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.

If you'd like to ask a question at this time, please press star 1 1 on your touchtone phone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from Matthew Lee with Canaccord Genuity.

Hey, guys. Thanks for taking my question. I wanted to maybe start on the demand side. Revenue is up $60 million sequentially, and I think our math suggests that even though backlog was down orders actually grew as well. So just can you maybe talk about what you're seeing in terms of quotation activity right now relative to Q4, Q1 and is it all data centers or is it maybe kind of more widespread?

Matt, so it's Adrian here. We continue to see a lot of activity particularly in the U.S. Not all of it is data centers so that continue to play into our order book on the data center side. We continue to see a number of large orders, but project timing and complexity of those jobs is You know, not easy to predict, but from from sort of a quotation, the robustness of our quotation activity, we continue to see a lot of customer engagement. So but the diversity of our, you know, across North America, we continue to see activity in a broad set of sectors, particularly in the US.

Like, would you say it's kind of ramping versus what you saw in Q4 and Q1? Or is it kind of like plateauing? Like this kind of maybe gives a magnitude of direction?

I would say it would be consistent with the end of last year.

Okay, that's fair. So the market remains pretty active. And I guess in that context, I just want to ask about capacity, you know, kind of the other side of the coin. If I analyze the quarter, it's about 1.3 billion in revenue that you're at right now. I think you've sort of mentioned in the past that 1.3 is a high watermark for what your facilities can do right now. So just like, is there space to reorganize the facility a little more to squeeze a bit more juice out? Or is it time for another facility or another expansion?

Yeah, I think when we look at expansion, it's not like one thing. We look at it as more multiple things you mentioned. We've done a lot of footprint optimization. We have now some ability to add additional equipment. And then I think the conversation around footprint expansion is also very active. So I think it'll be a combination of factors. I think what we're excited about the ramp up of MON4 has happened quite smoothly. And so the efficiency out of that factory has ramped up very well. And so we're excited about that. The mix of the products going through that factory also allows us to get some better efficiencies. So I think we're optimistic on maintaining our customer responsiveness and we're actively looking at how do we continue to increase our capacity to serve the customers.

Okay, that's fair. I'll pass the line. I appreciate the call.

Our next question comes from Nelson Ning with RBC Capital Markets.

Great, thanks and congrats on a strong quarter. First question, so just to follow up on Matthew's question, so I think last time you talked about data centers being like roughly 30% of revenues. has that changed? Like, are we still in that ballpark or is it a little bit higher now?

Hey, Nelson, it's Richard. Yeah, it's actually gone a little bit beyond 30% now. And, you know, and that's largely, you know, a lot of that, a lot of that product will be coming out of the MONFOR facility. So we've crossed over that 30% threshold.

Okay. And then just on Just in terms of Mexico, so are you fully ramped in MONFOR or are you still ramping up? No, we're fully ramped in MONFOR. Okay, got it. And then just on the revenue growth, it's probably a difficult question to answer, but like In terms of the 45% revenue growth, is there a way to roughly break that down into price, volume, and product mix?

Yeah, there is, Nelson, and price is certainly an important factor. It's also becoming a more competitive factor.

So, I guess the same product last year, would it be... 10% more or 15% more this year? How should we think about the revenue growth? Was pricing...

It's certainly more than a... I think if you look at conventional price increases over the typical inflationary price increases, these low single digits, what we're experiencing... If you recall, we had a price increase last fall And then we had another price increase in the spring. And so, you know, they are higher than they would typically be. So I won't get too specific on a number, Nelson, but just to say that it is more significant than it would normally be. but I'll also add that volumes have improved, not just in data centers but other markets as well. Okay, got it.

And then I think you, yeah, are you, I know it's only been about a month of closing AEG and I think when the acquisition was announced, you mentioned that in 2025, the revenues were about $325 26 million but could you talk about AEG revenues in the past six months how they've tracked?

So yeah so that's you know the number you quoted that that was you know very close to 2025 revenues and You know, so 2026 should, you know, it should be tracking very close to that, Nelson. Although, you know, the first half of the year they've been affected by, you know, they do a fair bit of business in the Middle East and they've been affected by that. And, you know, their profile is typically a little bit more back-end loaded in any case. But I think the number, you know, 200 million euros roughly, you know, in terms of order of magnitude is the right number. Okay, thanks.

I'll leave it there and get back in the queue.

Our next question comes from Nicholas Boychuk with ATB Coremark Capital Markets.

Thanks. Morning, guys. Morning, Nick. Morning, Nick. Coming back to Nelson's question on price there, I'm curious, given the strong demand profile you're seeing and the fact that you and it seems like everybody else in the industry is pretty capacity-constrained, How aggressive could you get with price? Could you start to really price these things as value and use and recognize that data center operators need what you have, your expertise, your track record, it's worth more than what another competitor can produce? Or is there another dynamic at play here in terms of the competitive environment that kind of puts a cap on how high you can get with pricing?

Hey, Nick. So I think just a few things. I think one Richard mentioned, we're more than 30% of our revenue is data center, but that means probably 60, 70% of our revenue is non-data center business. And that's a completely different dynamic, particularly I think in the standard products. So while there is on a project for project, I think the dynamics are different. So it's hard to say. based on the scenario with the exact project. So I think you have seen that we've been able to price up over time. We've built out the capacity to serve the customers and I think in some cases capacity and lead time are very important to the customer which allows for a different commercial situation and then other times it's more like I might say more like a frame agreement in which case there's more opportunity for competition so there's not a single answer to that but I would just say you know although it's becoming a bigger piece of our revenue and there is strong demand there we're pretty diversified and so it doesn't necessarily apply across our whole business.

Totally fair but let's dig into the data center stuff because if that's a third of your business now that's a very meaningful part of it and so if we're talking back to I think The earlier point of if your ceiling is kind of $1.3 billion of kind of utilization on the existing footprint under normalized pricing, but if a third of that business is now extremely in demand and very capacity constrained, is it fair to assume that that 30% could see materially higher pricing such that that 1.3 is now 1.4, 1.5?

I think it could give us a lift to our total custom business, Nick. I think the specific number, I don't know. Okay.

Thanks, guys.

Our next question comes from Razi Hassan with Paradigm Capital.

Hi, good morning. Thanks for taking my questions. Just maybe if you can comment a little bit on the drivers that led to improvements in operating leverage. Was it just the stronger top line that kind of flowed through, or is there anything else there?

Yeah, it's mostly the stronger top line. You know, when we've got, you know, both the new, you know, MON-3, MON-4, I mean, MON-4, we talked about it, that's, you know, essentially operating at capacity. MON-3 is not operating at capacity, but it is... getting much better, ramping up quickly as well. So I'd say those are the two biggest contributors to the improved operating leverage.

Okay, and then when you talk about an acceleration and conversion in orders to revenue, You know, is there anything specific there?

Or is it just the ability to have capacity flow through the door?

Was it, you know, changing in your plan formats or anything like that? Or is it just having more ability to get it through the door?

Yeah, and you know, yes, that's correct. And it's also by necessity, right? We're all operating to delivery schedules. So it's So it really just sort of becomes a question of how quickly can we get them out the door to meet the delivery schedule that's required by the customer. And that's really what's driving some of those higher sales. And we have to work overtime in many cases to do that as well.

Okay, great. And maybe a follow-up question on MON-2 and MON-4. Is there any more investment required? I know you mentioned MON-4, you're at full capacity, but is there any investment in those specific facilities that would be required to have incremental capacity flow through?

Yeah, no, we've made some, and we've talked about this in the past few quarters, we did make some incremental investments. in Mon 3, Mon 4, over and above our initial projections. And that's one of the things that's allowed us to increase that capacity. And it's also one of those things that's been pushing us beyond that $1.2 billion capacity level to what you're seeing today.

Okay, great. And then maybe just lastly, you know, you mentioned, you know, improvements in pricing to offset tariffs. Do you expect to do so for the remainder of the year to continue kind of balancing off the pressures, or do you find you're kind of capped here at the current levels? I think maybe a follow-on to previous questions on pricing.

Yeah, I think things have stabilized now in terms of, you know, pricing versus costs. So, So I don't anticipate any other changes in that area.

Okay, thanks very much. I'll pass the line.

Our next question comes from Tomo Sano with JP Morgan.

Hi, good morning, everyone. Good morning, Tomo. Hi, Tomo. Thank you for taking my questions. In Canada, You talk about the weakness coming from several factors, market softness and competition pricing driven and some project timing. Could you talk about what would you say like structural versus more like cyclical? And then if you see any signals of the recovery in a bad path, please.

Thank you.

Hey, Thomas, Adrian. Yeah, I think as you hinted, it's a combination of factors, some related to project timing, in some cases, more competitive environment. and the sectors that are active in Canada. So the investment activity in Canada isn't moving at the same pace that we see in the U.S., particularly on the data center and digital infrastructure side. But we do see opportunities for utilities, other electrification projects. And I would say one of the strengths of our business is the diversity of the markets we serve and in Canada, but also our geographic diversity across North America. I would say for the second half, you know, from a quotations activity in the first half, it looks to be very consistent quarter to quarter.

Thank you, Adrian. And one, a follow-up on data centers. On a high-level basis, some data centers move toward 800 volts DC Architectures. Where does HPS intend to win core transformers or power conversions, power quality? And then I'd like to know about how does AEG change that strategy, please? Thank you.

Thanks, Tomo. Yeah. First, I would say in terms of our quotation activity, we still see quite a bit of activity in what I would say traditional. So the kinds and the types of Transformers we're quoting for delivery, including deliveries out into 2027 still look like kind of traditional architectures. Going forward, I think AEG has power conversion capabilities up to 800 and even up to 1500 volts DC. So I think we're working with AEG to understand that better. And I think having power electronics and power magnetics together puts us in a better position to address that over the long term. When you move to an 800-volt system, the power distribution network shifts. There are other opportunities for us in that new architecture, particularly on battery energy storage and some other areas of the data center. So we think that there will continue to be opportunity for us in the new architecture.

Thank you very much. I appreciate it. Congrats on a quarter. Thank you.

Our next question comes from Sean Jack with Raymond James.

Morning, guys.

Just to start, I wanted to ask a question on custom sales. Obviously, these are very meaningful, part of the mix. Would you say that the average order value, excluding price increases as of recent, is moving higher versus a year ago, or if you could provide any details on that?

You mean just from a volume perspective?

Yeah, yeah, or like a, you know, cost to build, like total value of project.

Yeah, no, it is. It certainly is. Yeah, data centers tend to be larger orders, Sean. And, you know, you need a lot of transformers in a data center. So that is happening.

And then I noticed in the release as well, like beyond the new, you know, obviously the 1.4 coming online release, You said that you're also looking to expand capacity on other existing sites. Wondering if you could give us a sense of how meaningful that could be on the margin here.

Yeah, those kinds of expansions and capacity, they're usually measured in the tens of millions, Sean. So they could be shop floor process improvements. They could be adding pieces of equipment in areas where there are bottlenecks So it's really that type of thing. So we're not talking about sort of on the $50 to $100 million scale, but certainly in the tens of millions.

I would just add to that. I think the reason we're talking about that is as our footprint grows and you have a larger base incremental improvements add up over time to be significant. So I think that has been important for us in getting additional capacity out in the first half, and I will continue to work on that. Perfect. All right.

I'll pass the line. Thanks, guys.

As a reminder, if you'd like to ask a question at this time, please press star 11 on your touchstone phone. Our next question comes from Nelson Ng with RBC Capital Markets.

Great, thanks. I just had a quick follow-up. So just on tariffs, I have a multi-part question. So can you just remind us about what the effective tariffs that are applicable on the transformers you sell into the U.S. from Canada and Mexico are? are those tariffs included in your costs? And then also, did you receive any tariff refunds this year or whether you're expecting to receive any refunds?

We have not received any refunds. And the tariffs vary across product lines. So the rules, as you know, the rules change to a 25% tariff rate which was a little bit different from the tariffs on the metal component of the product. And not only that but the particular codes that got picked up in the tariff changed a little bit. So it is really very product specific and it for the most part applies to smaller size transformers and to a lesser extent large transformers. So in Canada, they tend to be on the larger side of the transformer, so Canada tends to be a little bit less impacted.

Just a quick clarification on tariff refunds. So the majority of our products are USMCA compliant. So those were excluded from IEPA and a number of the other tariff instances. The scope of any tariff refund is not relevant for us.

Okay, thanks for the clarification. I'll leave it there.

That concludes today's question and answer session. I'd like to turn the call back to Adrian Thomas for closing remarks.

Thank you, operator, and thank you, everyone, for joining us today with your questions and for your continued interest in Hammond Power Solutions. To wrap up, we continue to see strong long-term demand for electrical infrastructure that supports data centers, industrial growth, and power reliability. HPS is well positioned in that environment and with expanded manufacturing capacity, strong core business, and broader set of capabilities following the acquisition of AEG Power Solutions. We remain focused on executing well and building on that position through the second half of the year. I would also like to thank our employees, customers, and shareholders for their continued support. Thank you.

This concludes today's conference call. Thank you for participating.

You may now disconnect.