GENERAC HOLDINGS INC. (GNRC) Q1 2026 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the First Quarter 2026 Generac Holdings Inc. Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kris Rosemann, Director, Corporate Finance and Investor Relations. Please go ahead, sir.

Good morning, and welcome to our first 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 will now turn the call over to Aaron.

Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our first quarter results reflect a return to strong growth as net sales increased 12% year-over-year with healthy gross margin performance and robust operating leverage. Growth during the quarter was led by a 28% increase in our Commercial and Industrial segment sales primarily driven by continued momentum in the data center end market and the Allmand acquisition. First quarter adjusted EBITDA margin of 18.3% expanded significantly from the prior year and was stronger than anticipated, driven by strong execution, favorable sales mix and lower-than-expected input costs and operating expenses. Given our first quarter outperformance, the continued strength in our C&I segment, including an increase in projected global data center revenue, and the expected contribution from the acquisition of Enercon, we are raising our full year net sales and adjusted EBITDA margin outlook this morning. Now discussing our performance by segment in more detail. We're continuing to progress through the final stages of vendor approval with 2 hyperscale data center customers, and we are very confident that we'll be able to secure meaningful future volume commitments from these accounts. As previously disclosed, we received a nonbinding notice to proceed for approximately $600 million in 2027 deliveries with a certain hyperscale customer, and we have begun discussing site level specifications for these projects as we prepare to ramp our supply chain and production to meet this accelerating demand. We believe the successful navigation of these rigorous approval processes will solidify Generac as a top-tier global supplier of large megawatt diesel backup power generators in the years ahead. Importantly, we have also realized significant order activity from both new and existing data center customers, increasing our current backlog to more than $700 million, which does not include the anticipated impact of the notice to proceed opportunity mentioned above and represents an increase of approximately $300 million since our fourth quarter update in mid-February. This backlog growth provides visibility through 2027 even before considering the significant expected contribution from other hyperscale related opportunities and ongoing momentum with non-hyperscale customers. As we prepare for meaningful growth in large megawatt generator shipments in the coming quarters, our new facility in Sussex, Wisconsin, remains on track to begin production in the second half of this year, supporting the expected increase in our domestic generator manufacturing and assembly capacity for these products to more than $1 billion by the fourth quarter. We believe this expanded footprint will allow us to capture an increasing share of the rapidly growing demand for backup power solutions from large data center customers. And together with our international C&I production base, provides us with unique global flexibility and scale to serve this market. Additionally, on April 1, we completed the previously announced acquisition of Enercon, a leading designer and manufacturer of generator enclosures and switchgear. This acquisition enhances our competitive positioning for large megawatt generators by giving us direct access to the design and manufacturing processes that are an important element of the bespoke content included with large megawatt generators. Additionally, our ability to invest in additional capacity for these highly customized genset packages will allow us to solve for a growing industry bottleneck and enable us to better control overall customer lead times for our products. By bringing these packaging capabilities in-house, we expect to expand our margin profile, further improving the profitability for products sold into the markets for these products, including data center applications. In addition, Enercon's expertise in other product categories such as switchgear and packaged electronics controls also enables our participation in interesting adjacent market opportunities, which we are currently evaluating as we fully integrate this business into our C&I segment. During the first quarter, shipments to our domestic industrial distributor channel increased from the prior year and project quoting activity remains solid to start the year. While product lead times for this channel have continued to normalize over the last several quarters, we expect modest growth for the full year, supported by stable near-term end market demand as well as our continuing investments in distribution that are helping to drive market share gains. Order rates from domestic telecom customers improved sequentially during the quarter, providing visibility to better than previously expected growth for the remainder of the year. Our telecom customers continue to invest in further hardening of their networks, as dependence on wireless communications increases and global tower and network hub counts are expected to continue to grow well into the future. Additionally, the evolving telecom and digital infrastructure landscape is expanding our opportunity set with new and existing customers. We are working to leverage our track record of highly engineered solutions, market expertise and customer relationships in traditional telecom applications to capitalize on these opportunities, including data center adjacent applications. Domestic mobile product shipments to both national and independent rental equipment customers exceeded our expectations during the quarter and increased at a strong rate from the prior year. The acquisition of Allmand in January contributed to the strong year-over-year growth and outperformed our prior expectations with respect to both sales and adjusted EBITDA contribution. Many of our rental customers have begun to invest in new equipment as part of a refleeting cycle, and this timely acquisition has both broadened our customer base for mobile products and provided us with additional capacity and flexibility within our domestic manufacturing footprint. Additionally, robust order rates from our existing national rental customers are contributing to our increased overall net sales outlook for 2026. International shipments also increased at a strong rate year-over-year, driven primarily by revenue from products sold to the data center end market, global shipments of our control solutions and the favorable impact from foreign currency. Sales increased across most regions, partially offset by softness in the Middle East and Latin American regions, resulting from geopolitical instability and trade policy uncertainty. With the strong start to the year, we are increasing our full year 2026 C&I segment net sales guidance as a result of the increased expectations across our data center, telecom and rental markets as well as contributions from the Enercon acquisition. This is partially offset by softness in certain international regions as previously mentioned. We now expect C&I segment net sales to increase in the mid- to high-20s percent range, which represents an increase from our prior guidance for growth in the low to mid-20s percent range for this segment. And now I'd like to provide an update on our residential segment for both the quarter and the year. At our Investor Day in March, we introduced Generac Home, a new organizational structure within our residential segment that brings together our home standby, portable generator and energy technology teams into a single group. As our residential backup power and energy technology solutions are increasingly integrated, this combination enables us to better leverage synergies across our product development, supply chain, operations, sales and marketing and customer service capabilities. The unification of these teams will allow us to further streamline our software platforms to better serve our customers as well as accelerate the development of products and solutions to help homeowners solve for the increasing power reliance, resiliency and cost challenges they are facing. Importantly, the efficiencies resulting from this new structure reflect the continued recalibration of our clean energy operating expenses and are expected to enable cost savings that support our projected residential segment adjusted EBITDA margin expansion in the coming years. We've already begun to realize these benefits, as evidenced by the expansion of our residential segment EBITDA margins by nearly 500 basis points as compared to the prior year first quarter, driven largely by lower operating expenses in the current quarter. Looking at our first quarter residential segment results in more detail, home standby generator sales were approximately flat from the prior year with higher pricing offsetting lower volumes as compared to a strong prior year period that included the benefit from an active 2024 hurricane season. The current quarter's performance was slightly ahead of our expectations as we experienced stronger-than-anticipated demand following Winter Storm Fern. This event and the related media coverage preceding it helped drive awareness for our products, resulting in strong year-over-year growth in home consultations for home standby generators and higher shipments of portable generators. However, despite the elevated outage activity from Winter Storm Fern, overall power outage activity for the first quarter was approximately in line with the long-term baseline average. Activations or installations of home standby generators declined as expected from the first quarter of 2025, primarily driven by markets that were impacted by elevated hurricane activity in the second half of 2024. We expect activations will return to growth in the second half of this year, underpinned by our assumption for a return to a more normal baseline average power outage environment as compared to the exceptionally soft outage environment experienced in the second half of 2025. Our residential dealer network expanded further during the quarter and now includes more than 9,500 dealers, representing an increase of approximately 300 from the prior year. Continuing interest in the home standby category from these partners provides us with further confidence in the significant growth opportunity that remains for home standby generators as contractors continue to see value with their involvement in the category. Additionally, as we continue to integrate the teams within our new Generac Home organization, we intend to also unify our distribution networks with the goal of providing homeowners and channel partners greater access to a wider range of home energy solutions with enhanced service and support capabilities. First quarter sales of our residential solar and storage solutions decreased from the prior year as expected following the successful completion of our Department of Energy program in Puerto Rico. Throughout the quarter, we continued to execute against our plan of ramping production of Power Micro, the first Generac branded microinverter product with a contract manufacturing partner here in the U.S. The Power Micro product offering is expected to deliver strong gross margin contribution as sales increase throughout the second half of 2026 and into 2027. The attractive margin profile for these products, together with our ongoing focus on operational efficiencies within the new Generac Home structure are expected to contribute to our longer-term residential segment margin expansion. A significant focus for the Generac Home business is to market and sell our differentiated residential energy ecosystem with Ecobee positioned as the energy management hub of the home. An important metric, Ecobee's connected home count continued to grow in the quarter to more than 5 million homes with service attach rates further increasing and providing us with a growing high-margin recurring revenue stream to complement Ecobee's expanding hardware market share. Profitability continued to improve as well with Ecobee delivering its first positive adjusted EBITDA during the first quarter, which is normally a seasonally softer quarter for these products. We are expecting continued strong growth in Ecobee shipments for the full year 2026 and as a result, we believe the benefits of a scaling top line, together with a strong gross margin profile and disciplined operating expense investment will support continued improvement in profitability into the future. In closing this morning, our first quarter results and increased 2026 outlook provide an early look at the significant earnings growth potential of our business given the dramatic sales increase in our C&I segment, healthy gross margin performance and realization of strong operating leverage. Based on our continued progress in porting multiple hyperscale data center customers, combined with the improved competitive positioning and profitability resulting from the recent Enercon acquisition, our confidence in capturing a growing share of the generational growth opportunity in the data center market has only increased. Additionally, the megatrends of lower power quality and higher power prices remain firmly intact and continue to support long-term growth expectations for our Residential segment, highlighted by the $50-plus billion penetration opportunity that we believe exists for home standby generators. We remain guided by our powering a Smarter World enterprise strategy, and we believe that we are on the cusp of a special moment in the history of Generac as a result of the more balanced growth drivers we're experiencing across our entire business. With that, I'd now like to turn the call over to York to walk through some of the first quarter financial results and our updated outlook in some more detail. York?

Thanks, Aaron. Looking at first quarter 2026 results in more detail. Overall, consolidated net sales during the quarter increased 12% to $1.06 billion as compared to $942 million in the prior year first quarter. The net effect of acquisitions, divestitures and foreign currency had an approximate 4% favorable impact on revenue growth during the quarter. Residential segment total sales increased approximately 1% to $552 million as compared to $549 million in the prior year. This sales increase was primarily driven by higher portable generator shipments due to Winter Storm Fern in January 2026, and partially offset by a decline in energy storage system sales due to the completion of our DOE Puerto Rico program. Home standby generator sales were approximately flat versus prior year as higher pricing was offset by lower volumes due to a strong prior year period that included the benefit from a substantial 2024 hurricane season. Commercial and Industrial segment total sales increased approximately 28% to $510 million from $399 million in the prior year quarter, including an approximate 10% net favorable impact from the combination of acquisitions, divestitures and foreign currency. Favorable FX and the Allmand C&I mobile products acquisition contributed to this inorganic growth, partially offset by 2 small divestitures that closed during the quarter. The core total sales growth for the segment was primarily driven by revenue from products sold to global data center customers. In addition, increased shipments to our domestic industrial distributor and rental channels and higher sales of our control solutions to the global power generation market also contributed modestly to the C&I segment sales growth during the quarter. Consolidated gross profit margin was 38.7% compared to 39.5% in the prior year first quarter. The 0.8% decrease in gross margin was primarily driven by the higher mix of C&I sales in the quarter, partially offset by favorable price/cost realization. As compared to our prior expectations, we experienced better-than-expected sales of our higher margin home standby generators following Winter Storm Fern. This favorable sales mix, together with strong execution and lower-than-expected input costs, supported our first quarter gross margin outperformance relative to our previous guidance. Operating expenses increased $4.6 million or 2% compared to the first quarter of 2025. The increase was primarily driven by higher intangible amortization from the Allmand acquisition. Importantly, we were able to realize strong operating leverage on higher shipment volumes while also capitalizing on operational efficiencies by recalibrating our clean energy spending as part of our Generac Home reorganization. To that end, OpEx as a percent of sales, excluding intangible amortization expense, improved from 27.9% in Q1 of 2025 to 24.8% in Q1 of 2026. Overall adjusted EBITDA before deducting for noncontrolling interest, as defined in our earnings release, was $193 million or 18.3% of net sales in the first quarter as compared to $150 million or 15.9% of net sales in the prior year. As just discussed, the improved operating leverage on higher sales volumes coupled with reduced residential OpEx drove the significant increase in adjusted EBITDA margins versus prior year. Importantly, this represents strong outperformance compared to our prior expectations helping to contribute to our higher full year 2026 guidance that I will discuss shortly. Adjusted EBITDA for the Residential segment was $139 million or 25.1% of total residential sales as compared to $112 million in the prior year or 20.3%. This significant margin increase versus prior year was primarily driven by favorable price realization and operational efficiencies from the reorganization of Generac Home resulting in lower operating expenses, partially offset by higher costs from tariffs and commodity prices. Adjusted EBITDA for the Commercial and Industrial segment, before deducting for noncontrolling interest was $67 million or 13.0% of C&I total sales as compared to $45 million or 11.4% of total sales in the prior year. This margin increase was primarily driven by improved price cost realization, the favorable impact of the Allmand acquisition, and operating leverage on higher shipment volumes. Now switching back to our overall financial performance for the first quarter of 2026 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $73 million as compared to $44 million in the first quarter of 2025. The current year includes a modest noncash loss from the net impact of 2 small divestitures that closed during the quarter as we continue to trim the portfolio of noncore assets. The prior year included a $10 million noncash loss to reflect the change in fair value of our Wallbox investment. GAAP income taxes during the current year first quarter were $23.6 million, or an effective tax rate of 24.4% as compared to $14.2 million or an effective tax rate of 24.3% for the prior year. Diluted net income per share for the company on a GAAP basis was $1.24 in the first quarter of 2026 compared to $0.73 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $106 million in the current year quarter or $1.80 per share. This compares to adjusted net income of $75 million in the prior year or $1.26 per share. Cash flow from operations was $119 million in the current year quarter as compared to $58 million in the prior year first quarter. And free cash flow, as defined in our earnings release, was $90 million as compared to $27 million in the same quarter last year. The strong increase in free cash flow was primarily driven by higher operating earnings and a lower use of cash for working capital as compared to the prior year. From a use of cash standpoint, we closed the Allmand acquisition in January 2026 by funding the $123 million purchase price in cash. Subsequent to March 31 quarter end, we closed the Enercon acquisition on April 1. We funded the $122 million initial purchase price with $77 million in cash and $45 million in stock. Total debt outstanding at the end of the quarter was $1.32 billion, resulting in a gross debt leverage ratio at the end of the first quarter of 1.7x 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 raising our full year 2026 outlook for net sales and adjusted EBITDA given further momentum across certain C&I end markets, the acquisition of Enercon and our first quarter outperformance. As a result of these factors, we now expect consolidated net sales for the full year to increase at a mid- to high-teens rate as compared to the prior year, which includes an approximate 2% favorable impact from the net effect of foreign currency, acquisitions and divestitures. This net sales update compares to our previous guidance of growth in the mid-teens percent range over the prior year. This increased net sales growth expectation is driven entirely by the C&I segment with net sales for this segment now projected to increase in the mid- to high-20% range compared to 2025, an increase from our previous range of low to mid-20% growth as disclosed at our Investor Day in March. Incremental sales from additional data center projects, higher shipments into our rental and telecom channels and the Enercon acquisition are all contributing to this updated guidance for C&I segment net sales. For the full year, significantly higher data center revenue is expected to be the main contributor to our C&I segment organic growth, while the net effect of foreign currency, the Allmand and Enercon acquisitions, and 2 small divestitures that closed in the first quarter of 2026, are anticipated to have an approximate 5% favorable impact versus prior year. Our Residential segment net sales guidance remains consistent and is still expected to increase in the 10% range compared to the prior year. Growth in home standby generators is expected to be the primary contributor to this net sales growth during the year, in particular in the second half of 2026 and given a relatively easier prior year comparison that included a very low power outage environment. Consistent with our historical approach, this guidance assumes a level of power outage in line with the longer-term baseline average for the remainder of the year and does not assume the benefit of a major power outage event during the year. From a seasonal pacing perspective, we now expect first half sales to be approximately 45% weighted and sales in the second half approximately 55% weighted, resulting in second quarter consolidated net sales growth in the approximate 9% to 10% range, driven entirely by the C&I segment. Year-over-year net sales growth is expected to accelerate in the second half of the year, given expected continued data center strength and an easier prior year comparison for the residential segment that included very low power outage activity. Looking at our updated gross margin expectations for the full year 2026. We now expect gross margin percent to increase approximately 50 basis points from our previous expectations, resulting in full year 2026 gross margins in the 38.5% to 39.5% range. This improved gross margin outlook is driven primarily by our first quarter outperformance and the margin accretive impact of the new Enercon acquisition. From a seasonality perspective, we now expect gross margins to be more level loaded throughout 2026. Importantly, this updated guidance excludes the future impact of any potential tariff recovery as a result of the recent Supreme Court ruling related to EPA tariffs. Additionally, our outlook assumes that the removal of the EPA tariffs will get fully offset by a new tariff framework made up of incremental section 122, 232 and 301 tariffs. As a result, and given that the trade policy landscape remains dynamic, our assumptions around overall tariff rates remain consistent with our prior guidance. Given the factors outlined in our net sales and gross margin update, we are increasing our guidance range for adjusted EBITDA margins to 18.5% to 19.5%. This compares to our previous guidance range of 18.0% to 19.0%. We expect second quarter adjusted EBITDA margins to increase modestly relative to second quarter 2025 levels in the 18% range before improving sequentially in the back half of the year, reaching approximately 20% in the fourth quarter of 2026. This sequential second half adjusted EBITDA margin improvement is projected to be driven primarily by stronger operating expense leverage on seasonally higher sales volumes in the second half of the year. As is our normal practice, we will also provide 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 expected to be between 24.5% to 25.0%. We now expect interest expense to be approximately $65 million for full year 2026 down from $65 million to $69 million previously expected, assuming no additional term loan principal prepayments during the year. Lower borrowings during the year are the primary driver for this reduction in interest expense guidance. Our capital expenditures are still projected to be approximately 3.5% of our forecasted net sales for the year, slightly elevated from historical levels as we continue to invest in incremental capacity and execute other projects to support future growth expectations, particularly for C&I data center products. Depreciation expense is now forecast to be approximately $108 million to $112 million in 2026, an increase from $104 million to $108 million previously expected, primarily due to slightly higher CapEx guidance and recently closed acquisitions. GAAP intangible amortization expenses in 2026 is now expected to be approximately $112 million to $116 million during the year, up from $108 million to $112 million previously expected primarily due to updated assumptions around recently closed acquisitions. Stock compensation expense is still expected to be between $54 million to $58 million for the year. Consistent with prior guidance, operating and free cash flow generation is expected to be weighted toward the second half of the year in 2026, resulting in projected free cash flow generation of approximately $350 million for the full year 2026. Our full year weighted average diluted share count is still expected to be between 59.5 million and 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 during the year. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

Our first question comes from Tommy Moll with Stephens.

Aaron, you referenced the $600 million nonbinding notice to proceed, which was also discussed at the Investor Day. I'm just curious if you can share anything about how the product testing and pilots are going there. And then related, the accompanying service capabilities don't get a ton of air time, but you did mention it at the Investor Day. And I'm just curious, is that also potentially a gating factor here? Do you need to staff up a lot with Generac folks to enable those capabilities?

Yes. Thanks, Tommy. So yes, the notice to proceed that we talked about at Investor Day and we mentioned again this morning, that's from one of the hyperscale customers that we continue to negotiate with and maybe the best way to characterize it, Tommy, is if this was a 100-yard dash, we're like 99 yards of the way done with the race. We've got one yard left. We're in the final stages with the final agreement. There's a process; it's a gauntlet. I mean, there's literally a hurdle for every step along the way here. But everything from product quality to supply chain visits, our factory visits, the audits that they put us through internal and external—we continue to march through the process and we're passing all of those gates as we go. And we really are at the very last yard of this race, this 100-yard race. So we feel really good about it. And as such, we're in discussions about the specifics around certain sites, which sites would we see next year as part of that notice to proceed, and we're preparing accordingly. On that point, maybe transition to the second part of your question which was service. This is obviously an area that as we deploy equipment to these large project areas, we need to make sure we're appropriately staffed. I think one of the great things about our industrial distribution network is over the last 5 or 6 years, we've been in—we've talked about the investments we've made there. Some of those investments have come in the form of acquisitions. And today, we own about 30% to 35% of our industrial distribution network here in the U.S. And we continue to work with our partners on staffing to appropriate levels to serve the market. I mean, obviously, the ability to react to any kind of service situation is critical. And again, I think we're in a really good spot there given our own ownership and our appetite to continue to invest and hire people as needed as the sites get deployed.

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

As you look to scale hyperscale demand, how are you derisking your engine supply chain? And what sort of multiyear capacity guarantees have you secured? And maybe more specifically, any exclusivity frameworks you have to ensure that the supply remains an advantage to Generac?

Yes. Thanks, George. Obviously, an important question in this whole effort around data centers is supply chain based. And it's not just the engine, although the engine, of course, is critical, but it's alternator supply, it's cooling package supply. It's the end packaging of the product, which we're addressing—with our Enercon acquisition that we closed on April 1, we're taking a big step forward there trying to solve for what is becoming a fast-becoming bottleneck in the industry around finished packaging. Even if we can get great lead times on the unpackaged product, it doesn't help us if the packaging phase is constrained. So that was a big part of the thesis, our calculus in acquiring Enercon, and we look to expand that operation as well pretty aggressively here so that we can control those lead times. With respect to engines, we have a multiyear agreement in place with our current large diesel engine supplier. That agreement allows us to have exclusivity here in the U.S., with a couple of small exceptions for some legacy customers, but nothing that I would say any of those small customers are going to be able to get through the vendor approval gauntlet with hyperscale customers. Engine supply, we feel really good about our engine supplier's capacity and their ability to not only produce at the kind of scale that is going to be needed with the volumes that we're talking about with these hyperscale customers and non-hyperscale customers, but also their appetite to continue to invest and the global footprint they have and the ability to expand that footprint as needed. So we're talking with this engine partner about potential production of these engines right here in the U.S. at this point. So it might even be something co-located or co-invested with us on some kind of joint investment. We're not exactly sure at this stage. Right now, there's plenty of capacity in place. So we feel really good about that. And we're really working to solve kind of the next level of capacity constraints in supply chain around alternators, cooling packages. We're multi-sourcing those critical components as well. And we feel like the supply chain for those other critical components, if they don't already have the capacity added, they have really good plans to add it as we enter 2027 and beyond. So at this stage of the game, we feel like we're in pretty good shape. But supply chain is something that's not 100% inside of our control, so obviously that's something we have to keep a close eye on. I'm very pleased with our team's engagement there. It's an area of strength for Generac historically—working with supply chain, developing deep partnerships, focusing on capacity adds where needed and getting ahead of it. We don't wait to react. We try to be proactive. And so I feel like we're covering those bases as well as we can today. And we're basically coiling the spring here as we get ready to get into the fourth quarter, back half of this year and really into 2027, driving to the next level with the data center products.

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

So on the non-data center side of the C&I piece, maybe just talk us through what you're seeing from a sequential perspective and then how the rest of the year should play out on the core rental, telecom and then traditional C&I categories. And then related, layer in how the new product categories from a power range that you're bringing to bear, how those are being received early in those markets?

Yes. Thanks, Mike. The balance of our C&I business is also performing well. As we indicated, over the last couple of quarters, we were starting to see signs of nice recovery or growth in telecom, which really began in earnest in the fourth quarter of last year and has continued to pick up steam here in early 2026, really outpacing expectations on order volume giving us good confidence as part of the guidance raise here for the balance of 2026. A meaningful portion of the C&I segment's growth is coming from telecom. The other area is rental. Driving by one of these data center construction sites—there's actually one going up right next door to our Beaver Dam manufacturing plant—and when I was taking a drive through that last year, I was struck by just how much of our mobile equipment and the type of equipment that we build is on that site: light towers, mobile generators, for temporary power, temporary lighting and temporary heat even in the cold Wisconsin winters to keep construction going and construction does go 24/7 on these sites. So it's really no surprise that what we're seeing and hearing from our rental customers, starting with our national rental customers, is that the refleeting cycle really has begun. We've been waiting on it to begin about 18 months; it's been on the backside of that, and it's starting to kick up. Fortuitously, we had been negotiating for the Allmand acquisition and we closed that deal on January 1, and the timing couldn't have been better. We've seen just a really nice response there. That business has outperformed on top line and bottom line. The combination of that business with our historical focus on national rental account customers—which typically have a lower gross margin profile because they buy in bulk—was complemented well by Allmand, which was focused on the independent rental channel. It was a great fit from a distribution standpoint, and it also gave us some much needed capacity. They have a nice big factory in Nebraska. And so the combination of our factory here in Wisconsin and that factory in Nebraska give us some great capacity for serving a growing market. Our core C&I business, the industrial distributor business, has been good. Our quote rates remain pretty strong. As we've discussed over the last several quarters, we've been working down our backlog there and shortening up our lead times, and we've caught up there, and continue to grow, albeit not at the same rate we were growing previously for those core markets. Regarding the larger machines and bringing those to market through our traditional channels, that's been very well received. The sales cycles are very long, especially in the traditional market, so we've only started to realize the first couple of orders coming through the pipeline here. But just this week, we had an engineering symposium with over 200—about 220—engineering firms represented and it was an opportunity for us to talk about the expanded product line. One of the shortcomings of Generac historically in the C&I markets has been our product line stopped at 2 megawatts. So now having a product line that goes to 3.2, 3.25 megawatt and then we've got an expansion of that even further to 4 megawatts on the drawing board makes us a full-line provider and it really takes away any final excuses that specifying engineering firms may have had not to specify us by name, either because they were concerned that they couldn't specify us on certain specs because we didn't have a full product range. That's been completely eliminated now. So really good receptivity there, and we're expecting meaningful contributions from that product range in our traditional markets in the years ahead.

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

This is David Tarantino on for Jeff. Maybe switching to residential. Could you give us some color on the strength in margins here? It sounds like there was some favorable mix here. But could you parse out anything unique to this quarter? And maybe how sustainable this level of margin is moving forward?

Yes. Maybe I'll start and then York can chime in, too. The margin improvement there was pretty dramatic. It was 500 basis points of EBITDA margin expansion over the prior year. A combination of two things: primarily better cost control as we have brought together our teams under the Generac Home organization, which has helped us leverage team members more efficiently across that business. We built a world-class team in our Energy Technology business, and the market has shifted based on policy and persistently high interest rates, which have been headwinds to that market. We believe that long term that remains a good business opportunity as retail energy prices continue to rise. The reality is it's softer right now because of where the market is. Being able to leverage that world-class team and move them into our traditional residential business—consumer power, portables and home standby—has been a great move. We've been able to get early wins on cost containment. That's the primary driver for a big chunk of the improvement in EBITDA margin, and you should expect to see that going forward. We also had some gross margin improvement there as well. I'll let York chime in a little bit around the details.

Yes. Like Aaron said, probably about 3% of that 5% improvement was the OpEx side from the Generac Home reorganization that Aaron described, and the remainder is the gross margin improvement that we saw within residential. We did see strong demand following Winter Storm Fern and a little bit of favorable mix there relative to prior year. We still continue to see positive price/cost realization in the quarter. If you recall, we rolled out pricing in more Q2 of last year due to higher input costs and tariffs, and then we rolled out additional price with our next-gen home standby in the second half of last year as well. So the combination of the higher input costs and the rollout of the new model allowed us to realize additional pricing, and we saw that come through in the quarter. So still favorable price/cost in the residential side that we're pleased with.

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

I just wanted to ask about the standby business at the moment. I think I gathered that you said it was flat in the first quarter. And then I heard a comment that the second quarter growth would be driven entirely by C&I, but I think you're still modeling for the year, I don't know if you restated it today, but you're thinking like mid-teens growth for the standby business for the full year in '26. Is there a significant ramp in the second half that you're expecting? I know there's easy comps with the weather. But can you just talk about if there is a ramp and what drives that?

I'll start. Winter Storm Fern did help some of the residential side in Q1. We're not modeling any unusual weather for Q2; we're modeling baseline weather. Normal seasonality would have the second half sequentially increasing relative to the first half. When you're looking at year-over-year growth in the second half, you should see significant home standby growth because we just didn't have a strong season in the second half of 2025. So the roughly 15% home standby growth you're referring to, or the overall 10% for the residential segment, will come largely in the second half.

And to add, a good chunk of that is price as well—about half the growth in 2026 for home standby is price with the new product line we introduced at higher price points. The return to baseline outage assumptions is also a major driver for the second half. We started the year well with Winter Storm Fern providing a nice kickoff; we saw a lot of interest in sales leads in Q1. We'll see how conversion looks in Q2 as the first real test of our lead pool system. We're modeling Q2 off of our historical close rates when we get an influx like that. But with the easy comps in the back half and return to baseline outage activity, we feel like we'll see meaningful growth in home standby in the second half.

Our next question comes from the line of Stephen Gengaro with Stifel.

Two connected topics for me. The first is how should we think about C&I margin progression, given the strong growth that we're seeing? And attached to that, based on what you're seeing in order flow and you talked about the nonbinding notice, do you think growth rates in that business can remain in the teens plus into 2027?

Thanks, Stephen. On the growth rate, we put aggressive targets out at Investor Day, and the near-term growth rates are even better given the incremental nature of moving from a smaller base to the $700-plus million backlog we talked about. Converting that backlog over this year and into next, plus the hyperscale opportunities beyond what's in the backlog, provides meaningful visibility. The $600 million notice to proceed is a good example of the volumes that are possible. That said, growth is linked to data center CapEx assumptions. Where you land on those assumptions will determine multi-year growth. Our conversations across the ecosystem—the data center customers, developers, and suppliers—indicate that demand is likely to be a multiyear run as AI and compute needs expand. We feel good about longer-term growth rates, and we are preparing capacity accordingly.

To follow up on growth guidance, at Investor Day we guided a 3-year CAGR for our C&I segment in the low to mid-20% range. Given the visibility we have from the notice to proceed and the $700 million backlog, we feel good about the 2027 outlook. On margin progression, you're starting to see it in Q1. The Enercon acquisition, which started April 1, should give us about a 50 basis point lift to our C&I segment gross margins with the vertical integration benefits. As we grow at low to mid-20% CAGR over the next three years, we expect to leverage OpEx infrastructure and see more mid- to high-teens EBITDA margins in the out years, into 2028.

Our next question comes from the line of Praneeth Satish with Wells Fargo.

The release references a potential multiyear hyperscale agreement. Is that referring to the same customer behind the $600 million notice to proceed that was discussed at the Investor Day, potentially extending that order? Are you signaling a separate hyperscale opportunity? And then very quickly, can you confirm whether you've included the impact of the new Section 232 rules on steel in the guidance?

I'll take the first part. We're in conversation with two hyperscale customers in particular, and both would present multiyear opportunities for us. The agreements are structured with a master supply agreement, and then once approved, you can receive POs. Because planning cycles are long and lead times have been stretched in our industry, some planning already looks into 2028. Our current visibility is clearer into 2027, and we hope to have more clarity as we progress through the final stages with these two customers. The customer with the notice to proceed is the one closest to the finish line; the other is close behind with a few more steps to work through. Both have significant volumes that we've been preparing for, and we're already thinking about the next leg of capacity growth given these opportunities. We are accelerating our Sussex facility ramp and evaluating further capacity additions if needed to support winning multiple accounts.

On the Section 232 and tariffs question: with the EPA reciprocal tariffs being ruled on, there could be a savings, but with Section 122 temporarily in place and the potential for 232 and 301 tariffs, we've assumed any EPA tariff savings will be offset by those other tariffs. We've modeled the guidance to be consistent with our previous tariff assumptions—so not worse, not better—given the uncertainty. That is a conservative and consistent approach in the outlook we've presented today.

Our next question comes from the line of Christopher Glynn with Oppenheimer & Co.

Just wanted to go back to the residential margin upside. Curious—was that speed of the unification benefits or the scope of the cost structure opportunity? It sounds like maybe the 3 percentage points OpEx was a one-time or a step change and whether that's sustainable. Also trying to tie into the 50 basis point boost to the EBITDA margin guidance—what gives you confidence that the Q1 result is representative given seasonality?

If you look at the updated margin guide, the extra 50 basis points in our margin outlook comes from the Q1 outperformance and the margin accretion from the Enercon acquisition, which starts April 1. We largely held the rest of our margin profile consistent with prior guidance and the tariff assumptions I just mentioned. There's a mix element from C&I growth that would typically mix down residential contribution, but we've baked in a little bit of improvement to offset that. So outside of the Q1 beat and Enercon contribution, the rest of the year remains largely consistent with our previous margin profile assumptions.

On the residential OpEx point, unification has happened quickly and it's producing tangible benefits. We're also on the backside of some new product introductions like Power Micro and Power Cell ramping, so the heavy development spend from last year is tapering. On the software side, improved productivity in coding and development is helping reduce headcount intensity. Seasonally, you should expect OpEx dollars to increase in the higher-volume seasons, but the top line also increases in the second half. We like what we're seeing from Generac Home so far and we're getting meaningful leverage, but we're still integrating, so it's not complete; more benefits should come over time.

Our next question will come from the line of Julian Dominsmith with Jefferies.

This is Tanner James on for Julian. Maybe just a question on what you're seeing for pricing momentum for large diesel gensets. You spoke to the lead time advantage relative to competitors, you're talking about additional capacity growth and investment. Just prospectively, how should we think about sequential pricing excluding tariffs here into 2027, 2028, 2029 timeframe?

Thanks, Tanner. When we put our original business case together for large megawatt gensets, historical ASPs were lower because the market was less constrained. As supply constraints emerged, pricing improved and that has improved the overall business case. For data center customers who buy in large quantities, net margins may be lower compared to traditional markets, but they are much improved relative to historical levels. Looking forward, we expect lead times to remain constrained for the next several years, underpinned by engine supply constraints. Competitors are adding capacity, but it takes time to bring that online. Over time, ASPs may normalize, but we believe the opportunity to increase vertical integration and capture more packaging value—especially after Enercon—will support gross margins. So even if ASPs moderate, we expect to maintain a healthy gross margin profile on these products for the foreseeable future.

Our next question comes from the line of Vikram Bagri with Citi.

I have two quick questions, one on C&I and one on residential. On C&I, are you hearing air quality permits for diesel generators as a gating factor or a reason for delay in final orders? You talked about potential for the next leg of capacity growth—where do you see the gating factors in capacity growth? You've acquired Enercon, so would it require any more M&A to expand capacity beyond what you have? And then on residential, you've seen multiple benefits from the Generac Home expense recalibration—have you accelerated the Energy Technology breakeven timeline at all, any update on that?

Thanks, Vik. On permitting, air and other environmental permits have become more challenging as communities evaluate data center impacts on air, water and energy. There are solutions—for diesel backup generators, options include Tier 4 certified engines and after-treatment packages to improve emissions profiles, and in some markets those are required. We have projects where we are discussing site certifications that will include after-treatment or Tier 4 products, so it's solvable and not a showstopper. On capacity, we're already looking at ways to expand capacity beyond what we've announced. We need to think bigger—$2 billion or $3 billion in capacity rather than $1 billion—and we're evaluating whether that comes from expanding existing footprints (including Sussex and Enercon), greenfield builds, acquiring existing facilities or M&A to add capacity. Everything is on the table and we'll act as these opportunities firm up. On residential energy technology, we remain committed. We have a competitive microinverter in market and are scaling domestic production. We're exploring prepay lease products and continuing channel development. The market is bumpy near term—2026 into early 2027—but the long-term fundamentals are favorable if retail electricity prices rise and storage costs decline. We remain well positioned and focused on capturing share as the market recovers.

The breakeven timeline for the Energy Technology business remains intact for 2027.

Our next question comes from the line of Keith Housum with Northcoast Research.

Just in terms of the telecom and the national rental trajectory for both of those businesses, are these more refresh opportunities or growth within these markets? And then traditionally, when you guys have had an upward cycle, how long do these cycles generally last?

Thanks, Keith. On telecom, cycles are multiyear and often follow project build-out. Much of the current opportunity relates to new site builds and some retrofitting, primarily outside plant backup for towers. We're primary supplier to the Tier 1 wireless carriers and we provide customized solutions with strong service support. It's similar in approach to the data center work—working with engineering and operations to create bespoke solutions and then building them at scale—though on a different scale and scope. Telecom is typically a multiyear run and we feel good about it. On mobile rental, the current environment is a refleeting cycle—the independent and national rental customers are replacing older equipment and that typically comes in cycles of a year or two on then a year or two off. Those cycles are driven by utilization, residual values and the economics of their fleets. Refleeting can also be influenced by energy sector activity; we've seen that in the past. Right now, refleeting has picked up and our Allmand acquisition timed well to capture that demand. So both markets are showing durable activity and we believe the cycles will play out over multiple years.

And I'm showing no further questions at this time. I would like to hand the conference back over to Kris Rosemann for closing remarks.

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

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.