Hammond Power Solutions Inc.

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions' second quarter 2026 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 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?

Good morning, everyone, and thank you for joining us. I'm pleased to share Hammond Power Solutions' second quarter 2026 results. Joining me today is our CFO, Richard Vollering, who will walk through the financial results in more detail after my remarks. will then open the line for questions. The second quarter was another strong quarter for HPS. We delivered record sales of $324.8 million, improved profitability, and continued making progress on several important priorities that we believe will support growth for years to come. Demand remained healthy across North America. The US and Mexico continued to perform well, supported by activity in data centers, industrial electrification, and Power Liability Applications, while market conditions in Canada were more challenging. Over the last several years, we've invested heavily in expanding our manufacturing capacity. This quarter, it was clear that we started to see those investments show up in the numbers. We shipped more product than ever before, improved our responsiveness to customers, and converted more backlog into revenue. These are exactly the outcomes we were expecting when we decided to make our capacity investments. Backlog remains very healthy and was nearly double where it was a year ago, primarily driven by larger project orders, particularly in data centers. Backlog declined sequentially as higher production enabled us to meet customer delivery schedules and convert more orders into revenue. It is also an important proof point that our capacity investments are performing broadly in line with expectations and that the ramp up in production and onboarding of people is progressing well. We continue to see strong quoting activity across the business and healthy engagement from customers. Data centers are becoming a larger part of our custom business than they were just a few years ago, and we expect that trend to continue. These projects often require highly engineered solutions and involve scheduled deliveries over an extended period of time. The capacity investments we've made allow us to support those customers while continuing to serve our traditional customer base at the same time. This growth is supported by the breadth of our business. HPS serves customers across commercial and industrial construction, mining, oil and gas, utilities, infrastructure, renewables, OEMs, and other markets benefiting from electrification and increasing power demand. Shortly after quarter end, we completed the acquisition of AEG Power Solutions. This is an important milestone for HPS. It builds on our leadership in transformers and strengthens our position in power quality, power conversion, and Critical Power Applications. AEG brings a strong portfolio of UPS systems, battery chargers, rectifiers, power conversion technologies and other critical power solutions. It also adds a meaningful services business and a large installed base around the world. The acquisition broadens the ways we can create value for customers. It expands our technology portfolio, increases our recurring service exposure extends our geographic reach and creates opportunities to bring AEG's technology and capabilities into North America over time. Our immediate focus is straightforward. We want to integrate the business well, support AEG's employees and customers, and execute with discipline while positioning the combined organization for long-term success. Looking ahead, our priorities are clear. We need to keep converting backlog into shipments, maintain strong operational execution, manage working capital carefully, and integrate AEG successfully. We also need to continue evaluating our manufacturing footprint to ensure we're positioned for the demand opportunities we see developing across the market. The long-term fundamentals of the business remain attractive. Electrification, power reliability, infrastructure investment, and the growing complexity of power systems continue to create opportunities for companies that can help customers solve those challenges. Richard will now take you through the financial results in more detail.

Thank you, Adrian, and good morning, everyone. As Adrian mentioned, we delivered another strong quarter with record sales and improved operating performance. I'll spend a few minutes walking through the key financial highlights. Sales were $324.8 million in the second quarter, up 44.7% compared to $224.4 million in the second quarter of 2025. Growth was driven primarily by the U.S. market. where sales increased significantly due to higher data center shipments, improving price realization, and modest improvement in industrial markets. The US and Mexico continued to drive our growth, with sales increasing 73% over the prior year. Demand remained particularly strong in custom products supporting data centers and other critical infrastructure projects, while production from our expanded Mexico facility continued to ramp up during the quarter. Canada was down 23.7% compared with last year, primarily due to the timing of larger projects, softer market conditions, and more competitive pricing. India was slightly below the prior year for the quarter due to normal project timing. Increased production also allowed us to convert more backlog into revenue. Backlog declined 6.9% from the first quarter as shipment volumes increased, but remained 96.9% higher than a year ago. Together with continued quotation activity, this provides good visibility through the balance of 2026. Gross margins improved during the quarter. Gross margin increased to 31.5% compared to 30.1% in the first quarter of 2026 and 32.7% in the second quarter of 2025. This improvement reflects price realization, a higher proportion of custom sales, stronger operating leverage, and improve factory overhead absorption as volumes increased. Tariffs and input cost inflation remain factors we are managing, but our pricing actions and operational improvements are helping offset these pressures over time. Adjusted EBITDA was $53.2 million or 16.4% of sales compared with $33.4 million or 14.9% of sales in the second quarter of last year. The increase reflects the combined benefit of higher volumes, stronger gross margin, and improved operating leverage. Reported net earnings were $9.4 million compared with $13.4 million in the prior year quarter. Reported results included acquisition-related costs associated with AEG, foreign exchange losses, and higher share-based compensation expense. Adjusted earnings per share increased to $2.76 from $1.72 last year, which better reflects the strength of the underlying operating performance. General and administrative expenses were higher, largely due to share-based compensation and acquisition-related costs. Excluding these items, expenses remained well-controlled relative to the growth of the business. Net debt at the end of the second quarter was $36 million, which is higher than the net debt balance at the end of the first quarter. The increase is primarily the result of higher working capital requirements due to the higher sales level, particularly in the month of June. Working capital as a percentage of sales declined from the first quarter of 2026, reflecting improving working capital management. The AEG transaction closed on June 29, and the second quarter results included only transaction costs incurred to date and included no associated revenue or operating costs. The third quarter will include a full quarter of AEG results along with the remaining closing costs and associated debt. As we move through the second half of the year, our financial priorities are to maintain strong operating discipline, improve working capital performance, and support a successful integration of AEG while continuing to invest in the growth opportunities ahead. We believe HPS enters the second half from a position of strength with solid demand visibility improving operating performance, and a broader platform for long-term growth. With that, I'll turn the call back to the operator so we can begin the question and answer session.