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spk00: 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.
spk04: 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?
spk06: 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?
spk00: As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, please press star 1-1 on your 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.
spk01: Hey, morning, guys. I wanted to touch on your comments about standard transformer bookings cooling from April to June. Can you maybe break down whether that's due to competition intensity, the election cycle, or maybe just a higher level easing of industry-wide demand? And then maybe in your view, how does that demand look over the next one to two years? Sure. Thanks for the question.
spk04: I think when we look at standard products, these are typically going into kind of commercial construction projects and tend to be weighted towards general economic conditions. As you know, we've been adding distribution across the U.S. And so I think there's two things at play. There is what the outlook for the economic conditions, particularly in the U.S., are for the rest of the year. And then, you know, from our perspective, we believe that we can continue to add distribution and grow with our distribution partners. So we did see quite a bit of activity, which perhaps was out of sync with the economy, sort of April-May timeframe. And so my comment was just basically June looked like a more normal month in terms of order intake for standard product. But looking forward for the rest of the year, we don't believe or expect that the commercial market will grow significantly. So we're expecting that to be fairly stable with our approach trying to expand share in that area.
spk01: Okay, that's helpful. And then maybe if I take that in together with price increases, growth and distribution, continued strength in custom demand, and a back half acceleration of MESTA, you know, when we think about U.S. revenue growth in the back half of the year, should we be expecting it to be kind of similar to what we've seen in the first half?
spk06: Hey, Matt, it's Richard.
spk05: So, yeah, so if you look,
spk06: Over the course of last year, I mean, we were growing our sales quarter over quarter. And, you know, by the end of the year, we were, you know, we were reaching that point where we were getting pretty close to full capacity at certain facilities. And we've talked a little bit about this before. In particular, it relates to those power categories. And, you know, those capacity constraints, for the most part, aren't going to get cleared up in the back half of this year. They will some of that capacity will come on the additional capacity to cater to that power product will come online early 2025. So what that means is that as the year progresses, you know, we the differential quarter over quarter sales, it will narrow as we progress. I think we've talked about this before. I mean, you know, shipping, You know, shipping $200 million a quarter is probably the right range. I mean, we could end up shipping possibly a little bit more, could end up shipping a little bit less, but I think that's probably, you know, just from a capacity point of view, I'm not sure there's a lot more that we can do in certain categories.
spk01: And say $200 million includes India?
spk06: Yeah, that'd be everything. Yeah, yeah.
spk01: Okay, that's really helpful. And then maybe if I can just sneak a quick one in on margins, you know, really great numbers this quarter, especially just given the Mexico startup costs. Can you just maybe help us understand, you know, how much of the 30 basis points sequential improvement kind of came from mix versus operational efficiency versus maybe some scale and pricing involved?
spk06: Yeah, I won't sort of break it down into that level of detail. But we did call out a couple of things in the MDNA that I think are relevant. One is the impact of the price of copper. And then the other is the impact of the unabsorbed overhead at the new factory in Mexico. And the third is the effect of the price increase. which I think if you step back and look at it, that's positive news because, you know, the price increase, you know, essentially negated the impact of copper and the impact of the unabsorbed overhead. So I think we view that in a positive light.
spk01: Yeah, I would agree. All right. Thanks. I'll pass along that.
spk06: All right. Thanks, Matt.
spk00: Our next question comes from the line of Jim Byrne with Acumen.
spk02: Yeah, good morning, guys. I just wanted to get an idea maybe of what you're seeing on the competition side. Any changes from your competitors? Any kind of new capacity additions that you're aware of or anything on that front?
spk04: Hey, Jim. I guess what we've seen in the market has been a lot of announcements around like what Phil capacity increases. We have not seen any public announcements from our competition around dry type transformers. So no changes, I guess, from what we've seen previously in the recent news and industry information that we have. So most of what we see has been announcements around liquids.
spk02: Okay, and then you talked about kind of quotation levels remaining quite high. Are your win rates quite high? Has that changed at all? Are you seeing any changes there?
spk04: So I guess there's two things. So what we're seeing in the quotes is diversity in the sector. So it's project focused. In Canada, we're seeing things from hospitals to hospitals uh capital large industrial capital uh project spending um in in the us we see some infrastructure spending we see um data center project work so what's nice what we see in the in the project work is it's um Across multiple industries, certainly some big demand in the emerging sectors, data centers, probably you've seen a number of announcements around EV infrastructure from different people. So we expect those emerging sectors to continue for some time. In terms of hit rate, you know, I think we're being effective in chasing projects that we can win and that we have capacity to serve.
spk02: Okay, and then maybe lastly, just any updates on the M&A front?
spk04: M&A, we continue to manage a portfolio of potential targets. Sort of as I mentioned before, I think we look for a variety of opportunities, whether it's a tuck-in, whether we can gain customer market access, and I would say in the context of power quality, are there places where we can find portfolio expansion? So we're active, and when we have anything to share, we'll share it with you.
spk05: Awesome. Thanks, guys.
spk00: As a reminder, that is star 1-1 to ask a question. Our next question comes from Rupert Mayer with National Bank.
spk03: Hi. Good morning. If I can start with another question on margins. So the startup costs in Mexico were a 0.5% headwind to margin in Q2, I believe. Now, Monterey, I think, is largely a reshoring exercise, so maybe not going to drive revenue, but what sort of impact do you think it could have on margins for the rest of the year as you run production?
spk05: Hi, Rupert. It's Richard.
spk06: So It's going to take, I mean, we'll be ramping that facility up throughout the course of the year, and so it will take a little bit of time to get it to our initial capacity level. So we will still have some of that overhang in Q3 and possibly into Q4, but we think by the beginning of next year, That unabsorbed overhang will for the most part have cleared out. So there will be a little bit of a negative impact ongoing. But my expectation is that that'll become less with each passing quarter as we start to move product in there.
spk03: Great. Are there any other reshoring opportunities for the company in the future as you look at your future capacity expansions?
spk04: I think there's opportunity for us to look at what is reshoring opportunity for us from a growth perspective in terms of winning business by having a strong presence of manufacturing in North America. The focus for India is really to serve that region of the world. And the small products, which we have produced in different parts of the world, was something that we felt we could be more effective having it closer to customers. So I think the short answer is no, Rupert, based on how we're organized. But we do see opportunity through reshoring both in Mexico and the U.S. particularly in terms of industrial activity, providing opportunities for us to sell more.
spk03: Right. Okay, great. And then turning to your capacity expansion that's coming online early 2025, so I believe we're focused on the larger power transformers. Should we expect a similar dynamic there? Do you expect to see some margin headwinds as that capacity ramps up? And how long does it take to ramp up that capacity?
spk06: So that's a bit of a different situation, Rupert, because a lot of that capacity is really, it's being added through equipment and people in existing facilities. So the payback is, it should be much quicker. You know, measured in, you know, maybe one or two quarters, so. depending on how the orders flow and the production schedule works.
spk03: Okay, great. So I believe the backlog for the larger transformers can be over a year in some cases. So is this new capacity close enough today that you can start booking orders against it? Is it now starting to support the backlog?
spk06: Sorry, Rupert. Yeah, I mean, that is our plan. And I mean, it's... I mean, as you can probably imagine, it's not going to be ideal if we put all this capacity in and start taking orders at the same time and have it sitting idle for a period of time. So we're going to try to utilize it as best we can.
spk03: How long would it take to ramp up that capacity to fill it?
spk05: Well, so that's a difficult question to answer without knowing
spk06: you know, what's in the funnel at a given point in time. But what I can tell you is that the machinery is on the way and, you know, we should be installing it in the first quarter. So, you know, most of it should be up and running and ready to go in the first quarter.
spk03: Okay, very good. And then just finally then, I'm wondering if you can walk us through the planning process or your thought process on what comes after that expansion. Looking at the market today, does the market dynamic support a further expansion and how do you think about that as far as timing and lead time for getting new plants up and running?
spk04: So Rupert, I think long term we believe that there is going to be certainly a continued need for transformers and electrical equipment because we're not close to electrifying North America yet. So it's really what is the ramp rate. So certainly we believe more investment is needed. So it's going to be a matter of when we pull that trigger. Equipment itself. is more or less one year timeframe. Factory is probably a two or three year sort of timeframe. So without getting into too many details, it's something that we continually evaluate and we understand the timeframes for getting capacity in. And we do believe long-term demand is high and so it's something that is in active consideration.
spk05: Great. I'll leave it there. Thank you. Thank you, Rupert.
spk00: That concludes today's question and answer session. I'd like to turn the call back to Adrian Thomas for closing remarks.
spk04: Thank you, operator. Hammond Power Solutions is a leading enabler in the global push for electrification, global urgency to limit climate impact through electrification combined with the need for electricity to support The world's growing need and power and data are driving significant tailwinds, as I just mentioned, and these will benefit our business. I look forward to updating you on our progress throughout the rest of 2024. Thank you.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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