GNRC Earnings Call

OperatorGood day, and thank you for standing by. Welcome to the Second Quarter 2026 Generac Holdings, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press *11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press 11 again. 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 of Corporate Finance and Investor Relations. Please go ahead.

Kris RosemannGood morning and welcome to our second 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 certain 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.

Kris RosemannI'll now turn the call over to Aaron.

Aaron JagdfeldThanks, Kris. Good morning, everyone, and thank you for joining us today. Our second quarter results reflect continued momentum in our commercial and industrial segment, which drove 11% growth in overall net sales from the prior year. Highlighting the quarter was revenue from products sold to the data center market, which underpinned a 29% increase in C&I segment sales on a year-over-year basis as well as the return of solid growth for sales of our home standby generators during the quarter. Consolidated adjusted EBITDA margins also expanded during the quarter to 24.8%, primarily due to tariff refunds and strong operating leverage. During the quarter, we made significant progress in solidifying our position in the data center market as we recognized more than $100 million of revenue and secured 2 multiyear supply agreements with hyperscale customers. The first agreement, which we announced in early June, now includes the— now includes commitments totaling nearly $700 million for product to be delivered in 2027.

Aaron JagdfeldIn late June, we officially signed our second hyperscale supply agreement, and we are now in the final stages of negotiations with this customer on terms, conditions, volumes, and timelines for 2027 and 2028 deliveries. These agreements provide ongoing validation of our status as a top-tier supplier of C&I backup power generators and reaffirm our strong reputation as an engineering-driven organization with a unique focus on backup power, a customer-centric approach, and global service and production capabilities. With the addition of the first hyperscale customer, our backlog for products sold to the data center market now stands at $1.6 billion, representing new orders of approximately $1 billion over the last 90 days. Importantly, this backlog does not include expected orders resulting from the second hyperscale supply agreement, which we believe represents significant potential upside and further visibility to future volume growth in the years ahead.

Aaron JagdfeldIn addition to the hyperscale supply agreements we finalized, demand remains robust across a broad range of data center customers with strong order growth from new and existing co-locator customers. As our order book continues to build, we now expect to recognize nearly $450 million in data center revenue— related revenue for the full year 2026. This represents an increase to our previous expectation for revenue from the data center market in 2026, and the higher backlog also provides much greater visibility to accelerating CNI sales growth into 2027. To address this rapidly growing demand for our products, we are continuing to aggressively invest in production and packaging capacity for our large megawatt generators. During the second quarter, we continued to ramp production in our existing domestic and international facilities and sped up our efforts to build out our recently acquired large megawatt production facility in Sussex, Wisconsin.

Aaron JagdfeldWe are now on track to begin production in Sussex by the end of the third quarter, which is ahead of our initial target. Additionally, we continue to invest in vertical integration for large megawatt generators during the quarter as we work to increase our value-added content for these products, thereby allowing us to maintain shorter overall lead times versus the industry and to improve the overall profitability —of large megawatt packages. On April 1st, we completed the acquisition of Enercon, a leading provider of generator enclosures and specialty packages, and we recently closed on the purchase of a second facility in Belvidere, Illinois, which is expected to be operational in the first quarter of 2027, thereby significantly expanding our packaging and metal fabrication capacity for large megawatt generators. Importantly, we've also identified a number of additional investment opportunities within our existing and planned global footprint— that will dramatically expand our capacity for large megawatt generators in the years ahead.

Aaron JagdfeldAs a result, we believe we now have a path over the next 12 months to triple our production capacity from our original year-end 2026 target of 1.25 billion. The overall investments we are making to increase capacity underscore our confidence in the tremendous potential upside we see for large megawatt generators in the next several years. Now looking at our C&I segment results for the quarter in more detail. Second quarter shipments to our domestic industrial distributor channel declined from the prior year, which reflected a strong comparable period in 2025 in which we significantly reduced our lead times for C&I products. Despite lower shipments, orders from our industrial distributors remained strong through the first half of the year, hitting a record high in the second quarter, signaling solid demand across tradition— our traditional C&I markets. Additionally, we continue to see robust quoting activity for our large megawatt generators in non-data center applications offered through our independent distributor channel.

Aaron JagdfeldSales to our domestic telecom customers grew at a strong rate in the second quarter as our national wireless customers continued to harden their networks. However, full year shipments are now expected to be flat from the prior year, primarily as a result of a reduction in orders from a certain telecom customer as they work through a backlog of their generator installations. Longer term, we expect that demand for this channel will continue to be driven by increasing dependence on wireless communications, as well as the continued evolution of telecom and digital infrastructure, including data center adjacent applications. Mobile product shipments to our national and independent rental equipment customers also grew at a strong rate during the second quarter on an organic basis, and contributions from the Allmand acquisition exceeded our prior expectations. Allmand continues to outperform on both sales and adjusted EBITDA margin contribution, further validating the strategic rationale and the timing of this acquisition.

Aaron JagdfeldLooking ahead, we continue to expect strong full-year growth in shipments of both Generac and Allmand mobile products as rental customers continue to refresh their fleets to capture structural demand trends tied to the significant pipeline of mega projects such as data centers. Shipments of commercial and industrial battery energy storage systems grew in both domestic and international markets during the quarter. Our global backlog for these products has grown meaningfully, and domestic orders for multi-asset solutions have already exceeded full year 2025 levels through the first half of 2026. While still a relatively nascent market for Generac, the recent momentum and demand we are experiencing further reinforces our view that these energy technology solutions represent a meaningful long-term opportunity as a growing number of CNI customers look for multi-asset backup power solutions that can help to address the growing issues resulting from lower power quality and higher power prices.

Aaron JagdfeldOur international sales increased at a strong rate year-over-year, driven by data center shipments, control solutions, and battery energy storage products, partially offset by the June 1st divestiture of our gas engine controls business. Along with softer performance in certain regions globally, including the Middle East. We continue to expect solid international growth in 2026 outside of the data center end market, highlighting our diversified geographic footprint and our product breadth. Overall, we are increasing our full year 2026 CNI segment net sales growth guidance as a result of higher expectations for global data center product shipments and the continued strength in mobile products. CNI segment net sales are now expected to grow in the low 30s percent range for 2026, as compared to the mid to high 20s percentage range previously. The ongoing momentum in our CNI segment in 2026 now puts us on a path to exceed the long-range planning targets that we previously disclosed at our Investor Day earlier this year.

Aaron JagdfeldNow looking at our second quarter residential segments in more detail— residential segment results in more detail. Overall residential segment sales were down 2% in the quarter as compared to the second quarter of 2026, with growth in home standby generator sales mostly offsetting lower shipments in other residential products including portable generators and energy storage systems. Importantly, residential adjusted EBITDA margins expanded significantly in the quarter, reflecting the benefit from tariff refunds, a higher sales mix from home— the home standby category, the favorable impact from price-cost dynamics in the quarter, and continued operating expense discipline around our residential energy technology solutions portfolio. Home standby generator sales returned to solid growth in the quarter despite outage activity declining from the prior year and coming in below the longer-term baseline level.

Aaron JagdfeldThe softer power outage environment did, however, impact our domestic portable generator shipments in the quarter as they were lower on a year-over-year basis. While outage activity remained below our long-term baseline average during the quarter and declined significantly from the prior year, underlying demand in the home standby category remained resilient as in-home consultations were up on a year-over-year basis, driven by the Midwest region following multiple recent storms in that part of the country. The increase in IHCs also provides further evidence of our well-established demand creation efforts as IHC intensity or the IHCs per outage hour, remained strong in the second quarter. Our residential dealer network also expanded again during the quarter and now includes approximately 9,700 dealers, representing an increase of nearly 400 new partners from the prior year. Continuing interest in the home standby category, particularly against the backdrop of multiple quarters of average to below average outage activity, 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.

Aaron JagdfeldMarket adoption of our next-generation home standby product line that we introduced in late 2025 has been very strong, and we have seen excellent traction for our market-leading 28-kilowatt air-cooled generator, as the uptake of the high end of our product line has been faster than we had expected, driven by the significantly lower cost of the 28-kilowatt unit when compared to similarly, similarly sized liquid-cooled units. In addition to growth in our home standby sales in the period, our team at ecobee continued to add to their growing track record of strong execution as they posted another period of profitable top-line growth in the second quarter. Ecobee's connected homes count also increased at a, at a mid-teens rate from the prior year, surpassing 5.25 million homes during the quarter. And service attachment rates accelerated as well as consumers look for ways to offset rising energy bills without sacrificing comfort or convenience.

Aaron JagdfeldAs expected, sales of our residential energy storage systems were lower in the quarter as compared to a strong second quarter of 2025 that included the benefit of our DOE program in Puerto Rico, which was completed at the end of 2025. The more challenging policy environment has created broader weakness around the residential solar and storage markets, impacting demand for this part of our residential products portfolio. Although the market for these products has softened significantly here in 2026, We continue to believe that the increasing prices that homeowners pay for electricity will result in a residential solar and storage market that will resume growth over time. As a result, we continue to execute our Generac Home strategy, including the ramp of PWRmicro, our first Generac-branded microinverter product for the residential solar market. We are currently ramping our production capacity and distribution capabilities for PWRmicro and expect growth in these products in the second half of the year.

Aaron JagdfeldLooking ahead, we now expect our Residential segment sales to increase in the high single-digit range on a year-over-year basis for the full year 2026, a modest reduction from our previous guidance, primarily reflecting a continued soft power outage environment and the impact of affordability concerns amongst certain portions of our customer base. We remain focused on our disciplined approach to operating expense investments in the Residential segment and we continue to expect significant year-over-year EBITDA margin improvement for this segment in 2026. In closing, our second quarter results and our updated 2026 outlook reflect the tremendous momentum in the CNI segment and the resiliency of our residential segment. The significant growth in our data center backlog with both hyperscale and non-hyperscale customers provides further confidence in our ability to serve this massive and still rapidly growing market.

Aaron JagdfeldAdditionally, the visibility to our multi-year growth outlook is clearly exceeding our previous expectations, representing a generational growth opportunity that is within the core competencies of our business. Given the megatrends around AI infrastructure, lower power quality, and higher power prices, we believe we are extremely well positioned to success— for success through continued disciplined execution of our Powering a Smarter World enterprise strategy. With that, I'll turn the call over to York to walk through our second quarter financial results and our updated outlook in more detail. York.

York RagenThanks, Aaron. Looking at second quarter 2026 results in more detail, overall net sales during the quarter increased 11% to $1.17 billion as compared to $1.06 billion in the prior year second quarter. The net effect of acquisitions, divestitures, and foreign currency had an approximate 2% favorable impact on revenue growth during the quarter. Commercial and Industrial segment total sales increased approximately 29% to $556 million from $431 million in the prior year quarter, including an approximate 6% net favorable impact from the combination of acquisitions, divestitures, and foreign currency. The core total sales growth for the segment was primarily driven by ramping revenue from products sold to the global data center market. In addition, increased shipments to rental and telecom channel customers were more than offset by a decrease in shipments to the domestic industrial distributor channel as we were improving lead times to these customers in the prior year quarter.

York RagenResidential segment total sales decreased approximately 2% to $621 million as compared to $635 million in the prior year quarter. This slight sales decrease was primarily driven by lower energy storage system shipments in the quarter due to the Department of Energy program in Puerto Rico, which was completed at the end of 2025. In addition, we also saw a decline in portable generator shipments compared to the prior year given the lower power outage environment. Partially offsetting these declines, home standby generator sales returned to solid growth during the quarter, primarily due to increased price realization and slightly higher volumes.

York RagenAs disclosed in our earnings release, our second quarter results included an approximate $71 million pretax impact related to tariff refunds, which is reflected in gross margin, net income, adjusted net income, and adjusted EBITDA. Overall gross profit margin on a consolidated basis was 44.5% compared to 39.3% in the prior year second quarter. The increase was primarily driven by tariff refunds, which contributed approximately 6% to gross margin growth during the quarter. Additionally, unfavorable sales mix and higher input costs were partially offset by favorable price realization.

York RagenOverall operating expenses increased $6.4 million or 2% compared to the second quarter of 2025. The increase was primarily driven by increased operating expense investments to support future CNI growth and higher intangible amortization, partially offset by lower legal expenses in the quarter— in the current year quarter.

York RagenWe continue to expect operating leverage to be an important factor over the long term helping to drive adjusted EBITDA margin expansion as we remain focused on investments in key growth opportunities while realizing operational efficiencies across the organization.

York RagenOverall adjusted EBITDA before deducting for noncontrolling interest as defined in our earnings release was $291 million or 24.8% of net sales in the second quarter as compared to $188 million or 17.7% of net sales in the prior year. The significant increase in adjusted EBITDA margins versus prior year was primarily driven by a 6% impact from tariff refunds. When excluding the impact from tariff refunds, adjusted EBITDA margins increased by approximately 1% from the prior year due to strong operating leverage on higher sales volumes, partially offset by unfavorable sales mix given higher C&I sales.

York RagenAdjusted EBITDA for the Commercial Industrial segment, before deducting for noncontrolling interests was $81 million or 14.6% of CNI total sales as compared to $53 million or 12.4% of total sales in the prior year. This margin increase was primarily driven by the impact from tariff refunds of approximately 2% as, as well as the net favorable impact of acquisitions and divestitures and improved operating leverage. Offset by an unfavorable sales mix shift and strategic operating expense investments to support future growth.

York RagenAdjusted EBITDA for the Residential segment was $215 million, or 34.7% of total Residential sales, as compared to $146 million in the prior year, or 23.1%. This significant margin increase was primarily driven by tariff refunds, which impacted margins approximately 9%, as well as favorable sales mix and operational efficiencies resulting in lower operating expenses. Now switching back to our overall financial performance for the second quarter of 2026 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $143 million as compared to $74 million for the second quarter of 2025. GAAP income taxes during the current year's second quarter were $46.7 million, or an effective tax rate of 24.6%, as compared to $15.4 million, or an effective tax rate of 17.2% for the prior year. The increase in effective tax rate was primarily related to a nonrecurring favorable discrete item in the prior year period related to a business disposition that did not repeat in the current year period.

York RagenDiluted net income per share for the company on a GAAP basis was $2.40 in the second quarter of 2026 compared to $1.25 in the prior year. The current year quarter includes an approximate $0.90 impact from tariff refunds on an after-tax basis.

York RagenAdjusted net income for the company, as defined in our earnings release, was $174 million in the current year quarter, or $2.91 per share. This compares to adjusted net income of $97 million in the prior year, or $1.65 per share. Cash flow from operations was $121 million in the current year quarter as compared to $72 million in the prior year second quarter. And free cash flow, as defined in our earnings release, was $63 million as compared to $14 million in the same quarter last year. This strong increase in free cash flow during the quarter was primarily driven by higher operating earnings, cash receipts from tariff refunds and lower cash tax payments in the current year quarter. These items were partially offset by a greater use of cash for working capital as compared to the prior year period. Total debt outstanding at the end of the quarter was approximately $1.33 billion, resulting in a gross debt leverage ratio at the end of the second quarter of 1.5x on an as-reported basis, which is within our target gross debt leverage range of 1x to 2x adjusted EBITDA.

York RagenWith that, I will now provide further comments on our updated outlook for 2026. As disclosed in our earnings release this morning, we're maintaining our full year 2026 outlook for overall net sales as our growing backlog for data center customers is offsetting the impact of a modestly lower residential outlook. As a result, we continue to expect consolidated net sales for the full year to increase in 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. Given the momentum in our data center business as well as ongoing strength in the domestic rental channel, more than offsetting the impact of an immaterial divestiture, we are increasing our CNI segment net sales growth guidance to the low 30s percent range compared to 2025. This is an increase from our previous guidance in the mid to high 20s percent range.

York RagenAs Aaron discussed, Given the lower baseline power outages in the second quarter, the current macro environment driving affordability concerns, together with a small divestiture that closed during the second quarter, we are modestly lowering our previously expected Residential segment net sales growth outlook for the second half of the year. We now expect full-year Residential segment net sales to increase at a high single-digit rate as compared to the prior year, a relatively small reduction from the previous guidance for growth in the 10% range. The high single-digit rate growth for residential is expected to be driven primarily by the home standby category, given the combined impact of higher price realization compared to 2025 and higher volumes against an easier prior year comparable period for the second half of the year due to the very low outage environment in 2025.

York RagenConsistent 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.

York RagenFrom a quarterly pacing perspective, net sales growth is expected to accelerate in the second half of the year for both Residential and C&I segments. Overall, third quarter net sales is expected to grow in the high teens range, with further acceleration expected in the fourth quarter of the year as data center revenue continues to ramp and the prior year comparable period for Residential segment sales eases further. This will result in a more level-loaded second half for residential segment sales and a rapid sequential improvement in C&I segment sales from the third quarter to fourth quarter as we ramp data center capacity.

York RagenLooking at our updated gross margin expectations for full year 2026, excluding the tariff recovery impact, we now expect gross margins to be near the low end of our previous guidance range of 38.5% to 39.5% given the higher sales mix of C&I segment sales in our forecast, including the $71 million of tariff refunds that are reflected in the second quarter. We expect gross margins for full year 2026 to be in the 40% range. From a seasonality perspective, we expect the second half gross margins to be level loaded across the third and fourth quarter, in line with the full year gross margin guidance, excluding tariff refunds. This assumes that further tariff recovery will be fully offset by higher tariff levels that could potentially get enacted in the second half of the year.

York RagenWith regards to operating expense guidance, we now expect lower operating expenses relative to our previous guidance as a result of the two small divestitures that closed during the second quarter, as well as continued operational discipline in the Residential segment. This lower operating expense forecast fully offsets the lower gross margin forecast, excluding tariff recovery resulting from the higher mix of C&I sales.

York RagenAs a result of these factors, excluding the 150 basis point impact from tariff refunds, we are maintaining our previous guidance range for full year 2026 adjusted EBITDA margins of 18.5% to 19.5%.

York RagenWhen including the impact from tariff refunds, our full year 2026 adjusted EBITDA margins— got margin guidance range moves to 20% to 21%.

York RagenFrom a seasonality perspective, we expect third quarter EBITDA margins to be similar to Q2 levels, excluding the tariff recovery, and expect fourth quarter EBITDA margins to improve from there given significant operating leverage.

York RagenAs is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for full year 2026. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, 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%.

York RagenWe now expect interest expense to be approximately $65 to $69 million for full year 2026 compared to approximately $65 million previously expected, assuming no term loan principal prepayments during the year. Higher expected interest rates are the primary driver of this modest change in interest expense guidance.

York RagenOur capital expenditures are now projected to be approximately 4.5% of our forecasted net sales for the year, which now includes the purchase and outfitting of our new packaging facility in Belvidere, Illinois, and expanded investment levels in our other global large megawatt generator facilities. Depreciation expense is still expected to be approximately $108 to $112 million. GAAP intangible amortization expense in 2026 is now expected to be approximately $118 to $122 million during the year, up from $112 to $116 million previously expected. Primarily due to updated assumptions around recently closed acquisitions.

York RagenStock compensation expense is still expected to be between $54 to $58 million for the year. Consistent with prior guidance, free cash flow generation is still expected to be approximately $350 million for the full year 2026, as tariff refunds help to offset the incremental CapEx required to support future C&I growth.

York RagenOur full-year weighted average diluted share count is still expected to be between 59.5 and 60 million shares in 2026. And finally, this 2026 outlook does, does not reflect potential additional acquisitions, divestitures, or share repurchases, share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.

OperatorCertainly. As a reminder, to ask a question, please press star 1, 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1, 1 again. In the interest of time, please limit yourselves to one question only. Our first question will come from the line of Mike Halloran of Baird. Your line is open, Mike.

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

Aaron JagdfeldYeah, thanks, Mike. It's obviously a central question here. You know, we've been focused on this $1.25 billion, a billion of that domestically, the $250 million internationally by the end of this year, and definitely on path for that. In fact, I would, I would argue we're, we're, we're running higher towards even where we'll end the end of the year in terms of what our theoretical capacity could be. But the, you know, this pathway to tripling, as I mentioned, over the next 12 months, to be clear, it's only with relation to our generator assembly and our packaging capacity. It does not include anything with engines or any other upstream components at this point, although those things are currently, as we've talked and as we've discussed in the past, you know, those things are, are on the table. But today, The tripling of capacity is strictly for our own packaging and our assembly needs. You know, the— when I say we are on a path to it, maybe to put a finer point on it, you know, that path is one that we're already walking down.

Aaron JagdfeldIn fact, I would say we're running down it. You know, we've been speeding up our efforts to outfit the Sussex facility to bring that online quicker. We were intending to bring that online at the end of this year. We're gonna be online here actually in Q3. We've got our first product will be running down a line in August as we kind of prove out the line and then finish out the testing capabilities of that facility. And by the end of Q3, we will be, you know, we'll be starting our production ramp there. So that's about a quarter ahead of where we thought we'd be, which is really encouraging. And kudos to our team that is just working like crazy to figure this out. Furthermore, you know, we've identified a number of things that we can do to increase capacity in our existing facility footprint, both domestically and internationally. So Sussex, as an example, we're going to add a second line, and we've made that decision and made those capital commitments already.

Aaron JagdfeldThat's reflected partially in the CapEx elevated— the elevated CapEx guide from this morning. Taking that up to about 4.5% of sales, which is up about, call it, $50 million over our previous guide just in raw dollars. And then there'll be some more dollars going into that next year. But again, I don't see us getting—. We're not going to get over our skis here where suddenly CapEx is going to be 10% of sales or anything like that. That's not going to happen. I think we'll stay comfortably below kind of 5% and guiding back towards that as our top line grows in particular, guiding back towards our historical range, you know, at some point in the future. But, you know, we've identified a way to get more out of Sussex. We've identified a way to get more out of our Oshkosh facility. We've identified ways to get more out of our international facilities. We have a facility in Asia, we have a facility in Europe, we have a facility in India where these products are manufactured.

Aaron JagdfeldWe'll actually be standing up some production capability in Brazil and in Mexico. So the combination of all of those adds, plus what we're doing to add capacity for packaging, that's through the Enercon acquisition and then also this new facility that we just closed on in Belvidere, Illinois, northern Illinois, that will help us expand our capacity for packaging. So we won't quite be able to satisfy that full tripling of assembly capacity with packaging, but we'll be somewhere call it 70% of that number, and then we'll have to augment that with third-party packaging beyond the assembly capacity. So it is a full-court press. It's an aggressive plan. Our team is executing against that plan. So when I say we're walking that path, we're running along that path and we're actually executing against it. Now, obviously the agreement with the second hyperscaler that we announced this morning is a big part of why we've decided to pull that forward in Sussex and to accelerate our capacity expansions.

Aaron JagdfeldWe believe that that agreement, you know, is going to be at least as big as the first hyperscaler agreement that we announced or bigger. And we're also talking about '27 and '28 simultaneously here with that new customer. And we're just working through the final, you know, product schedules that are addendums to the master agreement that we signed in late June. So really excited about it. We've got— I think all systems are green, all systems are go, and, you know, we're pushing very hard to make that a reality.

Mike HalloranOkay. Thanks, Aaron.

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

George GianarikasHi everyone. Thank you for taking my question. It's more of a strategic question. As your revenue mix shifts more towards commercial and data center applications relative to residential, how are you broadly managing the operational transition? Like when you're trying to optimize capital allocation, sales channel capability, supply chain commitments, how do you preserve your return on invested capital profile given the longer sales cycles and the lumpier nature of large enterprise projects? Thank you.

Aaron JagdfeldYeah, thanks, George. Great question. So, you know, obviously the growth in the CNI business has been aggressive. It's stark and it's going to, you know, change. I think to the point of your question, it's going to change the face of the company, you know, in terms of the, you know, a lot of things. We'll get to the heart of your question, which is you know, return on invested capital and kind of the, you know, the profile, financial profile of the company. You know, big projects obviously bring different sales cycles, as you said, longer sales cycles. You know, we're working through how to match the customer deposits that are parts of these big projects alongside, you know, how we, you know, cash flow to our supply chain. So it does have ramifications along all of those things. I would say that initially here, the thing that we are observing is that all of the investment level that we've been making, and that's inclusive of not only the CapEx but also some of the M&A we've done, the payback is remarkable.

Aaron JagdfeldI mean, based on the volumes that we're projecting, it's very rapid, it's very quick. You know, I think it's— even with the longer sales cycles, you know, this isn't a dramatically CapEx-intensive part of our business. You know, it's— there's obviously capital to be deployed, and these are bigger pieces of equipment to move around and to manufacture and to package. But in the end, you know, they're bigger copies of what we've been doing for a long time. We know how to do that very well. And yes, the projects get bigger, the products get bigger. But I would say, based on the math that we've laid out, the reward gets bigger and the paybacks are look, you know, again, look stunning in terms of, you know, we used to always say when we look at our residential side of our business, you know, when we expand capacity there, you can wind the clock back a couple of years when we added the Trenton facility down in South Carolina, and that payback on that facility was inside of, you know, I think it was inside of 12 months.

Aaron JagdfeldIt's remarkably, this looks really good relative to that.

York RagenI would argue that this investment payback would be inside 12 months.

Aaron JagdfeldExactly. You could argue the same is true of the investments we're making today for large megawatts.

York RagenSo it's a— Just with our current backlog.

Aaron JagdfeldJust with the current backlog we have. So that's not even adding in some of the additional opportunities that we have in front of us, which are massive. So we feel good about it. Managing that, of course, is maybe to kind of hit the second part of your question, or maybe it's the first part, but managing all of that is, we have separate teams and separate— our organization is structured such Along the lines of the two segments that we have for reporting, reportable segments here, we have completely separate management teams. We have a corporate structure that serves those teams and we've had to beef up elements of that corporate structure around our advanced manufacturing teams and others who are supporting, you know, the rapid buildout of capacity for our industrial business, our C&I business. But right now we feel like, you know, we're pedaling fast. That business is going to grow. We set out a target to more than double our CNI business in 3 years.

Aaron JagdfeldWe set that target out at our Investor Day in late March, and all indications are we're going to crush that, and we may crush it by next year at the rate that we're headed. So we think that this is a, as we keep calling it, a generational opportunity. We believe that deeply, and we're not going to let that go by. Without giving it our best shot to see how many points we can put on the board here. And we are very laser-focused on maximizing, you know, not only our opportunity, but maximizing the return on that opportunity as well.

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

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

Aaron JagdfeldYeah, David, thanks. So to be, to be clear, the billion dollars of orders that we've taken in the last 90 days, included in that number is about $700 million, approximately $700 million for the first hyperscale customer that we announced. And that's all for deliveries in 2027. So just to be clear, you know, the $1.6 billion in backlog we have, if you do the math on the $450 million of data center business we're going to do here in 2026, $250 million is going to ship in the second half out of that $1.6 billion backlog. So we'll have about $1.35 billion, and all $1.35 billion right now is scheduled for deliveries in 2027. So our backlog does not contain at this point anything for 2028. Now, with respect to future visibility, as I, as I just said, the, you know, the second hyperscale agreement that we're talking about is actually as big or bigger, frankly, than the $700 million for the first hyperscaler.

Aaron JagdfeldSo, and we are talking about more definitively both 2027 deliveries as well as 2028. And I think also putting a finer point on it, that second hyperscale agreement contemplates deliveries on a global basis for those, at least for '27 for sure, potentially for '28 as well, depending on the schedule of development for that hyperscaler. So Very exciting for us, you know, and I think it's based on our global footprint. We felt we were in a very good position to be able to execute that. And it's a, you know, it's— it gives us a lot of confidence around the capacity investments that we just— that we just talked about. But, you know, we don't have any of that second hyperscaler at all in the $1.6 billion at this point. So we'll provide an update to the market when we finalize the product-specific terms, much like, you know, we had a notice to proceed with the first hyperscaler, so we had a little bit more to go on, but this second hyperscaler doesn't— they don't operate in that fashion, so they don't, you know, they hadn't given us anything that we could share with the market.

Aaron JagdfeldSo we'll provide that detail additionally when it becomes available, and we hope that that's going to be, you know, over the next several weeks.

David TarantinoGreat. Thanks, guys.

OperatorAnd our next question will be coming from the line of Brian Drab of William Blair. Your line is open, Brian.

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

Aaron JagdfeldYeah, thanks, Brian. That's a great question. So just from a specification standpoint, the product that we are offering in market is very competitive on all specs with products that are in market today for our competitive set. I would even say that at certain particular nodes, our product— at least this is from the, the feedback we've received from our hyperscale customers who have tested the product fully, and they've tested it in, with respect to how it performs, uh, against other competitive products on spec. And we have, at a couple of nodes, we're actually performing better, they tell us. And that makes sense because the core engine offering that we're using there is, frankly, it's a next-generation engine. It's the most contemporary engine design in market today relative to the competitive set. And so you would expect that you're going to get, from a horsepower standpoint and a power density standpoint in terms of power output, we're getting better values than some of our competitors at certain ratings.

Aaron JagdfeldSo that's encouraging. And in fact, you know, the ability for the product to take load inside of the 10-second startup requirements is very good. So all signs point to, you know, we are on market or better in terms of product specifications. In terms of lead times, Brian, you know, our lead times remain in that 40 to 45 week range for the products today in spite of the, you know, the backlog that's grown here. And that really is a testament to not only our growing capacity, but also the supply chain that we've been nurturing here over the last 18 months as we've been working to build that out. We're adding secondary sources to key components where, where we believe there could be constraints in the future. And we're starting to take control over the packaging element, which again is that, you know, it's not only about adding value to improve the overall margin profile of the products, But it's also about controlling those lead times because we're seeing lead times stretch out, you know, for these overall systems, 70, 80 weeks, you know, in some cases, some cases 2 years depending on the node, depending on the competitor.

Aaron JagdfeldAnd some of that is related to packaging constraints. And so it's one of the major reasons why we're investing heavily in packaging is because we want to make sure that even if we have shorter lead times on the bare genset as assembled, that doesn't help us if third-party packagers have long lead times. You know, that equation won't work. So we want to control lead times overall for the products, and that includes, you know, a deepening of our packaging capabilities as we go forward.

Brian DrabOkay, thanks very much.

OperatorAnd our next question will be coming from the line of Jon Windham of UBS, your line is open, Jon.

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

Aaron JagdfeldYeah, it's a great question. And appreciate, by the way, the question on the residential business because we haven't been getting many of those questions. And it's a great business for us. It was down in the quarter, as we said in our prepared remarks, mainly on the back of our portable generator sales and And also the, you know, the clean energy business, really the storage business being down because of the challenging comp from last year when we had the Department of Energy program in Puerto Rico that ended last year. So take that away. And then power outages were more than 30% below the long-term baseline average in the quarter. And that really hampered our portable generator shipments near term here. Longer term, though, maybe to get to the heart of your question, what I just, I continue to be shocked at the resilience of home standby generator sales. They're up again in the quarter in spite of, you know, the lower power outage environment.

Aaron JagdfeldNow that, you know, you can point to, you know, we did have some winter storm activity in Q1 that I think was helpful for Q2 shipments of home standby, you know, but Q2 outage environment was weak. So, you know, we thought it prudent to kind of reflect that in the back half of the year. And that was a little bit of the recalibration of bringing down the outlook. You know, it's a modest adjustment there, but a slight adjustment to that. But, you know, what can we do to answer your question? What can we do to get that category to grow? We can't wait for housing starts. We certainly can't wait for Mother Nature. We can't wait, you know, for some of these other macro things to turn when it comes to interest rates. I think what we can do is continue to pound the table on awareness. The category is still only in 6.5% of US households, single-family homes. So the upside is 93.5% of the households that don't own the category today.

Aaron JagdfeldPower outages and power outage activity, even though near-term here it's been softer than the long-term average— in fact, the last 4 or 5 quarters have been below the long-term average, so it's actually been quite soft. You know, that will return, we believe, to the long-term average here. That's just how weather patterns work. But in the near term, we're looking very hard at a couple of things. One, what can we do to continue to promote improved financing offerings? We know that the consumer is— that there is some fatigue with consumers. There's some concern about inflation. There's concerns about the overall economic conditions. And, you know, when it comes to large-ticket purchases, we're seeing softness in other parts of the economy. And we, we, our customers tell us this, you know, in terms of the retail customers we deal with. You know, we see this in some of the other sectors where, you know, our contractors and our dealers provide products.

Aaron JagdfeldWe're seeing weakness. And, you know, I think it's really important for us to continue to focus on, you know, getting in front of potential buyers when they experience an outage. Even though outage activity is down, there's still a lot of outage activity. You know, you look across the board, and every single day we track outages, and track the outage hours. And, you know, there are— at any point in time, there are 50,000 to 100,000 households in the US without power. Now, it's not because of a hurricane. It's not because of an ice storm. It's not because of some other— large-format type of outage event, it's from the thunderstorm rolling through the Midwest. It's from, you know, a, you know, it's from a winter event. It's from, you know, maybe high temperatures on a particular day that have caused equipment failure, accidents, things like that cause outages. They have been increasing, those everyday outages.

Aaron JagdfeldAnd as we become more dependent in our lives on, you know, a digital format in our households, right? We're working more from home, we're learning more from home, we're doing a lot more from home. And that— those were trends that were longstanding. They accelerated certainly during the pandemic, and they're not nearly where they were during the pandemic, but they're certainly higher than they were prior to the pandemic. And all of those trends point to a need for continuous power. And, you know, we're seeing great interest still. You know, we said our in-home consultations were actually up in the quarter. We're focusing our advertising and marketing efforts on, you know, we're sharpening our ability to go after that. We're sharpening our algorithms. We've changed, and we talked a little bit more about this last year and at our Investor Day, but we changed the way we generate leads and the way we allocate those leads.

Aaron JagdfeldWe've changed the systems for those. We continue to invest in the platforms there and the teams there. We can continue to invest in the products. You know, our next-generation product line that we introduced late last year is a material step forward and I think puts us, you know, leagues ahead of other competitive product that's available in market. So we're the clear leader there. We have the responsibility to grow that market, to create that market, and we take that responsibility seriously. There are a lot of headwinds that are working against us, but in spite of that, home standby generator sales grew. And that, I think, is a testament to just the resilience and the importance in that category and why we can't lose focus on it. We have to stay focused on growing that category because it's such an important thing for us as a company.

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

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

Aaron JagdfeldYeah, thanks, Tanner. I mean, those are important questions. I'll— maybe I'll tackle the first one or your last question first, the last part of your question there is a difference between hyperscale business and the non-hyperscale business. And it's not unlike anything in business, right? I mean, if you have a customer who is gonna buy in larger quantities than another customer, typically you will see the benefit of scale, right? It should read through in a, a sharper price point for that customer, right? Oftentimes what ends up happening though is, you know, you tend to see margin profiles of larger customers that are lower than that of our non-hyperscale customers. They're not dramatically different, I will say that. Now the contract terms can be different, and of course the timing and the scale, as I said before, is different. How, you know, so We're focused on having a healthy blend. I would just say that first.

Aaron JagdfeldThat said, you know, the addition of the second hyperscaler is going to throw that kind of mix to be obviously more heavily weighted towards hyperscale business versus non-hyperscale business in the near term. But we are very focused on continuing to add new business through existing co-locator customers as well as courting new ones. You know, there are a lot of people in this space that are opportunistic for us to go after. And we're still the new kid on the block. I mean, our competitors who have been, you know, in market for the last 18 months or 2 years selling these products, you know, are well established, well known. And as I said, you know, they have lead times which are longer than ours. So we have an advantage today to use our shorter lead times to, you know, get an opportunity to show these non-hyperscaler customers and the hyperscale customers what we can do as a company, how we perform.

Aaron JagdfeldAnd so we're moving into that phase of our relationship. Now, in terms of, you know, kind of— I don't want to use the word allocation because it makes it sound like we're at a fixed finite level of capacity and we're, you know, we're saying hyperscalers are going to get X percentage of that capacity and non-hyperscalers are going to get Why capacity? Today we're growing capacity. And, you know, obviously we're, we're talking about tripling, you know, our capacity from the 1.25 billion to something closer to, you know, approaching 4 billion in, you know, in the next year, year and a half. That, you know, we don't have that filled up today, but we are courting customers who have needs. If they have projects that they want to bring online faster, in some cases what we're hearing in particular from this particular customer set is that they have projects that if they could get backup power, they could turn the project on quicker because of the lead times of, you know, the backup industry today.

Aaron JagdfeldWe can help them with that. If they want to shift those orders to us, we'll give them our slots for 2027 and into 2028 to help them bring those data centers online faster. Those are the kinds of conversations we're having today. And we just, you know, we're getting success there. I mean, included in our backlog is another large co-locator that we landed in the quarter. And it's new for us, it's a new co-locator. So really excited about that. We continue to grow our existing co-locator relationships, getting new projects there. But the funnel, if you look at the whole funnel of opportunities, it's massive. I mean, it's just, It's embarrassingly— yeah, a lot of interest. It's embarrassingly large in terms of the total number of projects we're quoting and the total number of conversations we're having, both hyperscale and non-hyperscale.

Tanner JamesThank you.

OperatorAnd our next question will be coming from the line of Praneeth Satish.

Praneeth SatishGood morning. Good morning. Thank you. I guess just And just high level here, when we think about— in your conversations with hyperscale customers, you know, how are they thinking about backup generation for behind-the-meter data centers? I mean, usually for the front-of-the-meter grid-connected sites, it's usually a 1-to-1 ratio. But I guess, is that still the right framework for behind-the-meter deployments? And are any of the sites that you're bidding on or contemplating shipping to, are they behind the meter or are you kind of primarily focused on front of the meter?

Aaron JagdfeldYeah, it's a great question, Praneeth. And so, you know, the front of the meter grid-connected customer is, you know, that's an easy one. They need to have backup power. Behind the meter, you know, prime power-generated, self-generated power, it depends on the power format. I would say, you know, what we've done is we've as we've talked to the addressable market as we've defined it, and as we defined it on our Investor Day, we excluded some parts of the, you know, behind-the-meter power generation that's going on there, in particular where a customer may be deploying certain technologies like fuel cells. You know, they believe that there's not a need, particularly for our type of product, a backup, a reciprocating engine-driven backup genset.. But those projects are far and few between today. There are other types of behind-the-meter technologies, behind-the-meter power generation technologies. You know, you've got turbine technologies, well-known technologies.

Aaron JagdfeldIn some cases, there is backup power required there, because you could just as easily lose a turbine. Now, maybe you have N+1 redundancy in the way that the turbine array is constructed. So maybe you don't feel like, or that developer or customer base doesn't feel like they need 100% backup. Or 120% backup, I think, at least today, I think what's— this is my thesis, and, you know, people can take and apply this logic if they want, or they can use their own logic. There are certain of these behind-the-meter technologies, turbines being one of them, and where they're using recip gas engines in particular, those technologies are bridge technologies. They're a bridge to an interconnect to a grid. They are not permanent technologies simply because, from a cost of energy standpoint, to produce power on-site with those technologies, it's gonna be more expensive than it will be to secure grid power. In particular, the risk that comes with producing your own power in terms of hedging the cost of the fuel stock, the input, the natural gas in this case, in most of those technologies.

Aaron JagdfeldSo my point there is that We believe that longer term, as grid interconnects catch up and as that queue shortens instead of lengthens, as it's doing today on the grid interconnect, there could be more opportunities for backup power to present. It just may happen later when the, when the grid interconnect timeline becomes clearer. So, you know, today we've, you know, as I said, we've kind of adjusted our total addressable market to take out certain behind the meter power generation capabilities where certain data centers are going to do that, do that on their own. I do know we have a couple of projects we're involved with where we're supplying some backup power into some sites where they are going to generate their own power on site with certain technologies. I don't have the specifics of that, but I do know there are some projects that exist today where they're taking backup generators because they still need them.

Aaron JagdfeldYou could still have a turbine go down. You could still have part of your recip engine array go down, you could lose those technologies, and you need to back them up nonetheless, even if they're bridge power.

Praneeth SatishThank you.

OperatorAnd our next question will be coming from the line of Manish Somaiya of Cantor. Your line is open, Manish.

Manish SomaiyaThank you, and thank you for fitting me in. Congratulations on all the wonderful announcements. A couple of questions. One, I guess, is there, Aaron, is there a hyperscale customer number 3, and how far is that customer behind number 2? That's my first question. And then just related to that, I think you talked about some of the capacity constraints, and from my perspective, I'm also a little bit more focused on the supply chain. As it relates to generator assembly, alternator, switchgears. I think you discussed the case, the packaging part, but perhaps if you can just give us a sense of, you know, what's going on with the context that I just provided.

Aaron JagdfeldYeah, thanks for the question, Manish. So maybe I'll start there with the supply chain. You know, yeah, the supply chain capabilities, right? We can talk about how we want to triple our capacity. But if our supply chain can't keep up with it, it's kind of, kind of an all for naught. If— and if we believe that that was going to be a real problem, it'd be difficult for us to make the case that we should be investing in tripling our capacity. So I would tell you that alongside of tripling our capacity, we have a deep roadmap around how we can also triple our supply chain capacity. And that, you know, as you get into kind of the second order componentry that you listed, some of those components around alternators, There are cooling packages. There are some of the structural elements of the generator with base tanks and frames. Some of that we're going to undertake internally. We're going to, you know, kind of a make versus buy type of analysis.

Aaron JagdfeldWe're going to have to augment some of that with external purchases as well. And then the canopy components that go into the packaging and some of the other elements. You know, there are some of the aftertreatment systems that go into the diesel systems where we're seeing emissions levels where you've got local, either local codes or you've got local permitting requirements that are calling out best available technology for the aftertreatment of these products. Those also require additional components. All of those areas, we have second and third sources identified, and we're in deep negotiations with those for supply starting in 2027. So at this stage of the game, we feel like we have a roadmap both for our own internal consumption, our capacity, that tripling of capacity internally, as well as with our supply chain. Now, there's a lot of work to do both for our, you know, tripling our capacity internally here, but also with our suppliers to make sure that they're going to be capable to deliver at those rates.

Aaron JagdfeldAnd, you know, of course, they're being, you know, their own capacities are being added to and tested by the growth here in the overall market for data centers. But at this stage of the game, we feel like we're in a really good spot with our supply chain capacity. Now on your first part of your question on the third hyperscaler, you know, we, look, we have a lot of conversations we have with a lot of customers. We actually serve another hyperscaler with smaller backup power and have served them for a couple years where they have edge data center. Infrastructure, we back that up with our smaller generators. And when I say small, these are, you know, 500-kilowatt diesel and gas generators. So they're not that small, but they're small in the context of a hyperscale requirement. You know, we continue to talk to these customers about their needs. And as the market evolves here, you know, we could have, I think, additional opportunities.

Aaron JagdfeldToday, I would tell you, you know, whereas maybe we were on, I think we described it, yep, it was a 100-meter dash before we were on the 99th meter of that 100-meter dash with Hyperscaler 2. With, you know, any future hyperscalers at this point, those are just discussions and they're very early if they're having, you know, if we're having them. So I wouldn't, you know, I wouldn't bank on anything coming anytime soon there. Obviously where a big focus of our pipeline is, is building out the non-hyperscaler portion of that as well. We want to create better balance there. And those conversations are very robust and that funnel is very robust and we continue to get wins there. And I would, I would assume that a good chunk of our backlog growth in the future here is going to be from the firm orders we get from Hyperscaler 2 once we are ready to announce those and then additional non-hyperscaler orders as we work through our funnel and we progress through the sales cycle on that, that side of our business.

Manish SomaiyaOkay, fantastic. Thank you so much.

OperatorAnd our next question will be coming from the line of Keith Housum of Northcoast Research. Your line is open, Keith.

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

Aaron JagdfeldYeah, it's a great question, Keith. I would say that there are areas of the world where I think we're going to be very competitive. As an example, you know, outside the US, first of all, just to level set, the US market for data centers is the biggest market in the world, bar none, right? I mean, it's just— it's orders of magnitude larger at this point than almost every other region in the world. But that said, we have really interesting opportunities in Europe that, you know, we— because we're based in Europe, products are manufactured in— you know, we have a manufacturing facility in Italy where the products are of this size range are manufactured. We're seeing opportunities within, you know, the European theater where I think we can be very competitive. Some of our first projects were in Australia, and they were delivered out of our— you know, we have a factory in China. They were delivered from that Chinese factory down to Australia.

Aaron JagdfeldYou know, head-to-head in certain markets, like let's just go there, but the Chinese market for data centers, right, the domestic Chinese market for data centers, probably going to be very difficult for us to serve that market competitively. There are a lot of producers of gensets in that range in the Chinese market. And, you know, I don't think that the things that we bring to the table for a data center owner-operator-developer, such as, you know, our brand, the strength of our balance sheet, our ability to serve, our ability to have, you know, an international footprint or a global footprint, you know, I don't think they're as well appreciated, perhaps. In certain markets like China. So I wouldn't expect that we're going to be announcing a bunch of Chinese data center wins. But you get outside of China, India is a growing market. We have a facility in India, India to serve that market. You know, the South American continent, you know, you get Mexico and so Central and South America.

Aaron JagdfeldWe have a big facility in Mexico that serves the Mexican market and can serve the South American market. We have a facility in Brazil. That can serve the Brazilian market. That footprint gives us an advantage. And for those data center developers that want to make sure that they're buying a product from a company that's going to be around to support that product. And, you know, look, people— there's a low bar for people to bolt these things together. There's no question that, like the— and this has been the case in generators in general. It's not just large generators, it's smaller generators. What you have to wrap around that right, is the service network. What you wrap around that is the support capabilities. What you wrap around that is the certainty of a warranty and the certainty of the ability to get somebody to a facility or on-site when there's a problem, because uptime is absolutely critical.

Aaron JagdfeldAnd so for developers who take uptime seriously and understand the bit of a premium that they may have to pay for that, we're going to do well. And that— and we are doing well. We're seeing that in You know, domestic market, we're seeing it in Australia, we're seeing that in Europe where we've got project wins already.

York RagenConsistent global processes, they covet that.

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

Keith HousumGreat. Thank you.

OperatorAnd our next question will be coming from the line of Vikram Bagri of Citi, your line's open.

Vikram BagriMorning, everyone. I wanted to understand if you're seeing difference in inference data centers attaching more sort of like— or less capacity, backup capacity versus— let me rephrase that. Our understanding is that the training data centers will have less than 1-to-1 backup capacity versus inference will have more than 1. If you've seen that, I was also trying to understand if the increase in Hyperscale 1 order from initial expectation of $600 million to $700 million is a function of that, um, or you're gaining market share, uh, from another supplier to, to these hyperscale customers. And related to that, um, that you, you currently have a significant lead time advantage over incumbents in large capacity generators. Do you think there is a premium in pricing for quick delivery right now? And if so, Is there a way to frame how much that premium is for, you know, sort of speed to delivery? Thank you.

Aaron JagdfeldYeah, thanks, Vikram. Appreciate the questions. Maybe I'll start backwards and with your question there. You know, obviously the lead time advantage we have, I would say that, you know, today the market overall is higher on a price per kilowatt. Than actually than we framed the opportunity when we put the business case together to go in into the large megawatt genset market. We put that business case together 3+ years ago now, for almost 4 years ago. And we were, you know, the market at that point, you know, was, was on a lower price per kilowatt basis. Now there's inflation and some other things that have driven that up. But I think it's primarily being driven by the fact that there's a supply-demand imbalance there. Structurally, we're taking advantage of that, obviously. With our shorter lead times, we're able to supply that market that is paying more for access. I don't know that I can put a number on the premium there.

Aaron JagdfeldI would tell you that even though we have shorter lead times, the customer base there is not willing to pay more than market, even though we can produce the products and deliver them in a shorter timeframe. I don't think we're getting an above-market premium today versus our competition on a per-kilowatt basis. You know, that's slight, if anything. I think all that we're doing is we're able to capture some share here very quickly because of that shorter lead time. That's kind of our assessment of the situation. You know, I think that— could that change over time? That's probably the bigger question. Like, what does the price per kilowatt do over time? My experience in markets where you have supply-demand imbalance-led price escalation, oftentimes what you'll see is the price, the growth of price slow, but you won't see it go back down. Price rarely goes in reverse, especially if it's a non-commodity type business, commodity-based business.

Aaron JagdfeldYou're not going to see price go in reverse. I think you'll see the growth of price probably slow. Meaning I think these products probably will stay priced in the range that they're at here for the foreseeable future. And that, which is good for us because it's well above, as I said before, how we framed our business case. Now, the first part of your question on inference use data centers versus non, the Agentic, we do see different approaches based on the use cases for, the data center. So you will see a greater percentage of coverage for certain data centers where you're talking about, you know, cloud-connected versus, you know, where they're doing inference or learning model type of training data centers where maybe, you know, uptime, they have different levels of uptime requirements. They actually get very precise depending on the customer. They can get very precise about what that uptime number is depending on the use case of the facility.

Aaron JagdfeldAnd then dependent on that uptime number, that's how they size the backup requirement. So if that uptime number is greater, if it's 5 nines per se, or even more than 5 nines, you're going to see a greater percentage of coverage to the total potential consumption, power consumption for the data center. If it's less on the uptime scale because the data center is perhaps doing things that can be viewed in the context of non-critical, and there are differences, you know, beyond just inference and non-inference, but that lower uptime statistic then would lead you to a lower coverage rate. So it really is data center dependent. It's customer dependent because they all have their different views on what the right uptime statistic is. But today, you know, we're seeing a healthy coverage of at least 100% and in some cases up to 125% to 130% of the power consumption of the facility depending on the customer and depending on the use case of the data center.

Vikram BagriThank you.

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

Christine ChoGood morning. Thank you for squeezing me in. I just wanted to ask about, you know, your engine supply. I know you've mentioned that, you know, the supply has no problem growing with you and that will never be a constraint. But as we think about you tripling capacity in the U.S., would that require your engine supplier having to add or maybe diversify their manufacturing capacity in places like the U.S.

Christine ChoUS or Europe? And if so, should we think that the mix shift could impact gross margins in the future if it's skewing towards more expensive manufacturing regions with the cost of engines going up? You know, you talk about being priced competitively, and I think you've also talked about how your cost structure is very attractive. So just curious if you think you'll be able to like raise pricing in that case and maintain margins, or would that impact demand?

Aaron JagdfeldThanks, Christine. I mean, it's a great question. You know, our engine supplier is, you know, is— they have indicated to us that, you know, capacity is not an issue. You used the word never. I'm not sure I'm ready to say it's never going to be an issue, but they've told us that based on— and we're sharing, by the way, you know, our capacity. We had a team that was just over working with our engine supply team here just last week, as a matter of fact, working through some of our kind of forecasting for '27, '28 and where we think volumes could go. And all indications are that based on their current footprint and the additions they are making, by the way, so they are making investments and additions to capacity. They have in particular a facility in France that they are adding a lot of capacity to because We have some customers that want to have engines that are going to come out of the European theater as opposed to coming out of Asia.

Aaron JagdfeldSo they've requested that specifically. There's a bit of a premium to that, to your point, maybe around, you know, what that looks like in terms of the— but we've been able to roll that through with higher pricing. If that's what the customer is requesting, we've made it clear that that could mean a higher price.— you know, based on, you know, based on that decision. Now, there are maybe offsets for that. If the customer is going to locate those products in Europe, as an example, there might be lower logistics costs for them, right? So it's lower packaging costs for them. So it's a— there's kind of a— kind of an overall economic kind of model that they have to run through to understand whether our price increase on the genset because they want to they want an engine that's coming from a higher-cost region of the world, that, you know, that that works in their economic model overall. I suspect that that's going to be the case where, you know, our engine supplier is going to be increasing capacity in other regions of the world, potentially the U.S. as well.

Aaron JagdfeldWe've said this before. They continue to evaluate that. And we're evaluating it alongside of them to see what we can do to help them with that should they require that. But they are a very competent company. They have a lot of really great talent within their company and a very aggressive stance on their ability to produce these products wherever they need them on the planet. And so, you know, they— right now, you know, they are working through their kind of footprint for the future. I can't speak too detailed about that. It's their footprint, so they would really need to speak to that. But I can tell you that in the one example we have, where we have customers who might want engines out of a different region, uh, we've said that the price is higher. So we're trying to maintain our economics, uh, and, you know, at least that's how I think we would treat it, uh, going forward. I don't have an idea of what a cost structure would look like in the US.

Aaron JagdfeldWe haven't gotten that far yet, so I don't know how to assess that. But obviously there'd be a tariff offset there. In that instance, right? So there's a lot of moving pieces with that, and the tariff environment continues to move as well. So, you know, we're going to continue to watch it and put together the right economic models. And if we need to adjust pricing, we will. And if, if, you know, if our, our supply, our supplier there, if they, you know, if we need to work harder with them to make sure the cost structure stays competitive, we'll continue to do that, too. But I have no doubt that our supplier is going to be cost competitive. They are laser focused on being a leader in their cost structure for these types of products.

Christine ChoThank you.

OperatorAnd I would now like to turn the call back to Kris for closing remarks.

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

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