Generac Holdings Inc. (GNRC) Earnings

Management highlights

### Data Center Business Momentum - Recognized over $100 million in data center revenue in Q2 2026, and secured two multi-year supply agreements with Hyperscale data center customers. The first agreement (announced June 2026) has total commitments of nearly $700 million for 2027 delivery, while the second master agreement was signed in late June 2026, with final negotiations ongoing for 2027/2028 volume and delivery terms. - Total data center backlog reached $1.6 billion as of quarter-end, including $1 billion in new orders over the prior 90 days; the backlog does not include potential volume from the second Hyperscale agreement, representing significant future upside. Demand remains robust across non-Hyperscale data center customers, with strong order growth from new and existing co-locator clients. ### Capacity Expansion Progress - Aggressively investing in production and packaging capacity for large megawatt generators to meet growing demand. The new Sussex, Wisconsin large megawatt facility is on track to begin production by the end of Q3 2026, one quarter ahead of the original target. Closed on a second packaging/metal fabrication facility in Belvedere, Illinois, expected to be operational in Q1 2027, following the April 2026 acquisition of enclosure provider Enercon. - Management now has a clear path to triple large megawatt production capacity over the next 12 months from the original year-end 2026 target of $1.25 billion, with investments already underway across existing domestic and international facilities. ### Other Segment Operational Updates - CNI Segment: Industrial distributor orders hit a record high in Q2 2026, signaling strong underlying traditional market demand. Mobile product shipments to rental customers grew strongly organically, with the Almond acquisition outperforming sales and margin expectations. CNI battery energy storage backlog grew meaningfully, with domestic year-to-date orders already exceeding full-year 2025 levels. International sales grew strongly year-over-year, driven by data center, control solutions and battery products. - Residential Segment: Home standby generator demand remained resilient despite below-baseline outage activity, with in-home consultations up year-over-year and the dealer network expanding by ~400 new partners to 9,700 total. The next-generation 28kW air-cooled generator has outperformed adoption expectations. Ecobee delivered another quarter of profitable top-line growth, with connected homes surpassing 5.25 million growing at a mid-teens rate year-over-year. Power Micro, the new Generac-branded residential microinverter, is in production ramp ahead of expected H2 2026 growth. Residential EBITDA margins expanded significantly in Q2 2026 driven by tariff refunds, favorable product mix, and cost discipline.

Guidance

- **Consolidated Net Sales**: Full-year 2026 consolidated net sales growth guidance is maintained at the mid to high teens percent range year-over-year, as stronger CNI growth offsets a modest downward revision to residential guidance. - **Segment Net Sales Growth**: CNI segment full-year sales growth guidance is raised to the low 30s percent range from the prior mid to high 20s percent range. Residential segment full-year sales growth guidance is lowered to a high single-digit percent range from the prior 10% range, reflecting the ongoing soft power outage environment and affordability concerns. - **Gross Margins**: Excluding the $71 million Q2 2026 tariff refund impact, full-year 2026 gross margins are expected to land near the low end of the prior 38.5% to 39.5% guidance range due to a higher mix of lower-margin CNI sales. Including the tariff refund, full-year gross margins are expected to be ~40%. - **Adjusted EBITDA Margins**: Excluding a 150 basis point impact from tariff refunds, full-year 2026 adjusted EBITDA margin guidance of 18.5% to 19.5% is maintained. Including the tariff impact, the full-year adjusted EBITDA margin guidance range is 20% to 21%. - **Free Cash Flow**: Full-year 2026 free cash flow guidance is maintained at ~$350 million, as tariff refunds offset incremental capital expenditures for CNI capacity expansion. Capital expenditures are now projected to be ~4.5% of forecasted net sales, including the new Belvedere facility and large megawatt capacity investments. - **Quarterly Pacing**: Net sales growth is expected to accelerate in H2 2026 for both segments, with Q3 2026 net sales expected to grow in the high teens range, followed by further acceleration in Q4 2026 as data center revenue ramps.

Segment performance

Consolidated net sales for Q2 2026 increased 11% year-over-year to $1.17 billion. 1. Commercial and Industrial (CNI) Segment: Net sales increased 29% year-over-year to $556 million, accounting for 47.5% of total consolidated net sales. Adjusted EBITDA for the segment was $81 million (14.6% of segment sales), up from $53 million (12.3% of segment sales) in the prior year quarter. Growth was driven by strong ramp in data center product revenue, higher shipments to rental and telecom customers, partially offset by lower shipments to domestic industrial distributors (due to a strong comparable period in 2025). 2. Residential Segment: Net sales decreased 2% year-over-year to $621 million, accounting for 52.5% of total consolidated net sales. Adjusted EBITDA for the segment was $215 million (34.7% of segment sales), up from $146 million (23.1% of segment sales) in the prior year quarter. The sales decline was driven by lower portable generator shipments (due to below-baseline power outage activity) and lower residential energy storage shipments (lapped the 2025 DOE Puerto Rico program), partially offset by solid year-over-year growth in home standby generator sales.

Risks & headwinds

- Soft power outage activity below the long-term baseline reduces near-term demand for portable and home standby generators, and has already led to a modest downward revision to full-year 2026 residential sales guidance. - Affordability concerns from broader macroeconomic conditions pressure large-ticket consumer purchases in the residential segment. - A challenging policy environment has weakened demand for residential solar and energy storage products, leading to lower year-over-year sales for this product line in 2026. - Larger enterprise data center projects have longer sales cycles and lumpy revenue, which creates operational and cash flow planning complexity relative to the company's historical residential-focused business. - Supply chain constraints for upstream components (such as alternators, switchgears, and engines) could limit the company's ability to meet rapidly growing data center demand, even as the company expands its own assembly and packaging capacity. - Higher manufacturing costs for engines produced in higher-cost regions (such as the U.S. or Europe) could pressure margins unless offset by corresponding price increases.

Analyst Q&A

• Q: Management noted a path to triple large megawatt generator capacity from the original 2026 year-end target. Is this expansion limited to assembly/packaging, and what customer commitments are driving this acceleration? /

  A: The tripling of capacity applies only to internal assembly and packaging capacity; upstream engine and component capacity is not included in this announcement, though upstream supply partnerships are actively being expanded. The acceleration is driven by the expected large volume from the second Hyperscale agreement, which management expects to be at least as large as the first $700 million agreement. The expansion is already underway: the Sussex facility will come online Q3 2026 (a quarter early), with additional capacity expansions across existing domestic and international facilities, and the new Belvedere packaging facility. Management expects CapEx to remain comfortably below 5% of sales as this expansion is completed.

• Q: As revenue mix shifts toward CNI and large data center projects (which have longer sales cycles and lumpy revenue), how is management managing the transition and protecting return on invested capital? /

  A: The company maintains separate dedicated management teams for the CNI and residential segments to handle their different operational requirements. While large data center projects have longer sales cycles, the payback on current capacity investments is actually rapid (expected to be under 12 months based on the existing $1.6 billion backlog, not counting future upside). Management noted the company is on track to exceed its original 3-year target to double the CNI segment, potentially hitting that goal by 2027, and remains focused on maximizing returns on the large visible opportunity.

• Q: How does Generac's large megawatt product compare to competitors on specification and lead times? /

  A: Hyperscale customer testing confirms Generac's product matches or outperforms competitive products on specifications, particularly due to its next-generation engine design that delivers better power density and faster startup than competing offerings. Generac's total lead time currently sits at 40-45 weeks, far shorter than competitor lead times that can stretch to 70-80+ weeks (or even two years). A primary driver of the company's heavy investment in in-house packaging capacity is to maintain this overall lead time advantage, avoiding long lead times from third-party packagers that would erode Generac's key competitive edge.

• Q: How should we think about long-term growth for the residential segment, given headwinds from high interest rates and weak housing starts? What self-help levers are available to drive growth? /

  A: The home standby generator category still only has 6.5% penetration among U.S. single-family households, leaving massive long-term upside. Management cannot control macro factors like housing starts or power outage frequency, so it focuses on controllable levers: ongoing marketing to build category awareness, improved lead generation algorithms and lead allocation to dealers, investment in next-generation products that outperform competing offerings, and expansion of the dealer network. Despite near-term headwinds, home standby sales grew in Q2 2026 even with 30% below-baseline outage activity, demonstrating the category's underlying resilience driven by long-term trends of increased power reliance in the home.