Hammond Power Solutions Inc.

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.

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?

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?