Hammond Power Solutions Inc.

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions' third 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, trade, tariffs, and export controls, Fluctuations of Commodity Prices, Industry Competition, the Conversion of Backlog into Revenue, the Integration of Acquired Businesses and the Realization of Anticipated Acquisition Benefits, Financing Costs and Indebtedness, Foreign Exchange Rates, 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?

Good morning everyone and thank you for joining us. I'm pleased to share Hammond Power Solutions' third quarter 2026 results. Joining me today is our CFO, Richard Vollering, who will walk through the financial results in more detail after my remarks. We'll then open the line for questions. This was a milestone quarter for HPS as we reported our first full quarter with AEG as part of our consolidated results. It was also another record quarter with consolidated sales of $446.3 million, more than double the third quarter of last year, adjusted EBITDA of $84 million, and adjusted earnings per share of $3.13. Year-to-date sales have now surpassed $1 billion, reaching $1.04 billion through the first nine months of the year. Just as importantly, the quarter demonstrated the strength of our operating platform we have been building with higher manufacturing output, improved customer service, strong cash generation, and continued profitability gains with gross margin reaching 34.4%. New this quarter, our external reporting now presents our transformer and related magnetic operations as power magnetics and our integrated electrical solutions and systems business as Integrated Electrical Solutions, or IES. IES is primarily comprised of AEG, but also includes the power electronics products within the MESTA business. This gives investors a clearer view of two businesses with different revenue profiles, market exposures, and margin characteristics. I'll touch on both, and Richard will provide the detailed financial review, including further detail on the inclusion of AEG. Let me start with Power Magnetics. Our reporting segment that includes our historical business without AEG, Power Magnetics delivered an exceptional quarter with sales of $355.5 million, an increase of approximately 66% from prior year. The primary driver was volume, supported by pricing and stronger utilization of the capacity that we have added across our manufacturing network. Demand in the United States remains healthy, with distribution and data center related shipments continuing to be important contributors. We are also seeing solid engagement across industrial, infrastructure, energy and technology related markets. Our broad exposure across customers, channels and end markets remains a source of resilience, even as individual projects and order timing can be uneven. Canada remains a more challenging environment, Market activity is slower and pricing is more competitive, so our focus is on disciplined commercial execution, protecting the customer relationships and market positions that matter most, while remaining selective on mix and margin. During the quarter, shipments again exceeded bookings. As a result, backlog declined modestly from the second quarter, but remained approximately 61% above the prior year level. With net bookings up on a quarter-by-quarter basis, we view the movement and backlog as the result of record output and faster conversion of orders into revenue. Quotation activity continues to remain robust, including for large projects, but the timing of those awards is inherently lumpy as we engage in larger and more complex opportunities. Operationally, Monterey 4 is now fully ramped and contributed to record shipment levels, It is an important proof point for our capacity strategy. We were able to add capacity quickly, bring it into production, and convert customer demand into attractive returns. Our process improvement program also delivered the targeted production increase at our Guelph facility. Together, these improvements are increasing throughput, shortening lead times, and strengthening our responsiveness to customers. With the strong outlook for electrification, we also announced our new manufacturing facility in Fort Worth, Texas. This is the next major step in expanding our North American network, bringing an additional $250 million of capacity closer to key customers. The investment complements our operations and recent investments in Canada and Mexico and reflects our confidence in the long-term need for reliable power infrastructure. The third quarter was AEG's first full reporting quarter within HPS. Integrated electrical solutions contributed $90.8 million of sales in the quarter. The service business was the most resilient part of the portfolio, with both service revenue orders up from prior year, along with attractive margin performance. Product activity was softer, reflecting a more difficult project environment. The most significant near-term issue has been the conflict in the Middle East. It has affected order intake, customer travel, project timing, and shipping and freight costs. Outside the region, those pressures have been compounded by slower activity in sectors such as hydrogen and offshore wind. The results have been longer sales cycles, deferred projects, and pricing pressure. The team is responding, as it has previously, with focus and clear commitment to execution. We are concentrating commercial resources to mitigate these impacts and developing opportunities that will help us continue to build backlog for 2027. Operationally, we are strengthening project and shipment execution while maintaining tight cost and inventory control. At the same time, our long-term view of AEG remains positive. The service platform is resilient and highly profitable, and the business brings engineering capabilities in power conversion, critical power, and industrial systems that complement our transformer portfolio. We are encouraged by early customer interest in bringing more of AEG's technologies to North America, including opportunities connected to emerging data center power architectures. The integration has progressed across leadership, governance, cybersecurity, treasury, IT, and financial reporting. Completing the first full consolidated close was an important milestone. The next phase is increasingly commercial, educating both sales organizations on the combined portfolio, building collaborative customer engagements, and converting our broader capabilities into new opportunities. Strong cash generation in the quarter gives us greater flexibility. It supports debt reduction following the AEG acquisition, while allowing us to continue funding the capacity, product, and market investments that can create long-term value. Richard will cover the balance sheet and cash flow in more detail shortly. Our priorities for the remainder of the year are straightforward. In power magnetics, we need to sustain shipment execution, remain disciplined on pricing and mix, and maintain the working capital improvements achieved this quarter. In integrated electrical solutions, the priorities are orders, execution, and positioning the business for 2027. More broadly, we remain focused on expanding HPS from a strong transformer company into a broader provider of power magnetics, power quality, and integrated electrical solutions. Electrification and the growing need for reliable, efficient, and resilient power infrastructure continue to create attractive opportunities. We are pursuing those opportunities with the same discipline that has supported our growth to date. With that, I will hand the call to Richard, who will now take you through the financial results in more detail. Richard.

Thank you, Adrian, and good morning, everyone. As Adrian mentioned, we delivered a record quarter with strong growth in power magnetics and our first full quarter of results from AEG. because AEG is included for the first time, year over year comparisons should be considered in the context of a significant change in the composition of our operations. I'll spend a few minutes walking through the key financial highlights. Consolidated sales were $446.3 million in the third quarter, up 104.4% compared to $218.3 million in the third quarter of 2025. Power Magnetics contributed $355.5 million, an increase of 66.1%, and IES contributed $90.8 million. Year-to-date, sales were $1.04 billion, up 60.8% from $644.2 million in 2025. Within Power Magnetics, the U.S. and Mexico continued to drive our growth. with sales of $288.7 million, up 87.9% over the prior year, or 85.8% when measured in US dollars. Growth was driven by higher data center shipments, modest improvement in industrial markets, and full realization of previously implemented price increases. The sequential increase from the second quarter reflected the timing of shipments for certain large projects and improved price realization. Canada was up 12.1% compared with last year to $57.6 million as certain large custom project orders were completed. This narrowed the year-to-date decline in Canada to 3.7%. India sales were $9.2 million, comparable to the prior year. Gross margins continued to improve. Consolidated gross margin was $153.4 million, or 34.4% of sales, compared to 30.1%. in the third quarter of 2025, and 32.3% in the second quarter of 2026. Our magnetics gross margin was 34.3%, up 420 basis points from last year. This improvement reflects the continued realization of price increases, higher overhead absorption from increased throughput, a greater proportion of custom products, and improved factory efficiency from our process improvement program. Copper and aluminum prices have increased in recent periods, and tariffs remain a factor. But our pricing actions and operational improvements are helping offset these pressures. In IES, gross margin before purchase accounting amortization was 37.7%. Selling and distribution expenses were $57.1 million, or 12.8% of sales, compared to 11.1% last year. AG's operations added $15 million and purchase accounting amortization of acquired customer relationships added a further $1.8 million. The remainder of the increase was driven by higher power magnetics volumes and the distribution costs required to support that growth. General and administrative expenses, including share-based compensation, were $23.7 million or 5.3% of sales compared to 7.6% last year. A lower share price during the quarter resulted in a share-based compensation recovery of $3.2 million. Excluding share-based compensation, general and administrative expenses increased $11.8 million, including $8.6 million from AEG, but improved 90 basis points as a percentage of sales. Earnings from operations were $71.6 million compared to $24.9 million in the third quarter of last year. Adjusted EBITDA was $84 million, or 18.8% of sales, compared with $30.3 million, or 13.9% of sales, in the third quarter of 2025. Year to date, adjusted EBITDA was $178.3 million, up 88.5%. The increase reflects the combined benefit of higher volumes, stronger gross margins, improved operating leverage, and the addition of AEG. reported net earnings were $27.7 million, or $2.33 per share, compared with $17.4 million, or $1.46 per share, in the prior quarter. Reported results included $10.3 million of acquisition-related costs, foreign exchange losses of $8.2 million, primarily from the settlement of hedge contracts entered into to manage the currency risk associated with the acquisition, and higher interest expense of $9 million compared to $1.1 million last year, reflecting the acquisition debt. Our effective tax rate was 37.3% in the quarter, primarily due to the non-deductibility of acquisition-related costs. AEG contributed $1.7 million of net earnings in the quarter. adjusted earnings per share, which exclude foreign exchange, share-based compensation, and acquisition-related costs, increased to $3.13 from $1.56 last year, which better reflects the strength of the underlying operating performance. Year-to-date, adjusted earnings per share were $7.68 compared to $4.88 in 2025. Cash flow was strong in the quarter. Cash generated from operating activities was $75 million, compared to cash used of $2.1 million in the third quarter of last year, with changes in non-cash working capital generating $22.5 million. Year-to-date operating activities generated $80 million. At the end of the quarter, we had a net operating cash position of $51.6 million, representing cash of $134 million, net of bank operating lines of $82.4 million. compared to net operating debt of $36.5 million at the end of the second quarter. Including the term debt used to finance the AEG acquisition, net debt excluding leases was $352.9 million. Gross borrowings under our syndicated credit facility were $496.9 million, comprising of $412.8 million of term loans and $84.1 million of revolving borrowings. We remain in compliance with all of our bank covenants. As we close out the year, our financial priorities are to maintain strong operating discipline, continue to generate cash from operations to fund working capital, capital expenditures, and scheduled debt repayments, and support a successful integration of AEG while continuing to invest in the growth opportunities ahead. We believe HPS is well positioned heading into the fourth quarter with improving operating performance and a broader platform for long-term growth.