursue additional investments aimed at fostering future growth within our disciplined capital allocation framework. As is customary, we are providing guidance details to facilitate modeling of adjusted earnings per share and free cash flow for the full year 2025. We now project our GAAP effective tax rate for the full year 2025 to be between 20% and 20.5%, a reduction from the prior guidance of 23% to 23.5% due to the lower effective tax rate realized in the third quarter. Specifically, for the fourth quarter of 2025, we expect the GAAP effective tax rate to be about 25%. To accurately estimate adjusted net income and adjusted earnings per share, items needing to be added back should be reflected net of tax at this 25% effective tax rate. We now predict interest expense to range between $70 million to $74 million for the full year 2025, assuming no principal prepayments for the term loan during the year. This is a reduction from our previous guidance of $74 million to $78 million and reflects lower interest rates and outstanding borrowings than previously assumed. Our capital expenditures are projected to be about 3.5% of forecasted net sales for the full year 2025, an increase of 0.5% from prior guidance due to additional CapEx investments for data center capacity expansion expected in the fourth quarter of 2025. Expenses related to depreciation, GAAP intangible amortization, and stock compensation are expected to remain consistent with last quarter's guidance. Our projected weighted average diluted share count for the full year is expected to be around 59.4 million to 59.5 million shares, down from 60.3 million shares in 2024. Lastly, this 2025 outlook does not include potential additional acquisitions or share repurchases that could further enhance shareholder value during the year. This concludes our prepared remarks. We will now open the call for questions.
Operator, Operator
Our first question comes from Tommy Moll of Stephens.
Thomas Moll, Analyst
I want to start on the data center market opportunity, Aaron. What all have you learned thus far in terms of the competitive dynamics there, the size of the opportunity? I think last quarter, you framed it at about $5 billion, the deficit next year. And then just in terms of the types of customers where you're seeing some traction, what's the nature of the conversation with hyperscale at this point? And any orders there in the backlog number that you gave us?
Aaron P. Jagdfeld, President and CEO
Thank you, Tommy. This is indeed a unique opportunity for us. The backup power supply in this market has a significant structural deficit. As data center facilities are being established, every discussion with developers, hyperscalers, and edge data center providers highlights the challenges in getting these facilities operational due to constraints in the electrical infrastructure, including transformers, switchgear, and generators, which are all in high demand. I believe this situation will persist for a while. Although we do not currently have any orders from hyperscalers in our backlog, we are engaged in very fruitful discussions and are optimistic about being added to their approved vendor lists. They are keen to secure additional supply, and we are well-positioned as a trusted brand with over 50 years in the C&I backup power market. Our move into this product line is a natural progression for us, reflecting our established reputation and financial strength. We see a considerable generational opportunity within this segment of our business. As mentioned earlier, several initiatives will need decisions in Q4. We have slightly increased our CapEx guidance to support everything from facilities to equipment, and our M&A pipeline has broadened as we explore ways to enhance our capabilities and capacity. We are committed to being proactive and will capitalize on this opportunity. The market is encouraging us to succeed, and I am confident in our ability to execute. Our first shipments from our factory in Oshkosh, Wisconsin were sent out recently, and we are making progress in expanding our capacity through investments in this area of our business.
Operator, Operator
Our next question comes from the line of George Gianarikas of Canaccord Genuity.
George Gianarikas, Analyst
I know you're not focused on 2026 yet, but could you help us understand the various factors at play? Outages have been lower than expected, there is demand from data center generators, and we may see the impact of recent developments in Puerto Rico. How should we generally think about 2026 with all these elements considered?
Aaron P. Jagdfeld, President and CEO
Thank you for the question, George. To address your inquiry, let's look at our residential products, particularly home standby and portable generators. This past season was challenging due to unusually nice weather, leading to significantly fewer outages than expected. We typically plan around a normal level of outages, but this year we experienced around 75% to 80% below that norm in terms of outage hours, without any major events influencing those numbers. While this situation is disappointing, it's temporary. We've faced similar circumstances in the past, and weather patterns can change unpredictably. The fundamental issues regarding the reliability of the grid remain unchanged, and we expect these structural trends to continue. What's noteworthy is that our home standby and portable product categories showed sequential growth compared to Q2, maintaining the growth baseline we achieved last year. It's impressive that, despite not witnessing the typical seasonal demand spike, the underlying strength in these categories persists. Looking ahead to 2026, assuming a return to standard outage levels, we anticipate significant growth in these areas. Additionally, we've been expanding our dealer network, adding over 100 dealers this quarter, which indicates a healthy market with ongoing demand. Our customer acquisition costs are also decreasing as we refine our lead generation processes, leading to improved close rates, which we expect will continue into 2026. We've gained more shelf space for portable generators due to last season's hurricanes, expanding our retail presence. Altogether, this sets up a promising outlook for next year, with effective pricing contributing further to our residential products' growth. On the energy technology front, there may be challenges as the energy grant program in Puerto Rico ends this year, and we don't expect it to continue. The market for solar and storage is also expected to contract in 2026 largely due to the loss of the 25D tax credit for homeowners. However, electricity prices and demand are rising, outpacing inflation in many areas and likely to increase further as AI-related energy demands emerge. As these rates rise and technology costs fall, we believe there are still strong long-term growth prospects for solar and storage despite an expected overall market contraction. We're excited about our new products hitting the market, including ecobee, which has performed excellently in our portfolio. Moving on to our Commercial and Industrial (C&I) segment, we have exceptional visibility with a $300 million backlog, which has doubled in the last 90 days, primarily for 2026. We anticipate potentially reaching a $500 million capacity in 2026. Our focus is on expanding this business and preparing for future growth—it's a unique opportunity that we are determined to capitalize on aggressively.
Operator, Operator
Our next question comes from the line of Mike Halloran of Baird.
Michael Halloran, Analyst
I think you mentioned it briefly in there, Aaron, but maybe just on the new product launches on the clean energy side, I know early days, how is that tracking? And then maybe more importantly, could you just frame up what you mean or what the latest thought process is in terms of getting back to breakeven in those product categories? And what kind of that iterative process looks like as we work through the remainder of this year, early thoughts on '26 as far as how much of that loss you can reclaim?
Aaron P. Jagdfeld, President and CEO
Yes, thank you, Mike. We are optimistic about our product lineup and the market potential, considering the ongoing challenges with energy prices and the increasing need for resilience in this sector. We are developing an energy ecosystem. The year 2026 is going to be more challenging, and we have been using the term recalibrate frequently in our discussions to ensure we can manage our research and development spending as we approach the end of our product introduction cycle. This will transition into some necessary support for the new products that are just now entering the market. Our initial shipments of PowerCell 2 will occur in this fourth quarter, and we are on a limited launch plan, aiming to expand in 2026. PowerMicros will also begin shipping at the end of this year. As for data points regarding market acceptance of these products, we don’t have much yet. However, we have received consistent feedback over the years indicating a growing need for additional suppliers, as the inverter market is somewhat of a duopoly, while the storage market heavily relies on Tesla, which dominates that sector. We believe there are significant opportunities for success, with our goal being to reach breakeven by 2027. This goal remains unchanged, despite expected market contractions. It was our target before the loss of federal support for these products. Given the continual rise in retail electric prices, decreasing costs of technologies, and a possible decline in interest rates, we think the environment is favorable. The return on these systems should improve over time, although there may be a setback in 2026. We must see success in 2026, particularly in gaining market share in storage and inverters; otherwise, we will need to reassess our strategy. It is not our intention to operate at a loss indefinitely. We are not a startup with unlimited investor funding, and we manage this as if it were our own money. We aim to avoid losses in our ventures and view this as a long-term investment in an important market that is crucial for building out an energy ecosystem, differentiating us as market participants in the future. We are committed to this effort but require visible success and progress. We are confident that we will achieve that.
Operator, Operator
Our next question comes from the line of Jeff Hammond of KeyBanc Capital Markets.
Jeffrey Hammond, Analyst
Just back on the data center, I think you mentioned that you could achieve $500 million or possibly more next year. So as you begin to receive orders, are those anticipated for '26? Or are they for a later date? Also, regarding the new capacity you're considering, what would that entail? Is it a new plant, an expansion, or do we need to double production as quickly as possible?
Aaron P. Jagdfeld, President and CEO
Yes, to clarify, we have a backlog of $300 million, most of which is scheduled for shipping in 2026. The $500 million figure is related to our capacity, which we haven't fully subscribed yet, but there's potential for that. Currently, many of our discussions, especially with hyperscalers, are about 2027 and beyond since they have already finalized their 2026 plans due to long lead times for these products. Any additional orders beyond the $300 million for 2026 will likely come from opportunities with other suppliers facing delivery challenges, requiring a Plan B or needing to accelerate data center connections. We are engaging in discussions with clients who may be ready to launch a facility in the latter half of 2026, but initially planned for early 2027, and are looking to expedite that. If we can provide generators, it would be crucial for meeting uptime requirements. We aim to boost our capacity figures for 2026 beyond the current $500 million. In terms of significant changes, we're focused on potentially doubling our capacity for 2027 and 2028. Achieving that will require physical assets like facilities, which take up considerable space. We're currently negotiating on several facilities in Wisconsin and other locations in the U.S. while making progress in due diligence. Additionally, we've ordered equipment with longer lead times for production needs. We expect this equipment to be ready for the late 2026 and early 2027 timelines. Furthermore, we are exploring M&A opportunities to accelerate our growth in production capacity and explore other value streams since we don’t manufacture the engines ourselves. We are investigating whether acquisitions can position us as a more comprehensive supplier beyond just backup equipment. Our M&A team is very active, and we aim to capture additional capacity and capabilities as we approach 2026. Overall, we are in a solid financial position with a robust balance sheet and strong cash flow, which we intend to leverage aggressively in our commercial and industrial business. We see this as a unique opportunity that could potentially double this segment in the next three to five years.
Operator, Operator
Our next question comes from the line of Brian Drab of William Blair.
Brian Drab, Analyst
This is sort of an easy segue to my question. You're talking about the capacity expansion and the idea that you don't manufacture the engine. I'm just wondering, Aaron, like what are the biggest challenges? What are your biggest concerns about adding this much capacity that quickly in terms of supply chain or just anything in terms of the manufacturing operation that's going to be challenging? I think people are looking for just that confidence that this capacity can come online smoothly.
Aaron P. Jagdfeld, President and CEO
Thank you, Brian. That's a great question. We quickly brought our product line online at our Oshkosh, Wisconsin facility. We completed our development earlier this year and produced our first units. We made several upgrades to that facility as part of our capital expenditure this year to prepare for manufacturing these products. This is essential for reaching the $500 million or slightly more capacity available for us by 2026, aligning with our capital expenditure run rate this year. We've been working tirelessly on test cell upgrades, material handling upgrades, and other physical enhancements. We're making significant changes, including relocating walls and cranes, to get ready for production. Recently, we rolled out some of the first units and shipped them about 10 days ago, with production ramping up this fourth quarter. I am confident that we can handle the production side of things as that falls within our expertise. Our engine partner has substantial capacity, so I don’t foresee any constraints on that front, especially considering the current structural imbalance in the engine supply market we've discussed in previous calls. With our engine supply agreement with Baudouin—who has made major investments in large bore diesel engines—we are well positioned to meet market demands. Next, regarding alternators, we’re collaborating with several suppliers who we already know and work with for our C&I market, so there’s no risk of entering an unfamiliar supply base. We have strong long-term relationships with them, allowing us to effectively grow this business. We’re recognized as a reliable customer, not seen as a credit or operational risk, which is a plus in these partnerships. However, physical constraints may arise in how much product we can build due to space limitations and potential downstream packaging constraints. In our industry, once we build units to a specific level, they are sent to a packager who adds the final housing and enclosure based on unique customer specifications. These are often engineered to order, so we are exploring partnerships with packagers to ensure we can meet our in-house orders and avoid limiting growth. There are many execution strategies we need to focus on, but I believe this project is closely related to our operations in the C&I sector, where we have been active for the past 50 years. We see strong opportunities in both the data center segment and the traditional large backup power market, with a lot of ongoing order and pipeline activity as we start bringing our products to market for that segment. Exciting times are ahead for this part of our business.
Operator, Operator
Our next question comes from the line of Mark Strouse of JPMorgan.
Mark W. Strouse, Analyst
Aaron, you mentioned earlier trying to get on the approved vendor list for some of the hyperscalers. Can you just give a bit more color on what that process really looks like? And is the time line for that kind of more measured in months or quarters? Or anything that you can share there would be great.
Aaron P. Jagdfeld, President and CEO
Thank you. Each hyperscaler has a different process. I want to highlight that we are already the preferred supplier for two global co-locators. When we talk about being on the approved vendor list, we specifically mean the lists from hyperscalers. We are making significant progress with the co-locators, and I feel encouraged about our positioning there. Regarding the hyperscalers, if we think of this as a baseball game, we have moved beyond Milwaukee, unfortunately. To put it into perspective, we are likely around the sixth or seventh inning with most of the hyperscalers. Their processes are extensive and take time, often measured in months. We are working through their requirements, which include contracts, legal discussions, certificates of insurance, and management meetings. Each hyperscaler has its own approach, and while there aren’t any major obstacles, we need to navigate their requirements. I expect to see continued growth in our backlog as we progress, and our goal is to receive trust from a hyperscaler so that we can supply them with our products, which is likely to materialize in 2027 and beyond.
Operator, Operator
Our next question comes from the line of Christine Cho of Barclays.
Christine Cho, Analyst
Just as a follow-up to Mark's question. I understand that your engines are actually coming from France, but are you finding that the Chinese ownership of the supplier is something that is brought up in your conversations with the bigger type of customers? And would you say that you need at least one hyperscaler contract in hand in order to feel comfortable in doubling the capacity?
Aaron P. Jagdfeld, President and CEO
Yes, those are great questions, Christine. Regarding the supply chain, we've discussed with our customers where our engines are sourced from. It's important to note that certain components are only available in specific regions, such as China. Our reliance on the global supply chain, particularly from certain countries, is a common issue. We have talked about the ownership structure, and while our partner has a global manufacturing base that they are expanding, it’s not limited to France. They have facilities in India and are exploring options in other regions as well. We believe that any current concerns can be addressed over time. We also consider potential ownership structures in the future, whether that be joint ventures or other arrangements, and we want to ensure these factors do not hinder our market entry; so far, we haven't seen that to be a dealbreaker. As for your question about doubling capacity, having a commitment from a hyperscale client would definitely give me more confidence about long-term usage. However, we are structuring our capacity expansion in a way that allows for flexibility; if necessary, we can repurpose that capacity for other growth areas in our business. We currently lease external storage space, which we could convert if needed. While this scenario isn't ideal, we believe that the additional capacity will ultimately benefit us. Even if the hyperscale business doesn’t materialize, which I don't think will happen, we can still utilize that capacity, though it may take longer. I would feel more assured with that commitment, but I believe we can discuss this further in the coming months.
York Ragen, Chief Financial Officer
There will be growth in the traditional markets.
Aaron P. Jagdfeld, President and CEO
For sure, growth in our traditional markets that we'll need for that as well.
Operator, Operator
Our next question comes from the line of Keith Housum of Northcoast Research.
Keith Housum, Analyst
I appreciate it. Staying along the lines of the data centers, Aaron, perhaps you can touch on the pricing for these data center generators and like the margin profile and kind of thinking of how that might affect the margins going forward?
Aaron P. Jagdfeld, President and CEO
Yes. Thanks, Keith. It's a great question. When discussing pricing for a 3.25 megawatt unit or larger, I should mention that our product line has recently introduced units up to 3.25 megawatts. We plan to launch the next phase, ranging from 3.5 to 4 megawatts, in 2026. The average selling prices for these products can vary based on content and customer, generally falling between $1.5 million to $2 million per generator set. Our pricing remains competitive in the market. Regarding margins, the domestic margin profile is somewhat similar to our commercial and industrial products in North America, possibly slightly lower but not significantly so. Internationally, margins tend to be lower due to increased competition and our smaller presence in those markets. We have made substantial progress with our partnership with Pramac over the last decade, significantly improving their gross margins, and we aim to continue that momentum. Overall, the incremental effect on EBITDA margins from our data center products is very promising, contributing positively to our C&I product margins.
Operator, Operator
Our next question comes from the line of Sean Milligan of Needham & Company.
Sean Milligan, Analyst
I was just curious about the margin progression. I know you don't want to really give guidance for next year. But in terms of the framework, the back half EBITDA margins are kind of weaker than what were expected. So just gives and takes into next year, like does core resi HSB get better? Energy tech, you have some revenue headwinds and then the data center piece. Just trying to kind of think about what that all means for margins moving forward on the EBITDA side.
York Ragen, Chief Financial Officer
Yes, Sean, it's York. Looking at our updated guidance for 2025, we expect EBITDA margins to be around 17%, which is lower than the previous guidance of 18% to 19%. This represents a midpoint reduction of about 1.5%. The unfavorable product mix is mainly due to selling less of our home standby units, which are our highest margin products, particularly in the current outage environment. I estimate that about one-third of this 1.5% decline is attributable to the mix. If we return to the mean regarding outages in 2026, we should see a positive impact on home standby sales, helping to offset some of the mix decline. While there will be some recovery in the mix side in 2026, the operating expense deleverage from the lower guidance accounts for the remainder of the 1.5% decline in EBITDA for 2025. As we discuss our strategy for growth in home standby, portables, and C&I, we anticipate leveraging our operating expense structure, leading to improved EBITDA margins beyond the 17% expected in 2025. There is likely a small temporary price-cost effect in this 1.5% decline for 2025, which should not continue into 2026. Overall, I believe we will see a strong recovery in EBITDA margins from the 17% in 2025, driven by product mix, operating leverage, and mitigating factors like new product introduction costs and plant ramp-up costs.
Operator, Operator
I would now like to turn the conference back to Kris Rosemann for closing remarks. Sir?
Kris Rosemann, Director of Corporate Finance and Investor Relations
We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter and full year 2025 earnings results with you in mid-February 2026. Thank you again, and goodbye.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.