Hammond Power Solutions Inc.

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions third 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 in 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 be 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' third quarter 2024 financial results conference call. Joining me today is Richard Ballering, our chief financial officer. Hammond Power Solutions has continued to make significant strides in progressing our strategic goals and developing capacity for the future. The tailwinds of electrification evident in the first half of the year have largely continued through the second half. We continue to see the electrification of our power systems, the reshoring of manufacturing to North America, support for the renewal and expansion of infrastructure, and the growing need for power and data to run our economies globally. Our continued confidence in The long-term demand of our products, combined with sustained project quotation activity, led us to announce an additional $20 million investment in our capital program in August. These investments will be made over the course of 2024 and 2025 to expand production in Mexico to build custom power transformers. The new facility will remove capacity bottlenecks by adding more than $100 million in revenue capacity to our custom product lines. The new factory is expected to be operational in early 2026. In parallel, we expanded our product portfolio with the acquisition of Micron Industries, which closed in the second week of October. The addition of Micron will improve our ability to serve US and North American customers from their facilities in the US, as well as provide us with access to a broader set of original equipment manufacturer customers, where we can look to expand our sales of power quality products and other products in our portfolio. Micron is highly aligned with Hammond Power Solutions as it has a strong reputation for high quality products and service and brings a wealth of relationships within our OEM markets. The Micron team also brings technical product innovation and a highly skilled labor force that will complement our custom and stock product offerings for future growth. To support these initiatives, we continue to expand our distributor sales channel in North America And consequently, our sales have shown a year-over-year growth of 6.9% compared to the third quarter of 2023 and a year-to-date growth of 10.9%. Booking momentum continued through the third quarter with an increase in backlog driven primarily by custom products related to project activity. We saw the product mix continue to shift towards custom products, a trend we've been experienced for several quarters now, mainly driven by the increasing activity in emerging sectors. In parallel, we saw a slower overall market for standard products in the United States, mainly driven by broad weakness in commercial construction and general industrial markets over the summer, which by some data points is down as much as 13% in 2024. This trend was prevalent throughout the quarter, resulting in slightly lower shipments as compared to the second quarter and is expected to continue into the fourth quarter. As anticipated, MESTA shipments began to gain momentum in the third quarter with a large induction heating order starting to ship. We continue to see power quality gain momentum with increased MESTA sales and strong quotation activity and active harmonic filters. Outside North America, Indian sales increased by 15% in the third quarter compared to prior year driven by domestic renewable shipments. With that, I would like to hand the call over to our Chief Financial Officer, Richard Ballering, to provide some context to our financial results. Richard?

Thank you, Adrian. As Adrian mentioned, we continued to post year-over-year sales growth in what was a challenging market for a large portion of 2024. Although we saw a softening of standard product in the third quarter versus the previous quarters in 2024, overall sales in the distribution channel were more resilient. mainly due to the relatively stronger configured and custom product sales. While U.S. sales continue to grow at a more subdued pace, sales in Canada, while also down slightly versus the second quarter of 2024, remain strong year over year. As with the two previous quarters, demand in Canada is being driven across a broad range of segments, including healthcare, data centers, public infrastructure, EV charging, mining, and utilities. Margins reached 33.8% in the quarter and 32.8% on a year-to-date basis. The increase in the quarter was mainly the result of a more favorable product mix, driven partially by the shift to more configured and custom products. Selling and distribution expenses were 10.5% of sales, down from 11% in the third quarter of 2023. General and administrative expenses, excluding share-based compensation, were 7.3% of sales, down from 7.6% in the third quarter of 2023. Share-based compensation in the quarter was $6.9 million, compared to $2.7 million in the third quarter of 2023. Adjusted EBITDA, which excludes the impact of foreign exchange gains and losses and share-based compensation, was at $34,377,000 in the quarter, or 17.9% of sales. which is up from the third quarter of 2023, which was at 14.3% of sales. It is also the highest quarterly adjusted EBITDA figure posted in 2024. The higher adjusted EBITDA is a result of higher gross margins and improved operating leverage. EPS in the quarter was $1.37 versus $1.21 in the third quarter of 2023. EPS improved despite the higher share-based compensation realized in the third quarter of 2024. Capital spending was at $13.5 million in the quarter and $30.9 million year-to-date. We continue to invest as planned in our previously announced capital expenditure program. Inventory increased in the quarter to $131 million, mainly due to the implementation of our new consolidated warehouse strategy and to a lesser degree due to slowing sales of stock product. Net cash at the end of the quarter was $32 million, and net working capital as a percentage of sales increased slightly to 17.6% on a sequential basis. Despite seeing slightly lower sales in the quarter versus the second quarter of 2024, we were pleased to see stronger margins due to product mix offset some of the shortfall. Our strength in providing custom products to our customers appears to have brought added value in terms of improved margins in the quarter. Thank you all for calling in this morning. I will now hand the call back to the operator for questions.