Hammond Power Solutions Inc.

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions' second 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, 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'd now 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. Thank you for joining us for our second quarter update. I'm pleased to share that Hammond Power Solutions delivered another strong quarter in Q2 2025, achieving record quarterly sales of 224 million, 14% growth compared to Q2 2024. Driven primarily by U.S. shipments, all three of our channels to market saw strong gains. At the same time as our rapid sales growth, we saw faster than expected material cost increases. We implemented our annual price increase in April, which will partly offset these costs. We will see the net effects of our pricing more fully in Q3 as pricing flows through our backlog. Despite these cost headwinds, our gross margins ended the quarter at 31%. Our customer and market activity remains resilient with continued quotation and orders momentum, and we delivered growth in all three of our market channels. Healthy demand was seen across core markets, and increased production capacity allowed for higher shipments. While our increased shipments reduced our backlog on a quarter-over-quarter basis, our backlog remained strong on a year-to-date basis. The U.S. market experienced its strongest growth of all regions, up more than 18% compared to the same quarter last year. driven by strong standard product sales in the quarter. The Canadian market continued to grow at a rate of approximately 5%, with our distribution channel contributing to both standard product and custom product sales. Large projects in a diverse set of industries contributed to the sales of custom products. Looking at our recently acquired Micron brand, we continue to see strong sales from their products, and they are performing as expected and margin slightly ahead of our expectations. 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. As mentioned during our last call, while demand for some of our MESTA products has slowed due to a temporary pause in EV and chip manufacturing projects, we are making exciting progress in new areas. Our market development and sales efforts around power quality solutions, especially active harmonic filters, are gaining traction with new customers and projects. This positive trend in active harmonic filter sales is expected to balance out any softness in induction heating sales for the year. For most of the last two years, we have been operating our manufacturing facilities at near capacity. Today, we continue to install new equipment within several facilities and have constructed two new facilities in Mexico. We are now in the process of loading our newest facility, expecting shipments in the second half of the year. As we ramp up production in this facility and as we load up the other equipment and plants to meet the market demand, we expect to see benefits to our operating costs. Finally, I would like to share two great external recognitions earned this quarter. We are pleased to announce that Hammond has again earned the Great Place to Work certification, now including our Mexico facilities for the first time. This recognition demonstrates our dedication to employee engagement and workplace culture. We believe this recognition and the underlying employee culture will support us in our staffing growth and retention rates in Mexico and across our organization. I would like to close by mentioning that we were recently honored by TED Magazine as recipients of the Best of the Best Marketing Awards, an accolade that acknowledges distributors and manufacturers for excellence in marketing strategy and execution across multiple categories. We are proud to be one of this year's winners. With that, I will turn it over to Richard for some financial detail on the quarter. Richard?

Thank you, Adrian, and good morning, everyone. As Adrian mentioned, we are pleased with the strong top-line performance in the second quarter of 2025. This was a continuation of the growing momentum we spoke of at the tail end of the first quarter. Gross margin, while still historically strong at 30.7%, was lower than expectations. There were two main reasons for this. One is the higher material cost referenced by Adrian earlier, and the other is the cost of ramping up our new facilities in Mexico as we set up equipment and train an expanded workforce. These costs had an impact of approximately 123 basis points on the gross margin in the quarter. As we load the factories in the coming quarters, the impact of these costs will diminish. While it is difficult to ascertain what cost increases we might experience in the coming months, we will continue to monitor them and be prepared to adapt. Moving on to overhead costs, selling and distribution costs increased in the quarter by $4,074,000 due to higher shipping volumes and were slightly higher as a percentage of sales. With respect to general and administrative expenses, I will first highlight that the rapid share price increase since the end of the first quarter resulted in a share-based expense of $9,104,000 in the second quarter. On a year-to-date basis, there was a recovery of $1,752,000. The remaining general and administrative expenses were generally flat in the quarter. Adjusted EBITDA, which excludes the impact of share-based compensation and foreign exchange gains and losses, was $33,396,000 in the second quarter of 2025 versus $32,587,000 in the same quarter of 2024, an increase of 2%. On a year-to-date basis, adjusted EBITDA was $64,312,000 in 2025 versus $63,559,000 in 2024, an increase of 1%. Adjusted EPS was $1.72 in the second quarter of 2025 and $3.32 on a year-to-date basis. By comparison, adjusted EPS in the first two quarters of 2024 was $3.37. Net income was $13,376,000 in the second quarter and $39,598,000 on a year-to-date basis. Working capital increased in the quarter, mainly due to higher accounts receivable due to higher sales, inventory levels that remain historically high, and significant cash outlays in the quarter due to share-based compensation payments and income taxes. We expect that net cash will increase in the third quarter. Capital expenditures were $8 million in the quarter and $20 million year-to-date. This is in line with our expectations of capital expenditures of $35 to $40 million for 2025. Our financial focus in the coming quarters will be to monitor margins closely and be prepared to react quickly to maintain them. Ensure that we are managing our overhead costs prudently and manage working capital closely to bring it below 20% of sales. Thank you for your time and attention. I will now hand things back to the operator to open the line for questions.