Hammond Power Solutions Inc.

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions' third 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 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 third quarter update. In the quarter, we recorded revenue of $218 million, marking this our second-best quarter for shipments ever, and a 14% increase when compared to Q3 2024. The increase was driven primarily by U.S. shipments with gains in all of our channels to market. The U.S. market experienced its strongest growth in private label channel and steady growth in the distribution channel, with strong sales into data centers, switchgear manufacturers, motor control, and mining. While sales of stock products has grown, they have been outpaced by higher sales of custom products. At the same time that our sales grew, profitability for the third quarter remained below the prior year results, with gross margin of 30.1%. mainly due to ongoing material cost pressures and overhead expenses associated with our new facilities in Mexico. In September, we announced that changes to steel and aluminum derivative tariffs, Section 232 tariffs, have affected certain products. Although we worked closely with customers and suppliers to address and mitigate these increased costs, our margins experienced short-term negative impacts. Pricing adjustments to offset these added costs were implemented in the final weeks of the third quarter, and we expect margin improvement in the fourth quarter as these adjustments take full effect. We remain vigilant on our cost structure while maintaining strong customer relationships. While material cost inflation and overhead costs relating to our new facilities in Mexico have pressured margins, recent sales developments give us confidence in the quarters ahead. As I have said over the last few quarters, Quotation activity has been strong and has now translated into order volume. This increase in order volume grew our backlog in the third quarter by 28% compared to the beginning of the year, mainly driven by our U.S. distribution network and our OEM business. Digging down a little further, we saw data center activity accelerated in the quarter, and we are pleased to note that several large orders were received shortly after its close, amounting to 53% of total Q3 closing backlog. These orders are expected to be shipped primarily from our new facilities in Mexico over the next 12 to 18 months. As we have said in prior quarters, particularly with data center customers, we are delivering quotes for larger projects than what had been our historic averages. In addition, these customers require commitments of delivering high volumes within a reasonable timeframe. Our Monterey 4 facility was built to provide that ability, and the projects we have received have been possible due to those expansions. Due to the nature of some of these projects, we'll be able to exceed our original capacity designs by reconfiguring our equipment, streamlining supply chains, and further maximizing square footage. In addition, we will be adding equipment to further increase our production capacity. These new additions and adjustments will add approximately an additional $100 million of capacity to our two New Mexico facilities, bringing our total manufacturing capacity to around 1.2 billion by 2027. Speaking for Richard and myself, it is incredibly rewarding to have a team capable of building and launching a new manufacturing facility within just 12 months and pairing that achievement with a sales team that's already engaging with customers to fill that new capacity. I give full credit to our build teams and to our customer service teams, quotes teams, and salespeople for their hard work and dedication to meeting our customers' future plans. With that, I will turn it over to Richard for some financial detail on the quarter. Richard?

Thank you, Adrian, and good morning, everyone. I'll start by rounding out some of the items that Adrian touched on earlier. With respect to sales, we've seen a surprisingly resilient U.S. market in terms of shipments of standard and configured products in the distribution channel. We've also seen a significant improvement in bookings for longer lead time custom products led by strong data center orders. Overall, shipments in the third quarter of 2025 to the U.S. and Mexico increased by 21% versus last year. In contrast to that, the Canadian market showed some weakness, with sales down by 3%. We believe that this decrease is likely the result of the Canadian economy experiencing slower growth and greater uncertainty in recent months. Gross margin continued to show a decline versus last year and was 30.1% in the third quarter of 2025. down from 30.7% in the second quarter of 2025, and 33.8% in the third quarter of 2024, which was a record high. The decline is the result of higher input costs continuing from the second quarter, with the added impact of tariffs and products being shipped into the U.S. from manufacturing locations outside of the U.S. In the third quarter, we continued to have unabsorbed overheads in our newer factories in Mexico, negatively impacting margins by 233 basis points. Pricing actions taken in September should offset some of these impacts, and we expect absorption to improve as we ramp up production to address a rapidly growing backlog. General and administrative costs are growing more slowly in the third quarter versus previous quarters, improving leverage. Net earnings were $17,440,000 in the third quarter of 2025, or $1.46 per share. Adjusted EBITDA was $30,290,000, which was lower than adjusted EBITDA of $34,377,000 in the third quarter of 2024. The decrease is attributable to lower gross margins offset by higher sales volumes. Adjusted EPS was $1.56 in the third quarter of 2025. Working capital requirements increased in the third quarter of 2025, with inventory being the most significant factor. Inventories rose in the quarter, due to delays in shipping of certain large projects, safety stock requirements for certain projects, and tariffs. Capital spending tracked as we expected, with year-to-date spending at $27 million. Looking forward, the increased backlog will help to alleviate inter-absorption challenges in the newer factories in 2026, and we expect pricing actions to offset some of the negative inflationary impact on material inputs. We look forward to the quarters ahead. I will now hand the call back to the operator to take any questions from our participants.