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spk00: Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions' first quarter 2024 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 information and 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.
spk03: Thank you, Operator, and good morning, everyone. Welcome to Hammond Power Solutions' first quarter 2024 financial results conference call. Joining me today is Richard Ballering, our Chief Financial Officer. It's been a short four weeks since we last spoke to you, and I am pleased to update you on our progress for the first quarter of 2024. As we entered the year, we maintained our strong pace of production and continued to grow our quarterly sales volumes. Higher bookings versus Q4 2023 allowed us to utilize our additional capacity more fully, and as a result, bookings and shipments are now closely matched, meaning we are able to keep consistent delivery cycles to our customers, even with higher order intakes. On the demand side, we are seeing a steady pace across most segments and all geographies. As mentioned in our last call, we saw a good lift in our Canadian sales in Q4 of 2023, and they continued to be strong in the first quarter of 2024 with high bookings and sales related to several large projects across our focus sectors like commercial construction, EV charging, data centers, public infrastructure, oil and gas, mining, and utilities, as well as continued momentum within our distribution channels. Our power quality and induction heating sales were lower in Q1 as some large project schedules shifted, impacting both shipments and order intake. Nonetheless, we expect to be largely on track for our full year expectations. As I mentioned in our last call, 2024 will be pivotal for Hammond Power Solutions. The bulk of our announced capital expenditures will be spent this year and completed by early next year. The capacity that we started to add to our capital projects has helped us tremendously in achieving new sales levels and meeting the increasing demand from our customers. As we look out to 2025 and beyond, we continue to see strong demand from our emerging market segments, which include renewables, EV charging, data centers, and semiconductors. To meet this demand, the Board has approved an additional $8 million of capacity investment. This incremental investment will help achieve our goal of reaching a billion dollars of sales before the end of the decade. Throughout much of 2023, the company has benefited from operating at nearly full capacity, enabling us to maximize operating margins. A benefit that may change as we add more capacity in 2024. In the interest of protecting our gross margins, the company has been proactive in anticipating cost increases while being conscientious of our customer relationships. In the last 12 months, we have monitored closely key inputs for our products, which include electrical steel, copper, aluminum, and other materials, as well as labor and certain overheads. While a few material inputs have eased during 2023 and early 2024, they continue to fluctuate and labor and overhead costs have continued to rise. In consideration of persistent inflation and continued market demand for our products, we have announced to our customers a price increase that will be effective as of Q2 2024. Lastly, in January, we announced our last planned leadership transition with the retirement of Bob Yusup and the appointment of John Bailey as our Chief Operating Officer. I would like to thank Bob, who was instrumental in much of our expansion in Mexico, among other significant contributions, and for his dedication to Hammond Power Solutions over his 29 years of tenure. John has been working closely under Bob and has seamlessly taken over the role and has been critical in our recent capacity gains. With that, I would like to hand the call over to our Chief Financial Officer, Richard Bollery, to provide some context to our financial results. Richard?
spk01: Thank you, Adrian, and good morning, everyone. From our perspective, the quarterly sales were close to where we expected them to be. As you may recall, we reached $187 million in the fourth quarter of 2023, And with no additional capacity coming online in the quarter and with bookings remaining steady, it was a positive but unsurprising outcome. Overall, sales in the quarter were 11% higher than the first quarter of 2023. Sales in the U.S. distribution channel strengthened notably, mainly due to an increase in shipments of low-voltage standard products, and sales in Canada continued their strong momentum from the fourth quarter of last year. offsetting this for weaker MESTA sales in the quarter due to the delay of some significant project shipments to later quarters. The backlog remained relatively steady from the fourth quarter, experiencing a 1% decline. As compared to the first quarter of 2023, the backlog is up 11%. Margins for the quarter were 31.7% as compared to 31.8% in the first quarter of 2023. The strong margins are the result of sustained market pricing but notably are offset by lower margins in India due to higher than normal margins there in the first quarter of 2023 and a lower overall proportion of IHI and power quality sales in the first quarter of 2024. There was also a small negative impact to margins as a result of overhead incurred in our New Mexico plant without corresponding sales as the factory is being set up. Share-based compensation was $16.7 million in the quarter which was $12.2 million higher than the first quarter of 2023. This was a result of the share price rising to $146 at the end of the quarter. Selling and administration expenses were higher than 2023, mainly due to volume increases, compensation and marketing expenses, and slightly higher freight costs as a percentage of sales. General and administrative expenses are higher due to increased compensation costs, technology, warehousing, and other investments required to support growth. EBITDA for the quarter was $15 million, or 8% of sales. Adjusted EBITDA, excluding share-based compensation and foreign exchange losses, was $31 million, or 16% of sales. This was above our target EBITDA range of 12% to 15%, and is mainly the result of higher operating leverage and strong pricing. Net earnings for the quarter were $7.9 million, or 67 cents per share, versus $15.8 million, or $1.32 per share, in the first quarter of 2023. The decline is due to higher share-based compensation, selling and delivery, and general and administration expenses offset by higher sales volumes. Cash generated from operations for the quarter were $6.2 million, held back by increasing working capital requirements, which were mainly the result of seasonal payments for bonuses and rebates. Capital spending in the quarter was $7.5 million, which was lower than anticipated as we expect to spend over $40 million over the course of 2024. Most of the spending in the quarter was linked to our capacity expansion plans and other productivity investments. When measured by sales margins and adjusted EBITDA, we believe that these results are positive and reflect the continued momentum that we were experiencing at the end of 2023. Thank you. And I will now turn the call over to the operator to take questions. Operator?
spk00: If you'd like to ask a question at this time, please press star 1 1 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew Lee with Canaccord Genuity.
spk05: Hey, morning, guys. Thanks for taking my question. I wanted to maybe start on backlog. Our maps suggest that if delivery is at an all-time high, that means you probably generate sequential growth in orders as well. Can you maybe just talk about where orders are relative to historical levels and, you know, has it also reached an all-time high?
spk01: Hey, good morning, Matt. Yeah, I mean, I think your conclusion is accurate. So the backlog, I mean, we would describe it as being stable. And, you know, as you know, our sales volume or what we're able to ship has creeped up quarter over quarter. So, you know, that implies that bookings must also be up slightly higher. So I think overall, it's really... you know, demonstrating stability in both bookings and the backlog for us.
spk05: All right, that's helpful. And then maybe in terms of $8 million of additional CapEx, can you maybe talk to where you're specifically planning to put that or deploy that in terms of geography and whether it supports standard or specialty transformer production?
spk03: Yeah. Hey, Matt, it's Adrian. Adrian. Yeah, so the $8 million sort of spread across multiple factories, but... The primary target for that is where we have some capacity constraints on power transformers. So these are larger transformers. Transformers you would typically see in sectors like EV charging, data centers, renewables. But we will see that capital deployed both in Mexico and Canada.
spk05: Right. And then are there other areas you feel you could increase investment beyond the current envelope?
spk03: Well, I think beyond investing in capacity, we're looking for opportunities to deploy some capital with M&A, but that'll take the right partner and the right opportunity.
spk05: All right, guys. Thanks. Great quarter. Thank you.
spk00: Thank you. Our next question comes from the line of Jim Byrne with Acumen.
spk04: Good morning, guys. Adrian, maybe a question for you on this SmartD investment. Maybe just give us a few details on what you think the opportunity is there.
spk03: Yeah, so I think if you noticed on SmartD, they have some technology using silicon carbide devices for developing variable frequency drive systems. We think that there's opportunity long term for power conversion to utilize silicon carbide. So we think that's interesting technology with potential applications and things like active harmonic filters in the future. The other thing is, you know, with our power quality business, we've been focused on harmonic mitigation and the SmartD product is a very advanced drive in the sense that it eliminates harmonics both at the line side and then the load side so we see there are some synergies there in terms of what what we're looking at from the power system the power systems developing in terms of harmonics and the need for providing better power quality into the electrical systems okay that's great is this a like an early stage product or they are this kind of a helpful
spk04: to get them to market? How is your investment helping them?
spk03: Yeah, it's early stage. So it'll allow them to continue to develop out different, expand their product portfolio. And as they do that, reach additional customers. Okay, perfect.
spk04: And then I noticed you mentioned sales in Latin America. We're off to, it seems to be a decent start at about $2 million. Maybe talk about that opportunity and what you think it might bring in 2024 and maybe whether that's custom work or standard work.
spk03: So there's certainly opportunity for project work in Mexico. We believe some of that will continue to be driven by reshoring activities. However, we've also been working very closely Cohen, we're seeing some success in signing up distributors in the area, so that will help us on the standard product side. Okay.
spk04: And then, Richard, I know we've kind of been targeting that 32% range coming into 24, and you mentioned some of the moving parts that impacted in Q1. Given the price increase and some of those other factors leaking into this quarter, I mean, what is your confidence on that 32%.
spk01: Our view of the 31.7% in the first quarter, Jim, is positive because we did have a few things working against us in the mix, one being that the overall proportion of power quality in IHI sales was lower than what it would typically be. As we've talked about before, those products typically have higher margins. We also had you know, as we pointed out a few times, the recognition of a very large project in India in the first quarter of last year, which had favorable margins for us. So overall, you know, we view that as, you know, an indicator that, you know, pricing remains strong in the market. So, you know, as you know, It's difficult to see once you get too far out, but at least in the short to medium term, we feel fairly confident with those margins.
spk04: Okay, that's great. I'll pass the line.
spk00: As a reminder, that is Star 1-1 to ask a question. Our next question comes from the line of Eli Rodney with National Bank Financial. Thank you.
spk02: Good morning, guys. Just filling in for Rupert here. So starting again on that price increase, could you maybe quantify the impact of this a little bit more? Is it low single digits or can you put some goalposts around that? And then does it represent upside to the $900 million of revenue capacity that Hammond is working towards?
spk03: Eli, yeah, the price that we announced was 4% on standard products. Project-based business is always negotiated on a one, you know, individual basis specific to the project, but for the standard products, we announced 4%. Generally speaking, there is some erosion of that based on volume purchases and other things, but that should give you a sense of the impact of price. In terms of capacity, you know, I think we have... it's not the major impact capacity, it's the build-ups that we're doing on some of the equipment will be really the critical factors in us to get there. The additional investment of the $8 million was really based on our optimism on the outlook of some of the emerging sectors to provide demand going into the midterm.
spk02: Okay, great. And then on the M&A markets, appreciate the color on the smart D technologies investment. Uh, is there anything else in the pipeline that you guys are working on? And if so, uh, how, how quick do you expect the turnaround to be on some of the stuff in power quality?
spk03: I guess all I can say is that we're, we're actively looking and we have, we have files open, but, uh, as you know, in acquisitions, obviously we, we can't talk about what we're, what we're looking at and, um, There's a lot of dynamics as to whether any deal materializes.
spk02: Right. All right, last one for me then is, so you mentioned the $1 billion revenue capacity target by the end of the decade. Obviously, that's going to need more headcount. How are you guys thinking about finding the people you need in your plants and potentially replacing turnover as that comes?
spk03: So, you know, I think through the last few years of expansion, we've learned a lot. We've been able to recruit. The primary focus we have right now is improving retention of new employees. We see high turnover on employees less than six months, and we've initiated a number of initiatives to improve training and also improve selection of the labor force so that they're better aligned with the job function that they're hired for, and we're seeing that improving our retention rates. So I would say the labor market is tight, but not restrictive in terms of us adding people.
spk02: Great. Thanks, Adrian. I'll leave it there.
spk00: Thank you. Our next question comes from the line of Matthew Lee with Canaccord Genuity.
spk05: Hey, guys, I'm me again. Actually, we want to talk about India a bit. Still looks like pretty solid growth adjusted for one time items in that market. Can you just let me talk about how much capacity you have there and if that's going to require any capex or, you know, what are the limits on revenue you have in that segment?
spk01: Yeah, so Matt, we're We've got enough capacity for some growth beyond the run rate we're at now. And we think we've got roughly a couple of years of growth. But eventually we will have to add some capacity in India if we want to keep growing. But we're still, as I said, I think a couple of years out from that.
spk05: Okay, thanks a lot. I'll pass the line.
spk00: The next question comes from the line of Eli Rodney with National Bank Financial.
spk02: Back on pricing. So the price increase, is that going to start to impact sales recognized in Q2, or is it only taking effect on new orders?
spk03: No. So on stock products, we tend to ship them very quickly. So we see that impact start to arrive in Q2.
spk02: Okay, great. And then on the sort of longer lead time orders where a sale might be priced months in advance, is there any sort of hedging on the commodity exposure in that interim period before delivery?
spk01: No, we don't hedge our commodities. And electrical steel is one of the significant components. And there's really no effective way to hedge that in any case. When it comes to copper and aluminum, there are other factors in play. We've always had some exposure on those commodities, and it could affect us in the short term, but in the longer term, we've always been able to effectively pass cost increases on. Right, that makes sense.
spk02: And then maybe on steel, Ben, obviously it's been topical lately about steel tariffs potentially being raised in the US. What impact do you want to see there? And is there anything in the short term that if something like that were to materialize, Henry could do to mitigate the impact? Obviously, longer term, like you said, you could pass the cost on. But in the near term, is there any leverage you can pull?
spk03: So, you know, we have a diversified set of factories and we have some flexibility, but primarily the production is in Mexico and Canada in the short term, unlikely to impact. But if it does create any sort of dynamics in the supply of steel globally, then that's where we would see it. And we would expect that would be similar for the entire market.
spk02: Awesome. Thanks. Great quarter, guys. Thank you.
spk00: As a reminder, that is star 1-1 to ask a question. This question comes from the line of Jim Byrne with Acumen.
spk04: Guys, just maybe on the capital projects, just give us an update on where everything stands and the timing, everything going on plan and on budget.
spk01: Yeah, so the biggest project that's underway now is the new factory in Mexico, Jim, and it is on track, and we have always planned for it to be up and running by the end of the second quarter, and we think we're still on track to do that. We've had some delays with the MESTA expansion in Pittsburgh, and mostly around permitting. So we expect that to be very late into the year at best at this point. And as for the other projects, which are mostly involved putting equipment into existing factories, that is all on track. We won't really see any significant benefit of that until the fourth quarter at the earliest.
spk04: Okay. And then, Adrian, back to that $8 million, it sounds like it's kind of optimizing workflow and moving production around to different factories. Is that the way to think about it?
spk03: Yeah, it's additional equipment, which allows us to kind of adjust production of product mix so that we get more output from the existing factories. But there is some additional equipment that's part of it, but it also means that we have to adjust some production flows. Okay, that's perfect. That's all for me.
spk00: That concludes today's question and answer session. I'd like to turn the call back to Adrian Thomas for closing remarks.
spk03: Thank you, Operator. As we can see, there's continued tailwinds across North America. We believe being driven by the urgency to limit climate impact through the electrification of our power systems and energy usage as well with the growing need for data. I believe that we're well positioned for future growth and we want to ensure that our position is preferred choice of power solutions by our customers. I look forward to updating you on our progress throughout the rest of 2024.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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