Hammond Power Solutions Inc.

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions' fourth quarter and year-end 2023 Financial Results Conference Call. Certain statements that will be discussed in this conference call will constitute forward-looking statements. The forward-looking information and statements included in this discussion are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements will be based on current expectations, estimates, and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements involve known and unknown risks, uncertainties, and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. These factors include but are not limited to such things as the impact of general industry conditions, fluctuations of commodity prices, industry competition, availability of qualified personnel and management, stock market volatility, and timely and cost-effective access to sufficient capital from internal and external sources. The risks just outlined should not be construed as exhaustive. Although management of the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Accordingly, listeners should not place undue reliance upon any of the forward-looking information discussed in this call. I would now like to turn the call over to Adrian Thomas, CEO of Hammond Power Solutions. Please go ahead, Mr. Thomas.

Thank you, operator, and good morning, everyone. Welcome to Hammond Power Solutions' fourth quarter and year-end financial results conference call for 2023. Joining me today is Richard Waldring, our Chief Financial Officer. 2023 was an exciting year for our company. We delivered exceptional results with record sales of $710 million, up 27% over 2022, and with continued growth across all parts of our business. Organic growth continues in the low double digits in North America and 17% overall for our company. Although inflationary price increases have slowed as commodity prices stabilized, Pricing remains resilient as demand continues to stretch industry capacity. We continue to grow our standard products business by expanding our distribution base in the US and through our focus on growing sales in Mexico. The US economy defied the much talked about recession in 2023, and we saw steady growth in this geography. I should mention that Canada growth was also steady and even accelerated towards the end of the year. Our Indian business remains strong with an 85% year-over-year improvement in sales. Quote activity remains strong with target markets being secondary transmission, renewables, service, and multipulse drive applications. With high levels of growth come challenges, and in 2023, we were challenged in maintaining our exceptional service levels. While our stock levels improved on standard products, in the third quarter, we had to readjust our shipping schedules for some of our custom power and OEM orders, due to the high level of growth that came ahead of our capacity investments and at a faster rate than anticipated. This reschedule impacted many of our customers, and we've been focused on catching back up to our reputed performance levels. We thank our customers for their patience and flexibility as our teams work tirelessly through these scheduling challenges. In late 2022, we embarked on the largest capital program in our company's history, allocating $50 million dollars to our growing manufacturing capacity at our facilities in Mexico, Canada, and the US, specifically our MESTA facility in Pittsburgh. Every HPS facility surpassed 2022 shipments in 2023, with our Guelph facility seeing the highest level of growth across operations. The capacity that we started to add to our capital projects helped us tremendously in achieving these new sales levels. However, the bulk of our announced capital expenditures will be spent during 2024 and completing in the first quarter of 2025. This added investment will provide us with future annual capacity of approximately $900 million, allowing for continued growth in the coming years. As we have improved our stock position of transactional products at the end of 2023, we will continue to expand our coverage in the U.S. distribution network as well as in Mexico. Our distributor network, which accounts for more than 65% of our revenue, is critical to us And adding new distributors is a process we take very seriously. To better serve our increasing volumes, we opened a new warehouse in Baltimore, which is now fully launched, and is another step we have taken to better serve our customers and to optimize logistic flows. While we are adding capacity in our traditional product lines, we're very excited about several of our new products focused on power quality and harmonics. For those of you who are newer to the Hammond story, we're seeing increased demand for these products as our customers are increasingly in need for reliable and resilient electricity. Our MESA acquisition continues to grow as part of Hammond Power Solutions and achieved $18 million of sales in 2023. To continue to grow this business and to build a focus on our power quality, we have created a new business unit. In addition to increasing capacity, our team is also busy developing innovative solutions for the market, such as our recently launched sine wave filter, an essential element in our growing power quality portfolio. My last point before handing over to Richard, I'd like to make a note of our commitment to making a positive impact to society and environment. In 2023, we published our inaugural environmental, social, and governance report for Hammond Power Solutions. This report was based on 2022 measurements and was our first step in formalizing our commitments and making our progress transparent. We saw both internal improvements as well as improvement to our externally validated EcoMeta score. With that, I will now hand the call over to Richard to provide you with some financial context to our operations. Richard?

Thank you, Adrian, and good morning, everyone. In keeping with previous quarters, we continue our progressive growth in quarterly sales as we add capacity, peaking in Q4 at $187 million. While growth continued to be fueled by the distribution network, the demand shifted towards Canada in the fourth quarter, where growth had lagged the U.S. in previous quarters. As of previous quarters, the demand for larger, higher-power custom and configured units were responsible for most of the growth. Of the increase in sales of 27%, we estimate that 17% is due to organic growth when MESTA and India are included, 7% was due to price increases carried over from 2022, and 3% was due to the strengthened U.S. dollar. Not surprisingly, the backlog is up from the prior year by almost 20%. It is down by 3% when measured against Q3. The reason for the decrease is twofold. First, with our capacity additions, we are able to work to our backlog more quickly. And second, growth in certain markets in the U.S. moderated in the fourth quarter, mainly in commercial markets, which typically consume our lower-powered standard products. Margins for the year were 32.5%, at the high end of our recent range. This is 2.9% higher than in 2022, with gross margins of 29.6%. These margins are the result of higher operating leverage due to high factory throughputs, stabilizing input costs, a higher proportion of MESTA and power quality sales, and improving margins in India. While we implemented no new price increases during 2023, we did benefit from the carryover effect from 2022. The higher margins in the fourth quarter were mainly due to inventory adjustments due to the physical count and adjustments to inventory reserves. The full year margins are more reflective of our targets than the Q4 margins. SG&A costs in the fourth quarter were at their highest level during the year at 41.7 million, or 22% of sales. Of that, approximately 8.7 million was due to share-based compensation. Without this, SG&A would have been 17.6% of sales. For the year, SG&A costs were 143.7 million, or 20% of sales. Of that, close to 20 million was due to share-based compensation. Without this, SG&A would have been 17.4% of sales. Other increases in SG&A were mainly volume-driven in terms of freight and commissions and investments in people and technology to support our growing business. EBITDA for the year was $96 million, or 13.5% of sales, and adjusted EBITDA, excluding share-based compensation and foreign exchange losses, was $117 million, or 16.4% of sales. This was above our target EBITDA range of 12% to 15%, and is mainly the result of higher operating leverage. Cash from operations for the year was $44.1 million, held back by our increasing need for working capital in AR and inventory to support our year-over-year sales growth of $150 million. Capital spending in the year reached $20 million, much of which was allocated to our capital expansion plans. We expect that 2024 will see spending of approximately $40 million as we complete the new factories in Mexico and Pennsylvania, as well as further capacity additions within existing facilities during the year to support growth in the higher power in custom products. We are pleased with our results and believe that they reflect our ability to leverage our existing asset base while investing prudently to support growth in the years ahead. I will now hand it back to Adrian for closing remarks.