Hammond Power Solutions Inc.

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions' second 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 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' second quarter 2024 Financial Results Conference call. Joining me today is Richard Baldring, our Chief Financial Officer. Hammond Power Solutions had a busy and exciting second quarter with the official opening of a new factory in Mexico and achieving record all-time shipments for the sixth consecutive quarter. The increase in shipping volumes, along with similar organic increases in 2023, resulted in some facilities operating close to or at capacity. Over the past 20 months, we have been adding equipment to existing factories, which has allowed us to consistently increase shipping volumes. This cumulative added capacity produced sales growth that was 14% more when compared to 2023. As many of you are aware, the bulk of our announced capital expenditures will be spent during this year and completed by early next year. Construction and equipment installations have been running smoothly, which enabled us to open the Monterey III facility on time and on budget. The capacity that we started to add through our capital projects helped us tremendously in achieving new sales levels, resulting in higher shipments in the first half and record production levels at two of our facilities during the quarter. In addition to existing plant enhancements, our recently completed Monterey III facility was able to produce prototypes for certification and will begin to ramp up production in the second half of 2024 and into early 2025. In parallel, at several of our facilities, we are seeing the benefits of labor productivity from recently hired employees and layout optimization from reconfigured floor plate design. Our bookings were strong in the second quarter, and we achieved our second highest month of new orders ever in April. Year to date, the North American market experienced its strongest growth in the distributor channel in both Canada and the US, as the company continued to grow both the numbers of new distributors as well as sales within existing distributors. New orders reverted to more normal levels in June as standard product sales cooled in the United States, offset somewhat by increased sales activities within the distributor network. We are expecting the standard product market to remain stable for the remainder of the year. However, we expect to see continued strong activity in custom equipment as project activity remains elevated. Market growth was higher than expected in custom transformers, particularly in the data center markets and other emerging sectors. Canada remains strong in a diverse range of sectors, and in Mexico, we continue to establish our market presence through continued work with distribution partners and an increased focus on marketing. Outside of North America, India volume was impacted by lower renewable and export shipments. However, project selectivity is benefiting the business with above planned margin rates. Despite the lower sales, we continue to see an active pipeline of projects in those and other sectors. Our MESTA business, which builds our power quality portfolio, gained momentum as projects began to progress after a slow first quarter. We continue to develop the power quality market with a continued focus on product line expansions, utilization of our distributor network, and enhanced market presence. It was also an exciting quarter from a people and culture standpoint as well. Our chairman, Bill Hammond, was recognized at the Canadian Electro Federation Conference with a Lifetime Achievement Award for his contributions to the industry. We are very proud of Bill and congratulate him for this recognition. And for all of our employees, we are very proud to have been certified by Great Place to Work at all our Canadian, United States, and India locations. and we are looking forward to obtaining the same certification in Mexico in 2025. This certification celebrates the excellent culture that makes Hammond Power Solutions a great work environment, and it provides insights to where we continue to cultivate a positive workplace experience for employees and encourage others to join. Finally, Hammond Power Transformers plays an integral role as the world transitions to clean electricity as a primary source of energy. Strategic to Hammond Power, is our pillar of sustainability, and in June we published our second annual environmental, social, and governance report, documenting our progress and commitments for the future. I continue to be inspired by the attention and engagement of our teams in making our company a positive contributor to our planet and communities. With that, I would like to hand the call over to our Chief Financial Officer, Richard Vollering, to provide us some context to our financial results. Richard?

Thank you, Adrian, and good morning, everyone. Momentum continued in most aspects of the business in this quarter. We posted another record quarter in sales while maintaining margins at levels similar to previous quarters, despite some minor headwinds. Sales increased versus the second quarter of 2023 by 14%, and were higher than the first quarter of 2024 by 3.4%. The increases were primarily the result of more project work flowing through distributors, particularly in Canada, which has been exceptionally strong this year with shipments to a number of different end-user segments. Although there were some areas of business that were weaker in the same quarter in 2023, such as India, Mesta, and Latham, we believe that we will see some recovery in most of these areas later in 2024. Quoting activity and demand remained strong, with the backlog increasing 1% over the first quarter, despite higher shipments. We faced some margin headwinds in the quarter, with the price of copper surpassing $5 in May and unabsorbed overhead due to start-up operations of the new factory in Mexico. Offsetting this, we implemented our most recent price increase in early April and saw a small benefit from that increase in the second quarter of 2024. Price maintenance remains strong across all regions and channels. Selling and administrative expenses were higher by 8.6% in the second quarter due to increased volumes, but lower as a percentage of sales by 49 basis points. General and administrative expenses, excluding share-based compensation, were higher than the second quarter of 2023 by $3.6 million due to continued investment in people and systems to support the growing business and some higher volume-related expenses. As with the first quarter, earnings per share were significantly impacted by the change in the share price and its impact on share-based compensation. The change resulted in a positive impact on pre-tax profit of $6 million, which is a dramatic swing from the negative impact in the first quarter of 2024. A normalized measure of operating performance can be found in the adjusted EBITDA metric, which was 16.2% in the first quarter and 16.5% in the second. primarily the result of improved gross margin percentage. Cashflow from operations was 25 million for the first half of the year and capital expenditures were 17 million, supporting our capacity growth plans through early 2025. We are pleased with the results in the quarter. Sales and operating performance continue to improve quarter over quarter. And while we are somewhat limited in our ability to grow the top line more quickly due to capacity constraints, we are finding ways to shift incrementally more each quarter. Thank you, and I'll now turn the call over to the operator to take questions. Operator?