Generac Holdings Inc. (GNRC) Earnings Call Transcript

Hello, and welcome to Generac Holdings Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Kris Rosemann, Senior Director, Corporate Finance and Investor Relations. You may begin.

Good morning, and welcome to our third quarter 2026 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I'll now turn the call over to Aaron.

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our third quarter results reflect continued momentum in our Commercial and Industrial segment, with revenue from products sold into the data center market, leading to a 28% increase in C&I segment net sales on a year-over-year basis. Additionally, in the quarter, our residential segment returned to strong growth, with net sales increasing 9% from the prior year driven by the lower power quality mega trends that continue to support sustained demand for backup power solutions. Overall, net sales increased 16% during the quarter to an all-time high record for Generac, and robust margin expansion helped deliver a 33% increase in adjusted EBITDA compared with the third quarter of 2025, exceeding our prior expectations and resulting in the increase in our adjusted EBITDA margin guidance for full year 2026. The third quarter also marked a tremendous step forward in solidifying our position as a leading supplier to the data center market as we entered a long-term supply agreement with Amazon for data center backup power generators. Initial deliveries in this agreement are expected to be a combined $2.4 billion in 2027 and 2028, driving the increase in our backlog for products sold to the data center market to approximately $4.5 billion nearly tripling from just 90 days ago. The agreement with Amazon provides for up to -- approximately 1.7 million common warrant shares with future vesting of the warrants linked to a total of $8 billion in backup generator purchases over the 7-year term of the deal. This warrant structure provides for incremental strategic alignment as well as creating a material incentive for Amazon to continue leveraging Generac as a supplier, well beyond the initial deliveries expected in 2027 and 2028. We believe this long-term strategic collaboration validates our status as a top-tier supplier, C&I backup power generators and provides continued confidence in the durability of demand for our products in the data center market. In addition to the significant demand from our hyperscale customers, our updated backlog also reflects continued momentum with both new and existing non-hyperscale customers, which continues to expand geographically as well, with orders across multiple continents. We believe this growing customer base across an expanded geographical footprint helps to create an increasingly diversified business as the global data center investment cycle matures. Additionally, our previously announced capacity expansion plans remain on track and will allow us to serve this accelerating demand with our new large megawatt generator production facility in Sussex, Wisconsin, as initial production began at the end of the third quarter and build rates are expected to ramp significantly in the fourth quarter. This ramp is expected to support strong sequential revenue growth in the fourth quarter of 2026, resulting in full year 2026 data center revenue of nearly $500 million, an increase from the approximately $450 million previously expected. As we look toward a year of dramatic growth ahead for data center-related revenue in 2027, we continue to invest in our large megawatt production facilities and are working towards tripling our global production capacity. We expect to achieve significantly higher levels of output from our existing facilities through added production lines and an increase in manufacturing staffing levels. The relatively small incremental investment needed to ramp capacity further highlights the capital-light nature of our business and the incredibly strong ROI that we expect to realize from these investments. We also continue to invest in deeper vertical integration across our C&I product portfolio, highlighted by the outfitting of our new packaging facility in Belvidere, Illinois, which is expected to come online in early 2027. We view this additional packaging capacity as a key strategic advantage to protect our highly competitive lead times as end market demand surges while also expanding our share of value-added content and improving overall profit margins for large megawatt generators. We believe that the vertical integration of highly customized packaging solutions is an important and unique factor in our ability to continue to win in the data center market. Internationally, we are also investing in additional manufacturing capacity for large megawatt generators as data center demand continues to grow rapidly around the world. This includes expansions in Europe, Asia and Latin America to help serve demand we have secured from these customers in those regions. In addition to manufacturing capacity, we are also increasing our service and support footprint in these local markets where these new projects will be cited. As a result of our recent wins, current backlog, capacity expansion efforts and our track record of strong execution, we believe we have excellent visibility to dramatic growth in the data center market in the years ahead. Specifically for 2027, we now expect revenue from products sold to the data center market to well exceed $2 billion. Now looking at our overall C&I segment results for the quarter. Net sales growth remained robust, led by more than $100 million of revenue from products sold to the data center market. This significant sales increase versus the prior year period supported strong adjusted EBITDA margin expansion in the quarter, a trend that we expect to continue into 2027 as C&I segment growth dramatically accelerates further. Mobile product sales to national and independent rental equipment customers also grew again during the third quarter as compared to the prior year. Recall that in January, we announced the acquisition of Allmand, a mobile products company based in Nebraska, that we've now fully integrated into our existing mobile equipment offering. The resulting combined scale we now have in mobile products has allowed us to increase our market share with our rental customers. Specifically, the Allmand business has outperformed our prior expectations for both sales and profitability. And as we continue to see healthy rental fleet demand driven by a significant pipeline of large construction projects, we anticipate continued strong growth in 2027 for our mobile products. Shipments to our domestic industrial distributor channel grew sequentially in the quarter, but declined versus the third quarter of 2025 as the prior year included a tougher comparison related to our drawdown of backlog. In addition, lead times for products shipped to these customers grew longer in the quarter, driven primarily by the execution of the final phase of our project to relocate manufacturing of these products to our new facility in Beaver Dam, Wisconsin. We expect lead times to return to more normal levels in the first quarter of 2027 as production ramps at Beaver Dam. Order rates from our domestic industrial distributors remained robust, with the third quarter marking another record from industrial distributor customers and positioning this channel for continued growth in 2027. We also continue to see healthy quoting activity for our large megawatt generators in the non-data center applications through this channel, providing an incremental and diversified source of demand for these products. Shipments to our telecom channel slowed during the quarter, primarily due to certain customers working to reduce their backlog of site deployments. Although demand for backup power for telecom customers can be variable from quarter-to-quarter, we continue to view the telecom channel as an attractive long-term opportunity, supported by ongoing network hardening investments and growing interest in data center adjacent applications from our telecom operators. International C&I net sales, excluding shipments to data center customers increased during the third quarter when compared to the prior year as a result of broad-based regional growth. The European region, our largest international market, experienced solid sales growth from the prior year. While sales to emerging markets such as Latin America and the Middle East returned to strong growth in the quarter. This diversified geographic growth is encouraging considering the current geopolitical environment, and we continue to evaluate opportunities to expand our presence in other regions to serve more local markets around the world. Additionally, global shipments of our control solutions increased at a robust rate during the quarter, providing further evidence of the stronger conditions in the global power generation market. Looking ahead, we expect overall C&I segment net sales to increase in the low 30s percent range for the full year 2026. And as we look to full year 2027, we have visibility to a dramatic increase in revenue from products sold to the global data center market. When combined with our expectations for continued growth in our rental, industrial distributor channels and international markets, we now believe we have a path to double our commercial and industrial reporting segment in 2027. Now looking at our residential segment results in more detail. As expected, residential segment net sales returned to strong growth during the quarter, increasing 9% from the prior year. Home standby and portable generator sales both grew at a much faster rate than the overall segment, partially offset by an expected decline in shipments of energy storage systems. Segment adjusted EBITDA margins expanded by more than 350 basis points from the prior year due to favorable price/cost impacts, strong operating leverage and the continued recalibration of our energy technology-related operating expense investments. Home standby generator shipments increased at a mid-teens rate during the quarter as compared to the prior year period as the power outage environment returned to more normalized levels after several quarters of well below average outage activity. While Atlantic hurricane activity remained historically quiet during the period, everyday severe weather across the country supported baseline outage activity with particular strength in the late summer months in the Midwest and the Northeast. In-home consultations also increased sharply as compared to the prior year as a result of the higher power hedge activity and our well-established demand creation efforts. Most regions across North America saw higher IHC activity with significant strength in the Midwest and Northeast as homeowners experiencing power outages continue to seek out resiliency solutions. We believe that grid reliability challenges continue to grow, driven by the risks associated with increasingly severe and volatile weather patterns and aging infrastructure and a dramatic increase in the demand for power, with all of these factors supporting our belief in the continued demand for the home standby generator category, well into the future. Home standby activations or installations returned to growth in the month of September for the first time since the second quarter of 2025. For the quarter, activations were nearly flat year-over-year as declines in state that saw prior year activations benefit from the afterglow of an active 2024 hurricane season were offset by strong growth in the Midwest and Northeast regions during the quarter. This return to growth in activations is further supported by the continued expansion of our residential dealer count, which grew again during the quarter to nearly 9,900 dealers. Portable generator shipments were also very strong in the quarter as the product category benefited from the more active outage environment, and our team continued to win new retail shelf space for these products. As a pioneer in the portable generator category, we believe we have once again regained our position as the #1 market share participant in the U.S. The portable generator business remains an important part of our retail channel strategy, and allows more budget-conscious consumers to experience generic branded product options to protect their home and their family. Importantly, our customer demographic data shows that more than 50% of the purchasers of home standby generators, either previously or currently owned a portal generator, making the trade-up experience from a portable to a standby product, an important one for our residential business. In addition to strong performance in the home standby and portable generator categories, our ecobee team continued to perform well during the third quarter. Sales of ecobee Solutions increased again from the prior year, and their connected home count now sits at approximately 5.5 million homes. Ecobee's services attach rate and recurring revenue continued to increase faster than their overall growth and disciplined operating expense management helped to deliver another quarter of growing profitability for ecobee solutions. Furthermore, we continue to expand the ecobee user interface and experience to our larger customer base across our residential products as we recently rolled out a unified software platform to further drive adoption of the home energy ecosystem by our customers. As expected, sales of our residential energy storage systems were lower in the quarter as compared to a strong third quarter of 2025 that included the benefit of our DOE program in Puerto Rico, which was completed at the end of 2025. Higher interest rates and a more challenging policy environment continued to weigh on overall demand for solar and storage products. And as a result, we continue to recalibrate our investments in this market. Overall, we remain on track with our projection for Residential segment net sales growth for the full year 2026 to be in the high single-digit range, led by mid-teens growth in the home standby category. Driven by our record net sales volume for the total company, we delivered consolidated gross margin of nearly 40% and EBITDA margin of nearly 20% as well as generating over $130 million of free cash flow for the quarter. These metrics all represent a significant increase as compared to the prior year as we continue to see favorable price cost dynamics, leverage our fixed operating expenses, we rapidly grow, further recalibrate our energy technology OpEx spend lower and tightly manage the working capital requirements for our business. In closing this morning, our third quarter performance, including tremendous momentum in the rapidly growing data center market, highlighted by our agreement with Amazon, alongside a return to strong growth for residential segment sales demonstrates the strength and earnings potential of our more diversified business. Furthermore, our strong earnings and free cash flow enable us to continue to make opportunistic investments, allowing us to lean into the unprecedented data center market growth opportunity. As a result of this unique combination, together with the mega trends around AI infrastructure, lower power quality and higher power prices, we believe we are extremely well positioned for success as we look into the future. With that, I'll now turn the call over to York to walk through our third quarter financial results and our updated outlook in more detail. York?

Thanks, Aaron. Looking at third quarter 2026 results in more detail. Overall consolidated net sales during the quarter increased 16% to an all-time record of $1.29 billion as compared to $1.11 billion in the prior year third quarter. The net effect of acquisitions, divestitures and foreign currency had an approximate 1% favorable impact on revenue growth during the quarter. Commercial & Industrial segment total sales increased approximately 28% to $553 million from $432 million in the prior year quarter, including an approximate 4% net favorable impact to net sales growth 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 into the global data center market. In addition, broad-based regional growth internationally was offset by lower shipments to the domestic industrial distributor and telecom channels. Residential segment total sales increased approximately 9% to $744 million as compared to $685 million in the prior year quarter. This increase was primarily driven by strong sales growth for home standby and portable generators compared to the prior year, benefiting from more normalized outage activity in the current year quarter. This growth was partially offset by lower shipments of energy storage systems given the completion of our Department of Energy program in Puerto Rico at the end of 2025. The mid-teens percent increase in home standby generator sales was mostly driven by higher volumes, with pricing contributing a smaller portion of the growth as compared to the third quarter of 2025. Consolidated gross profit margin was 39.9% compared to 38.3% in the prior year third quarter. The increase was primarily driven by favorable price cost impacts, including lower tariff rates compared to the prior year and a modest tariff recovery benefit reflected in the current year quarter. This margin expansion was partially offset by unfavorable sales mix given the higher sales growth in the C&I segment. Operating expenses increased $31.6 million or 10% as compared to the third quarter of 2025. The increase was primarily driven by increased operating expense investments to support future C&I growth as well as higher marketing spend to drive awareness for our products and additional incentive compensation and intangible amortization expense, partially offset by lower operating expense investment in Energy Technology Solutions. As a percent of sales, excluding amortization expense, OpEx percent decreased by 1.6% compared to the prior year, highlighting the improved operating leverage on significantly higher sales. Overall, consolidated adjusted EBITDA before deducting for noncontrolling interest, as defined in our earnings release, was $256 million or 19.8% of net sales in the third quarter as compared to $193 million or 17.3% of net sales in the prior year. This significant year-over-year margin expansion was driven by the previously discussed gross margin performance as well as strong operating leverage on higher sales volumes as we maintain a disciplined and balanced approach towards investing in strategic growth opportunities. Adjusted EBITDA for the Commercial and Industrial segment, before deducting for noncontrolling interest, was $69.3 million or 12.5% of C&I total sales as compared to $43.8 million or 10.1% of segment total sales in the prior year. This margin increase was primarily driven by operating leverage on higher shipments and the net favorable impact of acquisitions and divestitures. Adjusted EBITDA for the Residential segment was $200.8 million or 27% of Residential total sales as compared to $160.2 million or 23.4% in the prior year. This margin increase was primarily driven by favorable price/cost impacts, operating leverage given higher shipment volumes and lower operating expense investment in Energy Technology Solutions. Now switching back to our overall financial performance for our third quarter of 2026 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $109 million as compared to $66 million for the third quarter of 2025. Total other expense net improved to $17.4 million in the current year quarter from $24.7 million in the prior year. Lower net interest expense, a reduction in our Wallbox investment fair value adjustment and a loss on refinancing of debt in the prior year all contributed to this improvement in total other expense net. GAAP income taxes during the current year third quarter were $34.2 million or a more normalized effective tax rate of 23.9% as compared to $11.8 million or an effective tax rate of 15% for the prior year. The prior year effective tax rate included certain favorable discrete tax items that did not repeat in the current year quarter. Diluted net income per share for the company on a GAAP basis was $1.83 in the current year third quarter compared to $1.12 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $151 million in the current year quarter or $2.54 per share. This compares to adjusted net income of $108 million in the prior year quarter or $1.83 per share. Cash flow from operations was $171 million during the current year third quarter as compared to $118 million in the prior year. Free cash flow, as defined in our earnings release, was $132 million as compared to $96 million in the third quarter of 2025. This strong increase in free cash flow during the quarter was primarily driven by higher operating earnings, partially offset by increased capital expenditures in support of our C&I capacity expansion initiatives. Total debt outstanding at the end of the quarter was approximately $1.33 billion, resulting in a gross debt leverage ratio at the end of the third quarter of 1.4x on an as-reported basis, which is within our target gross debt leverage range of 1 to 2x adjusted EBITDA. With that, I will now provide further comments on our updated outlook for 2026. As disclosed in our earnings release this morning, we are maintaining our full year 2026 outlook for overall net sales growth. We continue to expect consolidated net sales for the full year 2026 to increase in the mid- to high teens percent range as compared to the prior year, which includes an approximate 2% favorable impact from the net effect of foreign currency, acquisitions and divestitures. In addition, we are maintaining our previous sales growth guidance ranges for both C&I and residential segments. C&I segment net sales growth is still expected to be in the low 30% range compared to 2025, as revenue from products sold to the data center market continues to ramp. Within the C&I segment, we now expect data center revenue to be nearly $500 million for the full year 2026 as we continue to increase our backlog for products sold into this market. For the Residential segment, we continue to expect net sales to increase at a high single-digit rate as compared to the prior year. 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. Residential year-over-year net sales growth is expected to accelerate in the fourth quarter due to a softer prior year comparison that included the impact of very low power outage activity and the transition to our next-generation home standby product line. With regards to our gross margin guidance for 2026, we continue to expect full year gross margins to be in the 40% range, inclusive of tariff refunds in the second quarter, which benefited full year margins by approximately 150 basis points. Specifically for the fourth quarter, gross margins are expected to moderate sequentially to the 37% to 38% range due to the impact of sales mix from the significant projected sequential growth in data center sales and other inflationary pressures. Now looking at our updated adjusted EBITDA margin expectations for the full year. As a result of our third quarter outperformance, we are raising our adjusted EBITDA margin guidance range to 20.5% to 21%. This compares to our previous guidance range of 20% to 21%. This full year range includes the previously mentioned tariff refunds that were reflected in our second quarter results. Specifically for the fourth quarter, we continue to expect adjusted EBITDA margins to be in the 20% range, resulting in a 300 basis point improvement relative to the fourth quarter of prior year. On a sequential basis, we expect improved operating leverage on higher shipment volumes and seasonally lower operating expenses to allow us to hold EBITDA margins consistent relative to the third quarter of 2026. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2026. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add back items should be reflected net of tax using our expected effective tax rate. For full year 2026, our GAAP effective tax rate is still expected to be between 24.5% to 25%. This implies a GAAP effective tax rate of 25.5% to 26% for the fourth quarter of 2026. We expect interest expense to be at the higher end of our previous guidance range of approximately $65 million to $69 million for full year 2026, given modestly higher interest rate assumptions. Our capital expenditures are projected to be approximately 4% to 4.5% of our forecasted net sales for the year as we continue to invest in expanding our large megawatt generator production and packaging capacity. Depreciation expense is now expected to be approximately $112 million to $116 million for the full year 2026. GAAP intangible amortization expense in 2026 is now expected to be approximately $114 million to $118 million during the year. Stock compensation expense is now expected to be at the lower end of our previous guidance range of $54 million to $58 million for the year. Despite our elevated CapEx investments to drive our data center capacity expansion, free cash flow generation remains strong and is now expected to be approximately $450 million for the full year 2026 as higher operating earnings, lower working capital use and incremental data center customer deposits are driving free cash flow higher relative to previous expectations. Our full year weighted average diluted share count is now expected to be at the lower end of our previous guidance range of 59.5 million to 60 million shares in 2026. And finally, this 2026 outlook does not reflect potential additional acquisitions, divestitures or share repurchases that could drive incremental shareholder value in the fourth quarter. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

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

Aaron, you mentioned a pathway to potentially double the C&I revenue line in 2027. If we just use the 4Q revenue as our base, what can you tell us about the sequential uplift from there? It's going to be important for us to have some sense of how that progresses.

Yes. Thanks, Tommy. So -- yes, Q4 depends on kind of how you guys have modeled it everybody is going to probably do it a little bit different. But I think if you kind of take our guidance this morning, we're holding the full year guidance. There was just, I think, some timing between Q3 and Q4. I mentioned the ramp-up of our final phase of our project at Beaver Dam to consolidate our non-data center products, really, in effect, it's our smaller output products. And that was a little bit of a drag on the quarter beyond our expectations, but nothing severe, nothing we don't catch. We're going to make it up. But there is a huge ramp as you go into Q4. As we talk about hitting that $500 million of data center shipments for the full year, there's a big ramp just to hit that in Q4. And as we bring Sussex online. We've run our first units down the line there at the end of third quarter and now we're into kind of the significant ramp. But then as you get into 2027, there's going to be a significant ramp on our data center production rates. As we said, we're tripling our capacity. So kind of first half, second half, there's a pretty big lift to go from first half to second half. So from a pacing perspective, if that's kind of the heart of your question. But that's something that I think we're pretty confident in. We've got the backlog for kind of 1/3, maybe first half, 2/3 second half, kind of thinking about that.

In terms of the data center.

In terms of the data center ramp, yes, specifically. I think when you step back, you're right, we mentioned a potential path here to doubling the our global C&I business, which I think is just super exciting because we -- I've been saying that we could double it in the next 3 years, right, the next 3 to 5, I think I even said. And here we are, next year, we're going to double it off of potentially 2026 as a number, which is mind blowing to me in terms of just the uplift. So -- there's a lot that's got to go on to make that happen, but we believe we've got the supply chain. We believe from an execution standpoint, we're in good shape. I would also say though, Tommy, just if you kind of step back and with the whole company, right? I mean, if you take that doubling of the C&I business next year and you kind of look at our framework that we laid out back in our Investor Day back in March for everything else, for resi and for the other non-data center C&I, I mean, that puts us kind of at a $7 billion clip for top line for net sales for next year as a company, which is a dramatic increase over where we're at today. So 4.9%, I think total guidance, a little bit higher than that, but -- yes, but it's a huge ramp.

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

So just following up on that, maybe just more specifically, could you run to the capacity build schedule, when that should, in your mind, kind of hit that full run rate? And based on the conversations that you're having, is there -- are you seeing an incremental need for further capacity moves? And then I guess as a mild side bar, how does the strength of the quarter you're seeing in non-data center large gensets fit into that equation?

Yes. Thanks, Mike. And maybe I'll tackle that first. I mean the quoting has been -- we've quoted a lot of products, a lot of projects. Those are long sales cycles, as we know. The bigger you get into the size of the product, the more complex the project. And obviously, the larger the dollar amount in terms of financing those projects. I'm talking non-data center large megawatt projects now. There's just long sales cycles. We've definitely taken orders there and it's growing. But in all honestly, it pales at this point in comparison to what we're seeing in the data center in terms of our -- that $4.5 billion of backlog. On the capacity ramp, I think what's really interesting there is we've kind of said we're going to triple capacity by, I think we've said by the third quarter of next year is kind of when we hit that tripling. And we've been kind of saying $3.75 billion, probably use something closer to $4 billion, right? Just to round it up. And just because as we get -- as we start to lay out our kind of product lines here and we gained some experience building these sets. We feel -- we're feeling incrementally more positive about what we can get out of the existing footprint. So call it $4 billion by kind of the second half of next year. And kind of ending this year, as we said, we're kind of in that $1.25 billion as a company, it might be a little higher than that in terms of what the capacity would be. But we're approaching a number if you just take the backlog. If you kind of take that backlog and kind of piece of the part. More than half of that backlog is for 2027. So -- there's north of half there that's going to come through in '27. So we still have room to take some additional orders, team continues to quote. I would remind everybody, though, we've got a lead time there that we're quoting kind of in the 45 to 50 week range. So you just kind of do the math on that. And whatever orders we haven't received by Q1 of next year would be pretty tough to fulfill in 2027. So our backlog from this point to about maybe the second half of first quarter next year, that will be kind of what we're looking to fill up for capacity. Beyond that, the other part of your question, we continue to evaluate, as we've said, what is the next leg of growth look like should we perhaps land another major account. And we keep talking about hyperscale, but we're landing major accounts on nonhyperscalers as well. Co-locator accounts are very large. And so the progression there is going to be important for us to watch, and we're kind of watching kind of how it goes here. I would say, over the next kind of 90 to 120 days as we get into Q1 next year, as we ramp that production in Sussex, we bring our Belvidere packaging facility online. I mentioned that in the prepared remarks as well. So all of those things are projects that are in flight. Our team is doing a great job there. Really proud of what we've done to be able to get the first units down the line in Sussex earlier than we had thought. We've got them -- we're fully testing, fully producing at this stage and fully ramping that facility. We've already been producing in our Oshkosh facility. And that's something that is exciting as we add to that as we bring Belvidere online as well. And then I also mentioned internationally. We've got facility expansion plans in Europe, in Asia, in Latin America. And those are all the direct result of orders that we've taken orders that are in our backlog today to fulfill those orders, we're adding expansion plans. And there were plans that we've been talking about here as part of that tripling. It's nothing incremental to that at this point. But I think it's further evidence that we're going to have the footprint that's capable of approaching close to $4 billion annually in sales just for the data center market. And then we continue to evaluate kind of what would the next level of capacity look like beyond that?

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

I'm just curious as to how you view the recent executive actions targeting foreign-produced components within the bulk power system from the top administration? And any impact that you can see and how you're evaluating your component and engine sourcing strategy as a result of that?

Yes. Thanks, George. Yes, this has been a topic of discussion, obviously, since the draft of that executive order was released. It's not the first time that was also done in the first administration -- the first Trump administration. They also released that near the end of the administration's tenure. And it was kind of reissued here by this version of the administration. It really is targeting -- and if you just do a direct read of it, it's targeting 69,000 volt applications, which is absolutely utility-grade power. So the lines, the equipment and it's really geared around cybersecurity, right? So obviously, any kind of foreign entities of concern, having any of that in the grid right, in the grid system that could potentially cause a cyber type of issue is what that executive order is aimed at. Of course, it's broadly worded. And of course, it's left to interpretation, the final wording of that is going to come out, it's supposed to come out in December. But it is clearly on its face. And our policy team is highly engaged with the Department of Energy and with other stakeholders there. I would remind everybody that when we announced our agreement with Amazon that was after the draft of the executive order was issued. So we took our customers like Amazon and others who obviously had the same questions that you're asking, George. I wanted to understand our position on that. And then they obviously got counsel themselves to understand the reading of that and kind of what could get caught up in that. So we don't believe that. We believe there's a small chance. But like anything, until you see the final wording you're not sure. So if something were to happen there as we've talked. Our current engine supplier, we've been discussing kind of domestic options with them to supply here in the U.S. to build in the U.S. They are looking at that any way to support our growth. The tremendous growth that we're forecasting here in the next several years that can be satisfied today from their plants in Europe and in Asia, but they think that from a logistics standpoint and just a lead time standpoint, maybe having those products produced domestically might be a better thing to do. So that's an evaluation, and we would obviously accelerate those plans should -- we end up with a negative reading on that executive order. But again, everybody we've talked to, we believe that's a very small

Front of the meter high voltage.

Front of the meter high-voltage applications, not backup power. Our generators are not connected to the grid. They're connected to the facility. They're not grid connected. We don't push power back to the grid. And there are -- we're not buying any controls from foreign entity is concerned. In fact, we make the controls in the U.K. There are controls -- deep sea controls that we manufacture. And so the there's really no cybersecurity threat there. And there's certainly no kind of way to have those gensets even attached to the grid. So we just -- we believe that once we clarify that with the administration, we believe that we should be fine.

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

Just on kind of the ramp. One, just maybe just talk about supply chain readiness, comfort with the engine supplier for the ramp. And then just as you talk about going from, I guess, $1.25 billion to $4 billion, just -- what do you need to do? Is it just adding lines, adding people, adding shifts? Or is it -- is there any more complexity to it?

Yes. Thanks, Jeff. Yes. From a supply chain standpoint, we continue to dual and triple source all the major components there, obviously, with the exception of the engine at this point. Given the limited supply of engines, high horsepower diesel engines around the world, but everywhere else, we're dual and triple sourcing all the major components. And while supply will remain tight, we believe we have a path based on our deep conversations. And I would just point out, our hyperscale customers in particular, hyperscaler one, we've not named, but also Amazon have done their own deep due diligence on our supply chain to ensure that there's not only redundancy but also capacity in the supply chain. So that we can provide products at the levels that they are requesting at or higher as they told us. Hyperscaler One has told us that they'll go higher in 2028, if we can demonstrate execution in 2027. So we feel good on supply chain, obviously, tight something we watch. But supply chain is an area where we have deep expertise. We have a lot of resource and a lot of talent across the enterprise. We've always have that. And we're now applying it here. I think it's really interesting to take that, which has almost always been focused on our Residential business from being honest, and moved that over to our C&I business in terms of just the amount of activity to stand up that new supply chain and to ensure its capacity and redundancy. In the overall capacity increases, I think we've called this out before, but the kind of footprint, if you want to talk about the building. The 4 walls that we have at each of the places in Oshkosh and Sussex, our packaging capacity in Belvedere, the acquisition of Enercon down in Pure, Illinois. The international footprint that we have and the expansions we're talking about there. We are adding a new line in Sussex, so there is investment there, which we've talked about. That's a big part of how we get from $1.25 billion to $3.75 billion or $4 billion, if you will, tripling up capacity. The investments we're making in the international expansions are also part of that, getting to that kind of tripling of capacity. But the CapEx to do that, as we've called out, is relatively modest. I think in the grand scheme of things and the ROI is incredibly strong in a short-term period and a very short period. So adding additional shifts to those lines, adding more manpower is really what we're going to be doing there. We may have to pick up some more space for raw material storage and for finished goods storage, things like that. Those are areas where we could see additional expansion needs. But those, again, are relatively cost-effective in terms of, as an example, to hold the finished products, those are big open fields. You're not talking about buildings, big buildings or things like that. Those aren't -- I wouldn't say that, that's going to be a constraint. We don't see that as a constraint. And raw materials somewhat similarly, we can find space in our network. Today, third-party logistics, things like that to accommodate that as we grow. So working through all of that, but we feel that we've got a really high visibility path to that, that increase over next year, and that gives us confidence again to talk about the path and the framework here to double our overall C&I net sales for 2027.

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

I was just wondering if you could give us a little bit more on the visibility that you have to 2028 because -- you made the comment that 2/3 of the maybe roughly $2 billion in data center sales in '27 to come in the second half, that would mean like an annualized run rate of like $2.7 billion in data center in that second half. How much of that capacity do you expect to fill? I guess is what I'm wondering in 2028 because you're going to have $4 billion is like 50% more capacity than you're exiting the year with. Is that Amazon? Is it the other hyperscaler? What gives you the confidence and urgency around adding that much capacity as you look in '28?

Yes. Thanks, Brian. I think a big part of that confidence, if you will, or our views on meeting that capacity really revolve around a couple of things. One, I would say the strength of our non-hyperscale order opportunities, right? So the quote book there that we've got the funnel is incredibly strong around the world and here domestically. And so as those projects move to the finish stage to the final stages, we want to make sure that we've got capacity to accommodate that. So that's a big part of -- if you just step back and you look at kind of our backlog here, the $4.5 billion, as we said, more than half is for 2027, so less than half would be for 2028. And that does not include anything for hyperscale One in '28 today, right? So we don't have that in our math. So if you just take that number and what they've told us is if we execute, it can be as big or bigger than the $700 million that we anticipate doing with them in 2027. So if you put that into the number, and then you add continued momentum with our non-hyperscale customers at the same level that we're winning today, we can't see a path to needing that capacity for 2028. We think that, that's an opportunity. The other kind of open question, of course, and we've talked a little bit about this, is could there be another hyperscale customer. We have as we mentioned, I think, last quarter, we started deeper negotiations with a third hyperscale partner. And those -- that will be like the first 2 that we anticipate that will be a long process, but -- and probably wouldn't have any impact until 2028 for sure. I think at this stage of the game, just knowing the length of those -- to get on those approved vendor lists, the length of those processes and the depth of those processes. We just don't anticipate that being done prior to, as I said before, kind of the clock running out on our -- where our lead time sits for anything to happen in 2027. That would have to happen by the end of Q1. And I just don't see a path to getting a deal done with the third hyperscaler by the end of Q1. I think it's just going to be -- And also that -- those customers, because the lead times are so long in the market today, they're already planning out their '27. They kind of got everything nailed down. So when we're talking about additional opportunities for another hyperscalers, we're really talking about '28. So as that all becomes clearer, I think I'm not worried about whether we're going to consume the capacity we're talking about here, this kind of $4 billion. What I'm worried about is do we need more. And that's where I think we'll -- as I said before, we'll watch very closely this play out, and we'll react to that as appropriate. We're starting to plan. We're saying to our teams, what would it take to -- if we wanted to increase again another 50% capacity. If we wanted to go from $4 billion to $6 billion a year. What does that look like? And what would that take? As I said before, I think within our -- the 4 walls of the buildings we've got, the footprint we have today, that $4 billion represents kind of maxing out what's in that footprint today. So we think it's going to take some additional footprint. And that capacity can be added in a number of ways. It could be greenfield site, it could be an existing site. It could be an acquisition, right? We're continuing to look at a pipeline of acquisitions and how we might -- that might help us expand capacity as well. So a lot of focus and a lot of discussion on capacity here as we go forward.

Our next question comes from the line of Manish Somaiya with Cantor Fitzgerald.

If you can just help us understand how we should think about the C&I margin progression as hyperscale volumes ramp into '27 and I guess, into '28?

Yes. Thanks, Manish. Probably maybe I don't know. York?

I think in the fourth quarter here, as -- the data center business continues to ramp sequentially into the fourth quarter. I did mention that gross margin will moderate sequentially down to that 37%, 38% range. We're obviously still putting our budgets together for '27 in our longer-range plans for '28. But gross margins on a consolidated basis will moderate. But if you just look at the C&I segment, it's -- that's what we're evaluating to see how we can hold. Maybe the C&I segment overall, C&I segment gross margins might moderate a bit, but we'll definitely make it up on the OpEx line and EBITDA margins will definitely improve for the C&I segment. So I think we've said sort of that high teens range over the longer term into 2027...

Yes. I think we still believe that, that's possible. In fact, I think we think it's going to be possible faster. As we ramp the leverage we're going to get on the OpEx is going to be tremendous next year. So I think as York said, we're putting all that together, still -- but we're incrementally positive. We're already seeing some read through here in the early innings.

Still targeting improvement in C&I segment.

Absolutely.

EBITDA margins into that...

But the drop-through and the impact on the overall company, if you go back to our framework from the Investor Day back in March, we're still projecting that kind of low 20s EBITDA margin for -- especially as you scale. I mean, the drop-through is fantastic. So we're incrementally positive, I would say there, that we're going to achieve those numbers quicker than we were originally planning given the size of the data center opportunity and how that's grown much faster than what we had projected back in March.