Hammond Power Solutions Inc.

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions' first quarter 2025 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, fluctuation 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'd like to hand the call over to Mr. Adrian Thomas, Chief Executive Officer of Hammond Power Solutions. Mr. Thomas?

Thank you, Operator, and good morning, everyone. We were pleased with first quarter sales growth of 5.6% over same quarter last year. While slightly lower than Q4 2024, we saw strong growth and backlog of more than 17%, confirming demand for our custom products. Standard product shipments exceeded expectations in a quarter that was clouded with trade uncertainty. With the shift in product mix in Q1 and with higher material and labor costs, our gross margins declined slightly to 31.5% in the quarter. We announced a price increase for our catalog products to offset these costs. Announced in February, the pricing increase went into effect in April. With strong increase in backlog, we also anticipate that product mix will shift back towards custom products as we progress through the year, providing additional margin support. In Q1, we shipped more standard products than custom products. When we look back at our business in 2024, we saw a shift in mix towards custom products as many sectors grew, while the uncertainty of US election cycle and slowing commercial construction impacted standard product shipments. January started this year off unusually low. Construction demand could have been impacted by regional cold weather events, the California wildfires, and increased trade uncertainty. However, we saw a quick recovery in February and March. Custom product strength in the quarter came from strong data center shipments offset by weak sales and induction heating and markets related to electric vehicle production and infrastructure. With Micron now part of the HPS family, we have already seen contributions to our growth. With a full quarter of results, the initial synergies appear promising and the combined expertise of our teams is a step forward in our growth strategy. Together, we offer a broader array of solutions to our customers and enhance our reputation for quality products and services, particularly within our OEM markets. Due to rising demand for U.S.-made products, Micron's U.S.-based manufacturing location enhances our service to customers across the U.S. Another area we have been working to improve our customer service is in our ability to optimize our warehouse operations. to ensure quick delivery across North America while optimizing the finished goods inventories as we grow. Last year, we saw an increase in inventory due to the ramping up of our new warehouse in the Dallas-Fort Worth area. We expect to see inventory reductions over the next few quarters as this program is implemented. In the first quarter of 2025, we had an increase in inventory that was attributable to the buildup of safety stock to ensure that we meet our delivery commitments for upcoming projects. We expect that this, too, will normalize as the year progresses. Our capacity additions are progressing well, and our new factory in Monterrey, Mexico has reached a significant milestone of completion. We announced this investment less than one year ago as we continued to forecast demand for our larger custom products. We are now in the installation and setup phase. This timeline is ahead of schedule, and we expect to start shipping products by the end of the year and then ramp up volumes over time. As I wrap up, I would like to share the continued improvements we are making towards our sustainability goals. Our teams continue to be dedicated to making a positive impact on the planet and our communities. In the last reporting cycle, we improved our energy efficiency by 3.2% and diverted over 70% of our waste from landfills through recycling, repurposing, and reuse. Our upcoming 2025 ESG report will provide more details of the progress we have made. With that, I would like to hand the call over to our Chief Financial Officer, Richard Vollering, to provide some context to our financial results. Richard?

Thank you, Adrian. As Adrian mentioned, sales increased by 6% in the first quarter of 2025 versus the first quarter of 2024 to $201 million. Year-over-year sales in Canada showed strong growth at 7%, while sales in the U.S. were down slightly in U.S. dollars. Micron contributed 3% to overall sales year-over-year. Standard product sales improved sequentially from Q4, which we view as a positive sign, while custom sales declined in absolute dollars and as a percentage of overall sales. We attributed this to timing of certain OEM project business, which we expect will now fall into the second quarter of 2025. Gross margins declined in the quarter to 31.5%, from 31.7% in 2024, driven by higher input costs and product mix. However, we implemented a price increase at the beginning of April, and all other things being equal, we expect to see an improvement in the second quarter because of this increase. SG&A costs, excluding share-based compensation, were in line with our expectations. The decline in the share price over the course of the first quarter resulted in a reversal of share-based compensation of almost $11 million. Adjusted EBITDA was $30,916,000 in the first quarter, or 15.4% of sales. This is a decline from both the first quarter of 2024, which was at 16.2%, and the fourth quarter of 2024, which was at 15.6%. The decrease is a result of a lower gross margin in the first quarter of 2025. We included a metric for adjusted EPS in this quarter, and will continue to do so going forward. The adjusted EPS, which excludes share-based compensation and foreign exchange gains and losses, was $1.60 per share, as compared to $1.66 per share in the first quarter of 2024. Net cash decreased by $60 million in the first quarter of 2025. The first quarter is typically worse than other quarters with respect to cash flow due to annual incentive payments. However, in the first quarter of 2025, we also had a negative cash flow impact due to increasing working capital requirements, mainly driven by increased inventory. While finished goods have stabilized, we increased raw material inventory during the quarter, mainly due to an increase of safety stock in anticipation of upcoming projects. Capital expenditures in the first quarter of 2025 were at $8 million, which is on target. As indicated on our last call, we expect that our capital expenditures for the year will be approximately $40 million. While sales volumes and margins were lower than our expectations in the first quarter of 2025, it was mainly due to a slower than expected January and certain project timing. We believe that the growing backlog indicates that certain sectors, mainly data centers, are still active and that this will continue to propel demand for custom power products. With the current market uncertainty, we continue to monitor quotation activity and stock product shipments to gauge business activity in the coming quarters. At this time, we are not changing our investment plans with respect to our more strategically focused projects, including our capital expansion projects, but we will be increasingly vigilant with respect to managing costs as we move forward through this uncertain business environment. Thank you. I will now turn it back to the operator to take questions.