Generac Holdings Inc. (GNRC) Q3 2026 Earnings Report, Transcript and Summary

Hello, and welcome to Generac Holdings Third Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 1-1 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press 1-1 again. We ask that you limit yourself to 1 question only. I would now like to turn the call over to Kris Rosemann, senior director corporate finance and investor relations. You may begin.

Good morning, and welcome to our third quarter 26 earnings call. Like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer and York A. Ragen, chief financial officer. We will begin our call today by commenting on forward-looking. Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U. S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron. Aaron.

Thanks, Christine. Morning, everyone, and thank you for joining us today. Our third quarter results reflect continued momentum in our Commercial and Industrial segment. With revenue from products sold into the data center market leading to a 28% increase in C&I segment net sales on a year-over-year basis. Additionally, in the quarter, our Residential segment returned to strong growth with net sales increasing 9% from the prior year, driven by the lower power quality megatrends that continue to support sustained demand for backup power solutions. Overall, net sales increased 16% during the quarter to an all time high record for Generac. Robust margin expansion helped deliver a 33% increase in adjusted EBITDA compared with the third quarter of 25. Exceeding our prior expectations and resulting in the increase in our adjusted EBITDA margin guidance for full year 2026. The third quarter also marked a tremendous step forward in solidifying our position as a leading supplier to the data center market, as we entered a long term supply agreement with Amazon for data center backup power generators. Initial deliveries in this agreement are expected to be a combined $2.4 billion in 2027 and 2028, driving the increase in our backlog for products sold to the data center market to approximately $4.5 billion nearly tripling from just 90 days ago. The agreement with Amazon provides for up to 1. Approximately 1.7 million common warrant shares future vesting of the warrants linked to a total of $8 billion in backup generator purchases over the 7-year term of the deal. This warrant structure provides for incremental strategic alignment as well as creating a material incentive for Amazon to continue leveraging Generac as a supplier well beyond the initial deliveries expected in 2027 and 2028. We believe this long-term strategic collaboration validates our status as a top-tier supplier of C and I backup power generators and provides continued confidence in the durability of demand for our products in the data center market. In addition to the significant demand from our hyperscale customers, our updated backlog also reflects continued momentum with both new and existing non-hyperscale customers. It continues to expand geographically as well. With new orders across multiple continents. We believe this growing customer base across an expanded geographical footprint helps to create an increasingly diversified business the global data center investment cycle matures. Additionally, our previously announced capacity expansion plans remain on track. It will allow us to serve this accelerating demand with our new large megawatt generator production facility in Sussex, Wisconsin, and initial production began at the end of the third quarter and build rates are expected to ramp significantly in the fourth quarter. This ramp is expected to support strong sequential revenue growth in the fourth quarter of 26, resulting in full year 2026 data center revenue of nearly $500 million increase from the approximately $450 million previously expected. As we look toward a year of dramatic growth ahead for data center related revenue in 2027, we continue to invest in our large megawatt production facilities and are working towards tripling our global production capacity. We expect to achieve significantly higher levels of output from our existing facilities through added production lines and an increase in manufacturing staffing levels. The relatively small incremental investment needed to ramp capacity further highlights the capital light nature of our business and the incredibly strong ROI that we expect to realize from these investments. We also continue to invest in deeper vertical integration across our C&I product portfolio, highlighted by the outfitting of our new packaging facility in Belvedere, Illinois. Is expected to come online in early 2027. We view this additional packaging capacity as a key strategic advantage to protect our highly competitive lead times as end market demand surges. While also expanding our share of value added content and improving overall profit margins for large megawatt generators. We believe that the vertical integration of highly customized packaging solutions is an important and unique factor in our ability to continue to win in the data center market. Internationally, we are also investing in additional manufacturing capacity for large megawatt generators as data center demand continues to grow rapidly around the world. This includes expansions in Europe, Asia and Latin America to help serve demand we have secured from these customers in those regions. In addition to manufacturing capacity, we are also increasing our service and support footprint in these local markets where these new projects will be cited. As a result of our recent wins, current backlog, capacity expansion efforts and our track record of strong execution, we believe we have excellent visibility to dramatic growth in the data center market in the years ahead. Specifically for 2027, we now expect revenue from products sold to the data center market to well exceed $2 billion. Now looking at our overall C&I segment results for the third quarter, net sales growth remained robust, led by more than $100 million of revenue from products sold to the data center market. This significant sales increase versus the prior year period supported strong adjusted EBITDA margin expansion in the quarter, a trend that we expect to continue into 2027 as C&I segment growth dramatically accelerates further. Mobile product sales to national and independent rental equipment customers also grew again during the third quarter compared to the prior year. Recall that in January, we announced the acquisition of Allmand, a mobile products company based in Nebraska, that we have now fully integrated into our existing mobile equipment offering. The resulting combined scale we now have in mobile products has allowed us to increase our market share with our rental customers. Specifically, the Allmand business has outperformed our prior expectations for both sales and profitability. And as we continue to see healthy rental fleet demand driven by significant pipeline of large construction projects, we anticipate continued strong growth in 2027 for our mobile products. Shipments to our domestic industrial distributor channel grew sequentially in the quarter but declined versus the third quarter of 25, as the prior year included a tougher comparison related to our drawdown of backlog. In addition, lead times for products shipped to these customers grew longer in the quarter, driven primarily by the execution of the final phase of our project to relocate manufacturing of these products to our new facility in Beaver Dam, Wisconsin. We expect lead times to return to more normal levels in the first quarter of 2027 as production ramps at Beaver Dam. Rates from our domestic industrial distributors remained robust with the third quarter marking another record from industrial distributor customers and positioning this channel for continued growth in 2027. We also continue to see healthy quoting activity for our large megawatt generators in the non data center applications through this channel. Providing an incremental and diversified source of demand for these products. Shipments to our telecom channel slowed during the quarter, primarily due to certain customers working to reduce their backlog of site deployments. Although demand for backup power for telecom customers can be variable from quarter to quarter, we continue to view the telecom channel as an attractive long term opportunity supported by ongoing network hardening investments and growing interest in data center adjacent applications from our telecom operators. International C&I net sales, excluding shipments to data center customers, increased during the third quarter when compared to the prior year as a result of broad based regional growth. The European region, our largest international market, experienced solid sales growth from the prior year. While sales to emerging markets such as Latin American and The Middle East returned to strong growth in the quarter. This diversified geographic growth is encouraging considering the current geopolitical environment and we continue to evaluate opportunities to expand our presence in other regions to serve more local markets around the world. Additionally, global shipments of our control solutions increased at a robust rate during the quarter, providing further evidence of the stronger conditions in the global power generation market. Looking ahead, we expect overall C&I segment net sales to increase in the low-30s percent range for the full year 2026. As we look to full year 2027, we have visibility to a dramatic increase in revenue from products sold to the global data center market. When combined with our expectations for continued growth in our rental industrial distributor channels and international markets, we now believe we have a path to double our commercial and industrial reporting segment in 2027. Now looking at our Residential segment results in more detail, As expected, Residential segment net sales returned to strong growth during the quarter. Increasing 9% from the prior year. Home standby and portable generator sales both grew at a much faster rate than the overall segment partially offset by an expected decline shipments of energy storage systems. Segment adjusted EBITDA margins expanded by more than 350 basis points from the prior year due to favorable price cost impacts, strong operating leverage and the continued recalibration of our energy technology related operating expense investments. Home standby generator shipments increased at a mid-teens rate during the quarter as compared to the prior year period. As the power outage environment returned to more normalized levels, after several quarters of well below average activity. While Atlantic hurricane activity remained historically quiet during the period, everyday severe weather across the country supported baseline outage activity with particular strength in the late summer months in the Midwest and the Northeast. In home consultations also increased sharply as compared to the prior year. As a result of the higher power outage activity and our well established demand creation efforts. Most regions across North America saw higher IHCs with significant strength in the Midwest and Northeast, as homeowners experiencing power outages continue to seek out resiliency solutions. Believe that grid reliability challenges continue to grow. Driven by the risks associated with increasingly severe and volatile weather patterns, and aging infrastructure, and a dramatic increase in the demand for power. With all of these factors supporting our belief in the continued demand for the home standby generator category, well into the future. Home standby activations or installations return to growth in the month of September for the first time since the second quarter of 25. The For the quarter, activations were nearly flat year over year, as declines in states that saw prior year activations benefit from the Afterglow of an active 2024 hurricane season were offset by strong growth in the Midwest and Northeast regions during the quarter. Return to growth in activations is further supported by the continued expansion of our residential dealer count. Which grew again during the quarter to nearly 9.9 thousand dealers. Portable generator shipments were also very strong in the quarter as the product category benefited from the more active outage environment and our team continued to win new retail shelf space for these products. As a pioneer in the portable generator category, we believe we have once again regained our position as the #1 market share participant in The US. The portable generator business remains an important part of our retail channel strategy and allows more budget conscious consumers to experience Generac branded product options to protect their home and their family. Importantly, our customer demographic data shows that more than 50% of the purchasers of home standby generators either previously or currently owned a portable generator. Making the trade up experience from a portable to a standby product an important 1 for our residential business. In addition to strong performance in the home standby and portable generator categories, our Ecobee team continued to perform well during the third quarter. Sales of 5.5 million homes. Ecobee's services attach rate and recurring revenue continue to increase faster than their overall growth. And disciplined operating expense management helped to deliver another quarter of growing profitability for Ecobee Solutions. Furthermore, we continue to expand the Ecobee user interface and experience to our larger customer base across our residential products as we recently rolled out a unified software platform to further drive adoption of the home energy ecosystem by our customers. As expected, sales of our residential energy storage systems were lower in the quarter. As compared to a strong third quarter of 25 that included the benefit of our DOE program in Puerto Rico, which was completed at the end of 2025. Higher interest rates and a more challenging policy environment continue to weigh on overall demand for solar and storage products. As a result, we continue to recalibrate our investments in this market. Overall, we remain on track with our projection for our residential segment net sales growth for the full year 2026. To be in the high single digit range led by mid teens growth in the home standby category. Driven by our record net sales volume for the total company, we delivered consolidated gross margin of nearly 40%, and EBITDA margin of nearly 20%. As well as generating over $130 million of free cash flow for the quarter. These metrics all represent a significant increase as compared to the prior year as we continue to see favorable price cost dynamics leverage our fixed operating expenses as we rapidly grow, further recalibrate our energy technology OpEx lower and tightly manage the working capital requirements for our business. In closing this morning, our third quarter performance, including tremendous momentum in the rapidly growing data center market, highlighted by our agreement with Amazon, alongside a return to strong growth for our residential segment sales demonstrates the strength and earnings potential of our more diversified business. Furthermore, our strong earnings and free cash flow enable us to continue to make opportunistic investments, allowing us to lean into the unprecedented data center market growth opportunity. As a result of this unique combination, together with the megatrends around AI infrastructure, lower power quality, and higher power prices, we believe we are extremely well positioned for success as we look into the future. With that, I will now turn the call over to York to walk through our third quarter financial results and our updated outlook in more detail.

Thanks, Aaron. Looking at third quarter 26 results in more detail, Overall consolidated net sales during the quarter increased 16% to an all time record of $1.29 billion compared to $1.11 billion in the prior year third quarter. The net effect of acquisitions, divestitures and foreign currency had an approximate 1% favorable impact on revenue growth during the quarter. Commercial and Industrial segment total sales increased approximately 28% to $553 million from $432 million in the prior year quarter. Including an approximate 4% net favorable impact to net sales growth from the combination of acquisitions, divestitures and foreign currency. The core total sales growth for this segment was primarily driven by ramping revenue from products sold into the global data center market, In addition, broad based regional growth internationally was offset by lower shipments to the domestic industrial distributor and telecom channels. Residential segment total sales increased approximately 9% to $744 million as compared to $685 million in the prior year quarter. This increase was primarily driven by strong sales growth for home standby and portable generators compared to the prior year, benefiting from more normalized outage activity in the current year quarter. This growth was partially offset by lower shipments of energy storage systems, given the completion of our Department of Energy program in Puerto Rico at the end of 2025. The mid-teens percent increase in home standby sales was mostly driven by higher volumes, with pricing contributing a smaller portion of the growth as compared to the third quarter of 25. Consolidated gross profit margin was 39.9% compared to 38.3% in the prior year third quarter. Increase was primarily driven by favorable price cost impacts including lower tariff rates compared to the prior year and a modest tariff recovery benefit reflected in the current year quarter. This margin expansion was partially offset by unfavorable sales mix given the higher sales growth in the C&I segment. Operating expenses increased by $31.6 million, or 10%, as compared to the third quarter of 25. The increase was primarily driven by increased operating expense investments to support future C&I growth as well as higher marketing spend to drive awareness for our products, and additional incentive compensation and intangible amortization expense partially offset by lower operating expense investment in Energy Technology Solutions. As a percent of sales, excluding amortization expense, OpEx percent decreased by 1.6% compared to the prior year, highlighting the improved operating leverage on significantly higher sales. Overall, consolidated adjusted EBITDA before deducting for noncontrolling interests as defined in our earnings release. was $256 million, or 19.8%, of net sales in the third quarter as compared to $193 million, or 17.3%, of net sales in the prior year. This significant year over year margin expansion was driven by the previously discussed gross margin performance as well as strong operating leverage on higher sales volumes as we maintain a disciplined and balanced approach towards investing in strategic growth opportunities. Adjusted EBITDA for the Commercial and Industrial segment before deducting for non controlling interests was $69.3 million, or 12.5%, of C&I total sales as compared to $43.8 million, or 10.1%, of segment total sales in the prior year. This margin increase was primarily driven by operating leverage on higher shipments, and the net favorable impact of acquisitions and divestitures. Adjusted EBITDA for the Residential segment was $200.8 million, or 27%, of residential total sales, compared to $160.2 million, or 23.4%, in the prior year. This margin increase was primarily driven by favorable price cost impacts operating leverage given higher shipment volumes, and lower operating expense investment in Energy Technology Solutions. Now switching back to our overall financial performance for our third quarter of 26 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $109 million as compared to $66 million for the third quarter of 25. Total other expense net improved to $400 thousand in the current year quarter from $24.7 million in the prior year. Lower net interest expense, a reduction in our Wallbox investment for value adjustment, and a loss on refinancing of debt in the prior year all contributed to this improvement in total other expense net. GAAP income taxes during the current year third quarter were $34.2 million, or a more normalized effective tax rate of 23.9% compared to $11.8 million, or an effective tax rate of 15% for the prior year. The prior year effective tax rate included certain favorable discrete tax items that did not repeat in the current year quarter. Diluted net income per share for the company on a GAAP basis was $1.83 in the current year third quarter compared to $1.12 in the prior year. Adjusted net income for the company as defined in our earnings release, was $151 million in the current year quarter or $2.54 per share. This compares to adjusted net income of $108 million in the prior year quarter or $1.83 per share. Cash flow from operations was $171 million during the current year third quarter, as compared to $118 million in the prior year. Free cash flow, as defined in our earnings release, was $132 million as compared to $96 million in the third quarter of 25. This strong increase in free cash flow during the quarter was primarily driven by higher operating earnings partially offset by increased capital expenditures in support of our C&I capacity expansion initiatives. Total debt outstanding at the end of the quarter was approximately $1.33 billion, resulting in a gross debt leverage ratio at the end of the third quarter of 1.4x on an as reported basis, which is within our target gross debt leverage range of 1x to 2x adjusted EBITDA. With that, I will now provide further comments on our updated outlook for 2026. As disclosed in our earnings release this morning, we are maintaining our full year 2026 outlook for overall net sales growth. We continue to expect consolidated net sales for the full year 2026 to increase in the mid to high teens percent range as compared to the prior year which includes an approximate 2% favorable impact from the net effect of foreign currency acquisitions and divestitures. In addition, we are maintaining our previous sales growth guidance ranges for both C&I and Residential segments. C&I segment net sales growth is still expected to be in the low-30s percent range compared to 2025, as revenue from products sold to the data center market continues to ramp. Within the C&I segment, now expect data center revenue to be nearly $500 million for the full year 2026 as we continue to increase our backlog for products sold into this market. For the Residential segment, we continue to expect net sales to increase at a high single digit rate compared to the prior year. Consistent with our historical approach, this guidance assumes a level of power outage activity in line with the longer term baseline average for the remainder of the year and does not assume the benefit of a major power outage event during the year. Residential year over year net sales growth is expected to accelerate in the fourth quarter due to a softer prior year comparison that included the impact of very low power outage activity and the transition to our next generation home standby product line. With regards to our gross margin guidance for 2026, we continue to expect full year gross margins to be in the 40% range. Inclusive of tariff refunds in the second quarter which benefited full year margins by approximately 150 basis points. Specifically for the fourth quarter, gross margins are expected to moderate sequentially to the 37% to 38% range due to the impact of sales mix from the significant projected sequential growth in data center sales and other inflationary pressures. Now looking at our updated adjusted EBITDA margin expectations for the full year, as a result of our third quarter outperformance, we are raising our adjusted EBITDA margin guidance range to 20.5% to 21%. This compares to our previous guidance range of 20% to 21%. This full year range includes the previously mentioned tariff refunds that were reflected in our second quarter results. Specifically for the fourth quarter, we continue to expect adjusted EBITDA margins to be in the 20% range resulting in a 300 basis point improvement relative to the fourth quarter of prior year. On a sequential basis, we expect improved operating leverage on higher shipment volumes and seasonally lower operating expenses to allow us to hold EBITDA margins consistent with the third quarter of 26. As is our normal practice, we are also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2026. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add back items should be reflected net of tax using our expected effective tax rate. Full year 2026, our GAAP effective tax rate is still expected to be between 24.5% to 25%, This implies a GAAP effective tax rate of 25.5% to 26% for the fourth quarter of 26. We expect interest expense to be at the higher end of our previous guidance range of approximately $65 million to $69 million for full year 2026 given modestly higher interest rate assumptions. Our capital expenditures are projected to be approximately 4% to 4.5% of our forecasted net sales, for the year as we continue to invest in expanding our large megawatt generator production and packaging capacity. Depreciation expense is now expected to be approximately $112 million to $116 million for the full year 2026. GAAP intangible amortization expense in 2026 is now expected to be approximately $114 million to $118 million during the year, Stock compensation expense now expected to be at the lower end of our previous guidance range of $54 million to $58 million for the year. Despite our elevated CapEx investments to drive our data center capacity expansion, free cash flow generation remains strong and is now expected to be approximately $450 million for the full year 2026, as higher operating earnings, lower working capital use, and incremental data center customer deposits are driving free cash flow higher relative to previous expectations. We full year weighted average diluted share count is now expected to be at the lower end of our previous guidance range of 59.5 million to 60 million shares in 2026. And finally, this 2026 outlook does not reflect potential additional acquisitions, divestitures, or share repurchases, could drive incremental shareholder value in the fourth quarter. This concludes our prepared remarks.

At this time, we would like to open up the call for questions. Thank you. Ladies and gentlemen, as a reminder to ask a question. Then wait for your name to be announced. To withdraw your question, please press 1-1 again. Please limit yourself to 1 question only. Our first question comes from the line of Tommy Moll with Stifel. Your line is open.

Good morning and thank you for taking my questions. Hey, Tommy. Aaron, you mentioned a pathway to potentially double the C and I revenue line in 2027? If we just use the Q4 revenue as our base, what can you tell us about the sequential uplift from there? it is going to be important for us to have some sense of how that progresses. Thank you.

Yeah. Thanks, Tommy. So yeah, Q4, you know, depends on kind of how you guys have modeled it. Everybody's gonna probably do it a little bit different. But I think if you kind of take our guidance this morning, which we are we are holding the full year guidance. You know, there was just some timing between Q3 and Q4. I mentioned the ramp up of our final phase of our project at Beaver Dam to consolidate our-- you know, non-data center products really. In effect, it is our smaller output products, and that, that was a little bit of a drag on the quarter beyond our expectations. But nothing severe and nothing to catch. We are gonna make it up. But there is a huge ramp as you go into Q4 you know, as we, you know, we talk about hitting that 500 million of data center shipments for the full year, there is a big ramp just to hit that. In Q4. As we bring Sussex online. We have run our first units down the line there, at the end of the third quarter, and now we are into, you know, kind of the significant ramp. But then as you get into know, 2027, there is going to be a significant ramp on our data center production rates. As we said, you know, we are tripling we are tripling our capacity. So kind of first half, second half, there is there is a pretty big lift. Go from first half to second half. From a pacing perspective, if that is kind of the heart of your question, But that is, you know, that is something that you know, I think we are yeah, we are pretty confident in. We have got the backlog for, kind of 1-third, maybe first half 2 thirds, second half, kind of thinking about that. In terms of the data center? In terms of the data center Yeah. Specifically. I think when you step back, you know, I. You are right. We mentioned that potential path here to doubling our global CNI business, which I think is just super exciting. Because we. I have been saying that we could double it in the next 3 years. Right? The next 3 to 5, I think I even said. Here we are, you know, next year we are gonna double it off potentially 26's number, which is mind blowing to me in terms of just the uplift. So, You know, it is. there is a lot that is gotta go on to make that happen, but we believe we have got the supply chain. We believe from an execution standpoint, we are in good shape. I would also say though, Tommy, just to be. If you kind of step back and wait the whole company. Right? I mean, if you take that doubling of the C&I business next year and you kind of look at our framework that we laid out back on Investor Day back in March for everything else. For Resi, for the other non data center C&I. Sean, that puts us kind of at a $7 billion clip for top line for net sales for next year as a company. Which is a dramatic increase over where we are at today. So. 4 point 9. Yeah. 4.9. I think the total guidance is a little bit higher than that, but A little higher. Yeah. But it is, you know, it is a it is a huge a huge ramp.

Thank you. Please stand by for our next question. Our next question comes from the line of Michael Halloran with Baird. Your line is open.

Morning. Hey, Michael. Hey. So just following up on that. Maybe just more specifically, could you run through the capacity build schedule when that should, in your mind, kinda hit that full run rate, And based on the conversations, that you are having, is there-- are you seeing an incremental need for further capacity moves And then I guess as a mild sidebar, how does the strength of the quoting you are seeing in non data center large gen sets fit into that equation?

Yeah. Thanks, Mike. Maybe I will tackle that first. I mean, the quoting's been you know, we have quoted a lot of products, a lot of projects. Those are long sales cycles as we know. The bigger you get into the size of the product, the more complex the project. And obviously, the larger the dollar amount, you know, in terms of financing those projects. I am talking non data center large megawatt projects now. there is just long sales cycles. We have we have definitely taken orders there. And it is growing. But in all honesty, it pales at this point in comparison to what we are seeing in the data in terms of that $4.5 billion of backlog. On the capacity ramp, I think what is really interesting there is we have kind of said we are going to triple capacity by you know, I think we have said by the third quarter of next year is kind of when we would hit that tripling. And, you know, we have been kind of saying $3.75 billion. So I would probably use something closer to $4 billion, right, just to round it up. And just because as we get, you know, as we start to lay out our, you know, kind of product lines here and we gained some experience building these sets. We feel We are feeling incrementally more positive about what we can get out of the existing footprint. So call it $4 billion by, you know, kind of the second half of next year And kind of ending this year, you know, as we said, we are kind of in that, you know, $1.25 billion. A company, it might be a little higher than that in terms of what the capacity would be But, you know, we are approaching a number if you just take the backlog. If you kind of take that backlog and kind of piece it apart, more than half of that backlog is for 2027. So, you know, the. You know, there is there is north of that. North of half there that is going to come through in 2027. So we still have room to take some additional orders. The team continues to quote. I would remind everybody though, you know, we have got a lead time there that we are quoting kind of in the 45- to 50-week range. So, you know, you just kind of do the math on that. And whatever orders we have not received by Q1 of next year would be pretty tough to fulfill in 27. So, you know, our backlog from this point till about, you know, maybe the second half of first quarter next year, That will be kind of what we are looking to fill up for capacity. Beyond that, you know, the other part of your question, we continue to evaluate as we have said, what is the next leg of growth look like? Should we, you know, perhaps land another major account? And, you know, we keep talking about hyperscalers, but we are landing major accounts on non-hyperscalers as well. Locator accounts are very large. And so know, I. The progression there is gonna be important for us to watch. We are kind of watching how it goes here. I would say over the next, you know, kind of 90 to a hundred and 20 days as we get into Q1 next year. As we ramp that production in Sussex, We bring our Belvedere packaging facility online. I mentioned that in the prepared remarks as well. So all of those things are, you know, projects that are in flight. Our team is doing a great job there. I am really proud of what we have done to be able to get the first units down the line in Sussex earlier than we had thought. Got them. You know, we are we are fully testing, fully producing at this stage, and fully ramping that facility. We have already been producing in our Oshkosh facility And, you know, that is something that is exciting as we as we add to that. As we bring Belvidere online as well. And then I also mentioned internationally, you know, we have got facility expansion plans in Europe, in Asia, and in Latin America. And those are all the direct result of orders that we have taken. Orders that are in our backlog today to fulfill those orders, we are adding expansion plans. And they were, you know, they were plans that we have been talking about here as part of that tripling. it is nothing incremental to that at this point. But I think it is, you know, further evidence that we are gonna have the footprint that is capable of approaching close to $4 billion annually in sales just for the data center market. And then we continue to evaluate kind of what would the next level of capacity look like beyond that.

Thank you. Our next question comes from the line of George Gianarikas with Canaccord Genuity. Line is open.

Hi. Good morning, everyone, and thank you for taking my questions. Hey, George. I am just curious as to how you view the recent executive actions targeting foreign produced components within the bulk power system from the Trump administration and any impact that you can see in how you are evaluating your component and engine sourcing strategy as a result of that? Thank you.

Yeah. Thanks, George. Yeah. This has been a topic of discussion, obviously, since the draft of that. Executive order was released. it is not the first time It was also done in the first administration, the first Trump administration. They released that near the end of the administrations. Tenure. And, you know, it was kind of reissued here by this administer. Version of the administration. It really is targeting, you know, and if you just do a direct read of it, it is targeting 69 thousand-volt applications, which is absolutely utilities, you know, utility grade power. So the lines, the equipment, and it is really geared around cyber security. Right? So, obviously, any kind of, you know, foreign entities of concern, you know, having any of that in the grid. Right, in the grid system that could potentially cause a cyber type of issue is what that executive order is aimed at. Of course, it is broadly worded of course, you know, it is left to interpretation in the final wording of that is gonna come out. it is supposed to come out in December. It is clearly on its face. And our policy team is highly engaged with Department of Energy and other stakeholders there. You know, I would remind everybody that, you know, when we announced our agreement with Amazon, that was after the draft of the executive order was issued. So we took our customers like Amazon and others who obviously had the same questions that you are asking, George, You know, wanted to understand our position on that. Then they obviously got counsel themselves to understand the, you know, the reading of that EO and kind of what could get caught up in that. So we do not believe that. You know, we believe there is a small chance. But, you know, like anything, until you see the final wording, you are not sure. So, you know, if something were to happen there as we have talked, our current engine supplier, we have been discussing, you know, kind of domestic options with them to supply here in The US. To build in The US. They are looking at that anyway to support our growth. Tremendous growth that we are forecasting here in the next several years you know, that can be satisfied today from their plants in Europe. And, in Asia. But you know, they think that from a logistics standpoint and just a you know, lead time standpoint, maybe having those products produced domestic would might be a better might be a better thing to do. So that is an evaluation. We would obviously accelerate those plans should you know, we end up with a negative reading on that executive order. But again, everybody we have talked to, we believe that is a very small Front of this meter high voltage. Front of meter high voltage applications, not backup power. Our generators are not connected to the grid. Connected to the facility. They are not grid connected. We do not push power back to the grid and there are no. We are not buying any controls from foreign entities to concern. In fact, we make the controls in The UK. There are controls, deep sea controls that we manufacture. And so, you know, they are they are there is really no cyber security threat there and there is certainly no kind of way to have those gensets you know, even attached to the grid. So we just. We believe that, you know, once we clarify that with the administration, we believe that we should be fine. Thank you.

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

Hey. Good morning, guys. Morning, Jeffrey. Morning. Just on kind of the ramp. 1, just maybe just talk about supply chain readiness, comfort with the engine supplier for the ramp. And then just as you talk about going from, I guess, $1.25 billion to $4 billion just what do you need to do Is it just adding lines, adding people, adding shifts, or is it is there any more complexity to it? Thanks.

Yeah. Thanks, Jeffrey. Yeah. From a supply chain standpoint, we continue to dual and triple source all the major components there. Obviously, with the exception of the engine at this point. Given the limited supply of, engines. High horsepower diesel engines around the world. But everywhere else, we are dual and triple sourcing all the major components. And, you know, while supply will remain tight, we believe we have a path based on our deep conversations And I would just point out, you know, our hyperscale customers in particular, hyperscaler 1 who we have not named, but also Amazon, have done their own deep due diligence on our supply chain, to ensure that there is not only redundancy, but also capacity in the supply chain so that we can provide products at the levels that they are requesting at. Or higher, you know, as they told us. You know, hyperscaler 1 has told us that they will go higher in 2028, if we can demonstrate execution in 2027. So we feel, you know, feel good on chain. Obviously tight, something we watch But supply chain is an area where we have deep expertise. We have a lot of resource and a lot of talent across the enterprise. We have always had that, and we are now applying it here. I think it is really interesting to take that is almost always been focused on our residential business, if we are being honest, and move that over to our C&I business in terms of just the amount of activity to stand up that new supply chain and to ensure it is capacity and redundancy. In the overall capacity increases, think we have we have called this out before, but, know, we. The kind of footprint, if you if you wanna talk about, you know, the building, the, you know, the 4 walls that we have at each of the places in Oshkosh, in Sussex, our packaging capacity in Belvedere, the acquisition of Enercon down in Peoria, Illinois, the international footprint that we have and the expansions we have. You know, we are talking about there. We are adding a new line in Sussex. There is investment there, which we have talked about. that is a big part of how we get from 1, in a quarter to 3.75 billion or $4 billion, if you will, tripling of capacity. The investments we are making in the international expansions are also part of that. You know, getting to that kind of tripling of capacity. But the CapEx to do that, as we have called out, is relatively you know, modest. In the grand scheme of things. And the ROI is incredibly strong. In a short term period, in a very short period. So, you know, adding additional shifts to those lines, adding more manpower, is really what we are gonna be doing there. We may have to pick up some more space for raw material storage and for finished good storage, things like that. Those are areas where know, we could see additional expansion needs. But those, again, you know, are relatively cost effective, you know, in terms of. As an example. To hold the finished products. Those are big open fields. You know, you are not talking about you know, buildings, big buildings or things like that. Those are not you know, that is not. I would not say that is gonna be a constraint. We do not see that as a constraint. And raw materials, somewhat similarly. I mean, we can find space in our network today third party logistics, things like that to accommodate that as we grow. So working through all of that, but we feel, you know, that we have got a really high visibility path to that you know, that increase over next year. And that gives us confidence again that to talk about the path and the framework here to double our overall C and I net sales for 2027. Thank you.

Please stand by for our next question. Our next question comes from the line of Brian Drab with William Blair. Your line is open.

Good morning, Brian. I was just wondering if you could give us a little bit more on the visibility that you have to 2028? Because you made the comment that 2-thirds of the, you know, maybe roughly 2 billion in data center sales in 2027 will come in the second half. You know, that would mean like, an annualized run rate of, like, $2.7 billion in data center in that second half. How much of that capacity do you expect to fill, I guess, is what I am wondering in 2028? Because you are gonna have you know, $4 billion. it is, you know, 50% more capacity than you are exiting the year with. Is that Amazon? Is it the other hyperscaler? You know, what gives you the confidence and urgency around adding that much capacity? As you look at 2028.

Yeah. Thanks, Brian. I think the big a big part of that confidence, if you will, or our views on meeting that capacity really revolve around a couple things. 1, I would say the strength of our non-hyperscale order opportunities. Right? So the quote book there that we have got the funnel is incredibly strong around the world and here domestically. And so as those projects you know, move to the finish stage, to the final stages, we wanna make sure that we have got capacity to accommodate that. So that is a big that is a big part of you know, if you just step back and you look at kind of you know, our backlog here, the 4.5, as we said, more than half is for 2027. Less than half would be for 2028. And that does not include anything for hyperscaler 1. In 2028 today. So we do not have that in our math. So if you just take that number what they have told us is if we execute, it can be as big or bigger than $700 million that we anticipate doing with them in 2027. So you know, if you put that into the number, and then, you know, you add continued momentum with our non-hyperscale customers, at the same level that we are winning today, you know, we can see a path to you know, needing that capacity. 2028. We think that is a that is an opportunity. The other the other kind of open question, of course, and we have talked a little bit about this, is could there be another hyperscale customer You know, we have as we mentioned, I think last quarter, you know, we started deeper negotiations with a third hyperscale partner and those. That will be like the like the first 2 that we anticipate that will be a know, a long process. But and probably would not have any impact until 2028 for sure. I think at this stage of the game, just knowing the length of those, to get on those approved vendor lists the length of those processes, and the depth of those processes. We just do not anticipate that being done prior to, as I said before, kind of clock running out on our. Where our lead time sets for anything to happen in 2027. Would have to happen by the end of Q1. And I just do not see a path to getting a deal done with a third hyperscaler by the end of Q1. it is. I think it is just gonna be you know. And also, know, that those customers, because the lead times are so long in the market today, they are already planning out They are 27. You know, they kinda got everything nailed down. So when we are talking about additional opportunities for another hyperscaler, we are really talking about 28. So as that all becomes clearer, you know, I think I am not worried about whether we are gonna consume them. Capacity we are talking about here. This you know, kind of 4 billion. What I am worried about is do we need more? And that is where I think, you know, we will as I said before, we will watch very closely this play out, and we will react to that as appropriate. We are starting to plan. We are saying to our teams, what would it take to. You know, if we wanted to increase again another 50% capacity, you know, if we wanted to go from $4 billion to $6 billion a year, what does that look like And what would that take? You know, as I said before, I think within our the 4 walls of the buildings, we have got the footprint we have today. That 4 billion represents kind of maxing out what is in that footprint today. So it would. We think it is gonna take some additional footprint. You know? And that capacity can be added in a number of ways. Could be greenfield site, could be an existing site. You know, could be an acquisition. Right? We are continuing to look at a pipeline of acquisitions how we might. That might help us expand capacity as well. So a lot of focus and a lot of discussion on capacity here. As we go forward. Thank you.

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

Your line is open. Good morning, guys. If you can just help us understand how we should think about the C&I margin progression as hyperscale volumes ramp? Into 2027 and, I guess, into 2028 Yeah.

Thanks, Manish. I. Probably, maybe, I do not know your. Yeah. I know. I think in the fourth quarter here, as the data center business continues to ramp sequentially into the fourth quarter. I did mention that gross margin will moderate sequentially down to that 37% to 38% range. We are obviously still putting our budgets together for 2027 and our longer range plans for 2028. But gross margins, you know, on a consolidated basis, will moderate, but if you just look at the C&I segment, it is that. that is what we are evaluating to see how we can hold Maybe the consult. Maybe the C&I segment overall. C&I segment gross margins might moderate a bit, but we will definitely make it up on the OpEx line and EBITDA margins. We will definitely improve for C&I segment.

So I think we have said sort of that high teens range over the longer term into 2027. Yeah. I think we still believe that is possible. In fact, I think we think it is gonna be possible faster. Yeah. As we ramp the leverage we are gonna get on the OpEx, it is gonna be tremendous next year. So I think as Jorg said, we are putting all that together still, Manish, but we are you know, we are we are incredibly positive. We are already seeing some read through here, and we are just in the early innings. Still targeting improvement in C&I segment. Absolutely. EBITDA margins, to that teens. But the drop-through on the overall company, if you will go back to our framework from the Investor Day back in March, you know, we are still projecting that kind of low twenties EBITDA margin for. Especially as you scale. Especially as you scale. I mean, the drop through is fantastic. So, we are we are incrementally positive, I would say, there. That we are gonna achieve those numbers quicker than we were originally, planning given the size of the data center, opportunity and how that is grown much faster. Than what we had projected back in March. Thank you.

Please stand by for our next question. Our next question comes from the line of Praneeth Satish with Wells Fargo.

Thanks. Good morning. On the non-hyperscaler side, it seems like you are seeing good traction. I think $500 million of bookings this quarter, if I heard you correctly. And I guess, I mean, all of that seems encouraging given, you know, some of the financing concerns that we are hearing about. For the Neo Clouds. And so I guess as you look into 2027, are you seeing any change in customer conversations or project activity or the scope of your backlog on that non hyper scalar side? And do you think we could see kind of the same level of bookings, for that business next year or potentially grow it from here?

Yeah. it is a great question, Praneeth. You know, the funnel is huge. Outside of the hyperscale business. Hyperscale customers directly, you know, we are seeing and we are starting to see repeat customer you know, orders. Right? So non-hyperscale customers, colocators that already won projects with that we are bidding now second phases, third phases, other projects. We have got a series of kind of executive top to top meetings coming up with a number of our larger I would say, colocator customers. I will be visiting 1 on Friday, as a matter of fact. And, you know, we are talking about long range plans here. Know, in terms of their. I would just say their confidence to put a put a finer point on it. Their confidence is very high that they are gonna need a lot of product for, you know, for the foreseeable future. And so what they are pushing us on is in, you know, in light of the fact, kind of our announcement with Amazon. I think this really did trigger a lot of these conversations kind of kicking into another gear. Is just a level of wanna have a level of understanding of what we are willing to do or what we can do for them outside of the hyperscale accounts. So there is a. You know, maybe call it a level of concern that, you know, that the allocation does not shift, you know, 100% to hyperscale customers and away from the colocators or non-hyperscale customers. That is not our intention. And as we said, it is a big part of why we have pegged the backlog or the capacity number at, you know, kind of close to $4 billion. We believe that there. We need room to have a diversified customer base there. And we are very bullish on, you know, what that order book could look like. I think if you did the order, you did the backlog roll forward, it is actually almost $600 million of non-hyperscale orders that we received in the last 90 days. Just looking at kind of that roll forward from $1.6 billion to the $4.5 billion. Given that we shipped $100 million as well in the quarter. So, you know, it is a strong order book. it is a even stronger pipeline. And it is why we are thinking about, again, just to reiterate the point, we are thinking about what, you know, is the next leg of capacity look like We are asking, you know, for strong commitments from these non-hyperscaler accounts. You know, it is a. it is something to help us get comfortable with additional investment that might be needed. And those are the kinds of conversations we are having in those top to top meetings. Thank you.

Our next question comes from the line of Tanner James with Jefferies. Line is open.

I will try to sneak 1 in on residential. Thanks for the standby color, by the way. Some encouraging trends there. I just wanted to focus on the margin side now that you have seen some more normalized volumes. Assuming standard volume growth, how should we think about potential operating leverage for the segment on a go forward basis? What portion of the step up in year over year margin performance would you consider to be durable? And how might you frame preliminary expectations for 2027? Thanks.

Yeah. I think we are we are the residential margins are coming out on a gross margin basis, that is-- when we have modeled it out, that is basically we think we can sustain that. We think it is something we can achieve. Where you get further margin improvement on the EBITDA line is that operating expense line, and that is what if you look at back at our Investor Day, we expect to continue to drive further operating leverage, operating expense leverage, and further margin improvement Now having said that, we said in 2028, we would be close to 27%, and I think we delivered that the quarter. But granted, that is seasonal, I guess, seasonally strong period. Strong period. But we also But for a full year, I guess, you know, we would expect it to continue to generate strong EBITDA margins at residential segment.

Yeah. I think the key there is what you said, York, that the gross margin, we feel good about being able to kind of hold that Now that, obviously, there is a lot of things that go into that as you guys know from tariffs to commodities to everything else. So we are we are rolling up our plans for 2027 specifically. But just. If you just go back to the framework we provided, and kinda using 2027 gross margin or Q3 gross margin as kind of a as a harbinger for the future, I think that is probably realistic. I think the EBITDA margin seasonal. You know, it is a seasonal business. So as York said, I think, you know, maybe Q3, is a little bit of a, you know, kind of just seasonally, we outperform kind of the full year because of the because of the higher sales volume that we generally experience in the back half of the year and Q3 specifically. But we are also. Just the last part of that, you know, as we not only leverage the operating expense, but we continue to talk about our you know, recalibration of our OpEx for our energy technology spend. So that also, you know, is going towards you know, improving the EBITDA margin for that segment of our business.

Yeah. The only other thing, I guess, is reminding everyone that Q2, we had a pretty high tariff refund going through. that is right. And a lot of that went through the residential segment. So you do not want to run-rate obviously, that Q2 number. There was a small. A very small amount that came through in Q3. That you would not run rate, but for the most part, it is ineligible. it is negligible.

Thank you. Our next question comes from the line of Nitin Doshi with Piper Sandler. Line is open.

Good morning, Aaron and York. Thanks for taking my question. Just more broadly, are any hyperscalers or colocation customers today asking for nat gas or bi fuel backup instead of diesel. Or said differently, what share of RFQ specified gas in your view? Yeah.

Thanks. Nimble for us, on the. For backup power, we have had conversations about gas Generally, the projects are smaller in nature. Some of them, I would refer to more as edge data centers. We have a customer, in fact, that we provide a mix of gas and diesel product for backup. Again. But as you get into larger power ranges, the problems that you run into in using gas as backup is that the machines themselves are just. They are not as power dense, meaning they take up a lot of space. The conversations about gas with hyperscalers and for large projects, is almost always around prime power. So behind the meter prime power. And that is an area that as we have talked, you know, today, we do not have a product offering for that, and so that is not inclusive in anything that we are bidding today. But, you know, we continue to look at that product category. I think there is. You know, there is a viewpoint that you know, honestly, you know, those are places that for a reciprocating engine, genset, to run on natural gas and provide prime power to a facility. Norman facility operator wants to do that any longer than they have to. They want to have GridConnect. That would only be a bridge solution or a very short term interim solution. Other solutions, you know, turbines and things like that, combined cycle turbines are a much better way to do that because they are more efficient. And, you know, the power outputs are greater. You have fewer machines, obviously, the cost is higher, but, recip engine, you know, gas machines for prime power, I would view as a very short term bridge solution until a facility can get grid connected. No 1 operator wants to run you know, an energy plant using that type of technology for any length of time. that is just not at volume, at scale. It just you know, it is a. it is not it is not a technology that is, that is best suited to that, I would say. There are certain applications where it works very well. Landfill gas where you are trying to use, you know, kind of other feedstocks and things. But when you are talking about pipeline gas, and feeding that as prime power, using a recip engine is probably not probably not the best way to do that. Thank you.

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

Thanks. Good morning, everybody. Yes. I am just curious. You. You have you have covered a lot. When you look at the residential home standby business, and, you know, you have the new products that have rolled out. Have you seen any change in from. On the demand side? I am just kinda curious if you are if that is impacting demand, or is it or is it more of an efficiency gain on your part? And maybe the alongside of that, as we sort of think about the installation side, have do you have any feedback from the dealers as to how that process is going?

Yeah. Thanks, Stephen. Yeah. The new product line, which, by the way, is packed with, you know, just a lot of technology, for efficiency to not only produce the product, so efficiencies that we get, but efficiencies on the installation and service side as well. But I would say that probably 1 of the biggest features in the new product line is out of the box connectivity on a cellular basis. So every single machine is connectable, and we have. Our fleet connectivity rate is something like 99% right now, which is when we had a Wi Fi protocol as our standard protocol, we usually got about a 50% to 55% connectivity rate. So we are now seeing almost 100% of the fleet and what it is doing, which is fantastic information back for us, back for the dealer, back for the customer. Terms of, you know, making sure that unit's ready to run. In terms of feedback from dealers, you know, once they do a few of them, I mean, it is like anything. it is a it is a new product. A bit of a learning curve with every new product. So once people get through that and they do a few machines, they come to appreciate, I think, the, you know, the install installation, the ease of installation, and you know, the efficiency gains there. So and then also, again, having each machine connected so that the dealer can see it and monitor it provides them a lot of, you know, potential opportunities to make sure that a customer is not let down. When they need the product and so. And that just provides an overall better experience for everybody involved. And so I think over time as we. As the product category matures, but early returns are good. there is just this learning curve that people have to get through. And, you know, we have gotten through that learning curve, I would say, in our own facilities quite well. We have now. Our facilities in Whitewater and Trenton have returned to kind of our. The pre next generation product in terms of production levels, in terms of our labor efficiency to put those machines together, you know, all of the things that we look at first pass test rates, all of those things. We are very pleased with the way that is run through our facilities. So and, you know, it is just. We continue to see more and more of the product get installed in the field. And as customers and dealers get more comfortable with it, you know, that is gonna be. that is gonna only get better from here. Thank you.

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

Good morning, gentlemen. I appreciate the opportunity. In terms of the residential just following up on that. I think in the script, guys mentioned adding new retailers into the footprint there. Just talk a little bit about the expansion of the retail footprint as well as promotional activities in the quarter and how they benefit the quarter and how to think about that going forward.

Yeah. Thanks, Keith. So on the retail side, yeah, that comment was maybe more specifically made around our portable generators. Our team there is doing a great job. You know, it is a portable generator market. We are you know, our founder of this company, basically, you know, the if you have a portable generator today or anything that is sold out in the market, it traces its lineage back to Generac, to our founder back in the 1.96 thousands. Late 19 fifties and early 1.96 thousands. You know, we are the pioneer in that market. And, you know, we. We have kinda add the home standby business grew over the years, you know, portables were, I would say, probably, I want to say they were starved of resources, but it is just like anything. You know, it is like. I call it kind of conscious neglect. You know, you go through a process where you are just not. You are not putting resources into everything at the same level. We made a decision a couple years ago to do that. We brought in a new leader for that group, specifically a general manager. To lead that, and he and his team have done just a great job. And that is manifesting itself now in. You know, if you if you know the retail space, product line reviews, PLRs, as we call them in the lingo, we. We have done a great job picking up share there. On the product line review side and getting that share in and then having and as we said, having some. A little bit more active weather patterns here in the third quarter. Our portable generator business is growing nicely and doing well. And it is really kind of an important thing when you step back You know, you wanna try and be a bigger provider of products to your retailers. Right? You do not wanna just be a 1-trick pony in terms of I give-- you know, if we were just supplying home standbys into our retailers, you know, you wanna have an array of products. And as we have said previously, it is a trade up experience for people who own or own a portable generator. You know, they go oftentimes go on to owning a home standby when their circumstances change. They go on to owning a home standby. So having them have a good experience with a portable product with our brand, we think it is just really important in getting people to ultimately convert to a home standby buyer, whether it is next year or 10 years from now and that, you know. And also say, you know, look, I think consumers are a bit under stress. You can look at the. Across the spectrum there and you know, there is. Whether it is K-shaped or whatever shape depending on what letter we are on now to describe it. But, you know, there are consumers who they still have backup power needs, but maybe, you know, a home standby is just not attainable. Terms of where their budget is today. Portables are a great option. You know, as a first as a first line of defense for a homeowner to protect their family, protect their home. Protect their business even. In some cases, we see that. So we love our retail strategy. We got a really strong retail team. Portable generators are a cornerstone of that, but we, you know, we have a lot of retail business as well with home standby. And the home standby business just keeps trucking along. I mean, that business is it is just fun to watch. You know, it is been tough. I think we are coming off the bottom now of a number of quarters. I do not know how many quarters we strung together there, Kris. 4 quarters of, you know, kind of down below average outage environment, but we are kinda coming back now and we just see. You know, we see a tremendous opportunities there. I think we are closing in on 7% penetrated, about 6.75% of households that have the product, and the opportunity is enormous going forward. Thank you.

Our next question comes from the line of Christine Cho with Barclays.

Good morning. Thank you for squeezing me in. You know, we have seen error permit air permitting and emissions requirements just being more scrutinized on prime power. But curious if this is trickling to diesel backup gen for data centers, in certain states or markets with tighter emission standards. You know, how easy would it be for customers to change equipment specs and to depending on the outcome of the midterms, do you think this is also something that could become more stringent? And if so, like, what sort of changes would that entail for you with respect to supply chain? Thank you.

Yep. Thanks, Christine. Good question. I would say that a good chunk of our backlog today already includes products that. Where the emissions regulations are more stringent than the current federal levels. So in backup power products, high horsepower diesel, product ranges, those products are required by EPA to meet what is known as tier 2, levels for diesel engines for emergency backup. Let's see if you can show that those products are gonna be used in that capacity. But we have customers who are requiring best available commercial technology, which would be more tier 4. So that is kind of the difference being, you know, an over the road truck engine that runs all the time, have a higher, more stringent level of emissions requirement at the federal level. And we also see at the state level that you know, and it is happened for years in places like California. We are seeing it in certain East Coast states, certain pockets around The US. that is been a long standing trend. And you know, irrespective of administration, to be honest, you know, whether the midterms go 1 way or the other, that is a that is something that continues to march forward. But there is technology that allows us. We can add technology to these pieces of equipment that allow them to meet those more stringent, levels of emissions. For backup. You know, I think if you step back you know, and we are happy to add those pieces of equipment to these gensets. But the reality of it is they just do not run that often. And so in terms of the overall total output, certainly with prime power, you need to have that. Right? I mean, that is you are talking about, needing to control NOx and particulate matter for diesel engines, and that would be a tier 4 type of requirement. You know, full stop. But if you are in an emergency situation, you know, you are adding a lot of cost and complexity to the machine. You really you really probably do not need but we are happy to accommodate that. And again, sometimes those are requirements at the project level because of the specific siting location of the project. Being in an air quality district that requires that, or we have got a customer that has just said, look. We do not-- you know, we understand it is not required at the federal level, but we want that. We have decided that is a position we are gonna take, and we do have customers that have taken that, and we can satisfy that. From a supply chain standpoint, again, the rest of our supply chain, there is some constraints there. But, you know, this is kind of I would say, it is well trotted technology. it is not new technology. it is around using catalysts and, and other technologies to reduce the NOx and particulate matter particulate filters, things like that go into the machines or on top of the machines. In this case, there is not room inside the box. They actually sit on top of the box. And we are doing that today, but we are. And we are looking to add additional supply base there as well. As that becomes a more a more frequent request from customers. Thank you.

Our next question comes from the line of Joseph Osha with Guggenheim Securities.

Thanks for taking my question. Let me just state at the outset that I hope the new residential products have spark plugs that are easier to change. that is that is my only request. Hard to get at that 1 plug. 2 questions for you. First, on the on the colo side, is it fair to assume that a lot of that business is concentrating into, you know, some of these large data center REITs that we both know about, or is your business more dispersed? And then the second question, following up on some of the others, you know, York, I hear you on gas versus diesel, but we do see, you know, what is still a lot, know, even Cat and Cummins investing pretty heavily there. So I am just wondering, are they seeing something that you are not? Thank you.

Yeah. Thanks, Joe. Yeah. I think on that point, specifically on gas, you know, those companies, the competitors you mentioned, already had lines in those spaces. And I think they are adding capacity to sell those existing products. For us, it would be a new product line, and we would have to design that. So, you know, in terms of the timeline to do that, and then if, again, we believe that bridge power requirement is shorter term in nature, you know, I just we continue to look at it. As a space. We do not wanna ignore it. But right now, we have got our full attention on expanding capacity for our high horsepower diesel backup solutions, which we believe is a you know, we believe there is there is actually an opportunity there for us to be a bigger player longer term as well, as we have said, you know, outside of the data center market. So we wanna make sure that we are doing all the things we need to do there to put us in position to win even outside the data center market. Now on your. The, you know, the first part of your question on the colocators, you know, in terms of, you know, are they. Is it concentrated? You know, there are a couple of bigger guys in there that we are having conversations with. I would say the project the projects that we booked in our backlog today is pretty diversified. I mean, there is, you know, maybe 1 customer in there that is got, you know, a larger chunk of that, but it is not like a disproportionately large portion of that. it is a big part, but it is not disproportionately so. We have a lot of smaller collocators spread out with a lot of projects around the globe. So we feel pretty good about the diversification there. But what is interesting is we are quoting a lot of those larger REITs, those larger REIT based customers or REIT backed customers for future projects. You know, that is where I think we are we are looking at, okay, where do we kind of in terms of allocation. Right? Like, it gets back to the discussion around how much concentration do you wanna have in a customer base. And that is you know, I am never a huge fan of that. I wanna have a diversified customer base both in terms of the number of customers, but also geographically where they are located. that is just, you want to have a healthy customer base. So we continue to be measured about that. And, you know, we. We have had some pretty pointed discussions with some customers as an example. You know, if a customer comes in and they are unwilling to provide a corporate guarantee for an SPV, We are just we are kind of at a point where we are like, you know, appreciate your interest in the product. But if we cannot get comfortable with who the parent company is, and we cannot get, you know, some level of guarantee around that for purposes of us underwriting the credit. For a project, then we are not gonna do it. Or appropriate customer deposits. Or appropriate customer deposits and payment timelines. Yeah. That cover, you know, that de-risk a project. You know, we are not gonna do it. You know, we have a lot of options out there in terms of customers who are interested. And we are kind of getting to that point in the cycle here in terms of being able to be, I think, more selective, which I think is a good thing. And that is leading us down a path that, know, should be interesting as we. You know, as this matures, we will be able to give more color on this. But, you know, today, it is a pretty diverse customer base beyond the hyperscalers. Thank you.

Ladies and gentlemen, at this time, I would like to turn the call back over to Christine for closing remarks.

We wanna thank everyone for joining us this morning. We look forward to discussing our fourth quarter and full year 2026 earnings results in mid February. Thank you again, and goodbye.

That concludes today's conference. You may now disconnect.