HAMMOND POWER SOLUTIONS INC achieves $218 million in revenue, driven by robust U.S. demand, while navigating material cost challenges impacting margins.

OPERATOR - (00:00:00)

Good morning ladies and gentlemen. Welcome to HAMMOND POWER SOLUTIONS INC 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 would like to hand the call over to Mr. Adrian Thomas, Chief Executive Officer of HAMMOND POWER SOLUTIONS INC.

Adrian Thomas - Chief Executive Officer - (00:01:49)

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 us shipments with gains in all of our channels to market. The us 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 time frame. Our Monterrey IV 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 us 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 us 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 is 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 us from manufacturing locations outside of the us 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 the 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.

OPERATOR - (00:08:30)

If you'd like to ask a question at this time, Please press star11 on your touchtone phone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q and A roster. Our first question comes from Matthew Lee with Canaccord Genuity.

Matthew Lee - Equity Analyst - (00:08:54)

Hey morning guys. Thanks for taking my question. I want to drill down on the demand picture a bit. You provided some commentary on the October orders, which is very impressive. Do you feel like the large orders are a bit of a one time item or are you seeing kind of a sustainable shift in terms of the bidding environment? Hey Matt, it's Avery. So I think a couple things. One, our orders in the queue in the quarter were up. We had those significant orders which came in just after quarter close that were significant. What we see generally speaking, and I made a comment in my remarks, is that we're seeing more activity around quotations for larger projects. So we see a trend towards larger projects, particularly in the data center business where people are trying to build quickly and they need large quantities of transformers. So, so I think that trend is continuing and I think the ability for us and other manufacturers to supply those quantities is critical to winning those jobs. And maybe the follow up to that. Why are these big projects choosing Hammond over some of the peer groups or competitors? So one, so we've got an established reputation in the industry for the quality of our products and for delivery. And second, as I mentioned earlier, just the confidence of the customer that we have the capacity to deliver those quantities of equipment. Okay, great. And then maybe just one on the capex side. You mentioned that you were able to kind of do 1.2 billion in capacity with Monterrey IV, but I mean, if demand continues this way, how easily could you open up a Monterey 5? Or would capacity beyond 1.2 billion be difficult to create? Yeah, so we're always evaluating map and capacity requirements and locations. I think what you saw, we built two factories in Mexico successively pretty quickly. We have the ability, now that we have those two new facilities to add some equipment in there, maximize the footprint. The other thing unique about these orders, although they're custom transformers, they're high quantities, high run. So we're also able to utilize our footprint more effectively for those. So we'll continue to analyze that, we'll continue to add equipment and we will continue to add capacity so that we can meet our future demands. Okay, great guys, I'll pass the line.

OPERATOR - (00:11:43)

Our next question comes from Balte Sidhu with National bank of Canada.

Balte Sidhu - Equity Analyst - (00:11:49)

Hey, good morning guys. So a few questions for me. So if we're looking at line four in Mexico, how are conversations with potential customers evolving? Appreciating the incremental investment for capacity and just following up on that, could you provide color on how buffed out Monterrey IV is? So we were able over the last year to bring another customer down to Mexico to show up our facilities, our operations in progress on the plant. And so I think that Built confidence with our customers that they saw the capacity coming on board. Sorry, what was your second question? So just any color that we can have on monitoring for and capacity utilization and how booked out it is? Yeah, so when we announced it, we had announced sort of $120 million capacity. We will be adding additional equipment and we'll be optimizing supply chains. So I believe with some additional capex this year, we should be able to add another 100 million of capacity to that factory. Okay, great. And then just turning over to the backlog. Great to see the growth in Q3. Particularly of interest was the 53% of total value booked already a month in the quarter. Could you give any color on what percent of that sales would be from data centers in the backlog? Nearly all of it is data center. Perfect. I'll pass the line over.

OPERATOR - (00:13:37)

Our next question comes from Nicholas Bojchik with Cormark Securities.

Nicholas Bojchik - Equity Analyst - (00:13:43)

Good morning, guys. Just want to confirm my understanding on something here. So $100 million of new capacity that you're adding, is that specifically for Monterrey IV or does that include the other organic initiatives and facility improvements that you're doing across the spectrum of your assets? Primarily Monterrey IV. Okay, so are there other things like you mentioned in the MDA quickly, that there are both capacity improvements, flow improvements, things that you can do at existing facilities. Is there additional capacity we could think about on top of the 1.2 billion outside of that? So it's primarily Monterrey IV. We are reshuffling some of our production footprint, so we will utilize other factories as we optimize monfor. So we are doing some enhancements at other, other factories that will allow us to get more output out of Monterrey IV by taking some other loads and putting in other factories. So it's all inclusive of our other footprints. Got it, thanks. Now, just thinking about mod 4, can you guys comment at all on the contribution margin and how we should be thinking about what that looks like on the custom business versus what you've historically done in Guelph? Is it fair to say that once you get that facility operational and fully, you know, humming and it's doing some of these larger data center projects, is the contribution margin higher than what we've historically seen? Yeah, Nick, it's Richard. So, yeah, listen, I think as you know and as you can imagine, manufacturing in Mexico is less expensive and having some of these projects where we can do longer runs is more efficient, particularly when you're ramping up labor and training and that kind of thing. So the other side of that is, of course, the pricing equation. Right. And so I think you have to put the two of those things together. And because some of these large projects, I mean, as you can imagine, they're going to be competitive, very competitive. So I wouldn't, I don't have an expectation that it's going to be significantly accretive to our margins, but it will definitely help our absorption. So to the extent that we are, to the extent that we are unabsorbed in those factories today, a lot of that will go away as we ramp them up with this new volume. Okay, makes sense. And when you say that these are longer run items, does that mean that you have greater visibility into data center demand, where you'll be able to sell the similar product into other data centers, or does it have applicability into other, more traditional segments that you've sold into? So one Richard. So every data center customer has a unique sort of architecture, but there's a lot of similarities. So the longer runs mainly do one design and then we're producing it. So what we see in a lot of other industries, we will do a design and there will be, you know, a handful, maybe two, three, maybe six transformers of that design for the project, and then you do a different design. When Richard says longer runs, you may see hundreds of the same design for some data center buildup. So that gives us some efficiencies to reconfigure for. We can use the same equipment. There is some spacing and some other things that minor tweaks that we do. So that does allow us to pack more in when we're doing these longer runs that we would have to reconfigure if we had a different mix. So that's how the longer runs help us. Okay, got it, thanks. And last for me, just on the backlog, I know in the past you've mentioned, and even in the MDNA highlighted again that the backlog isn't necessarily fully indicative of somebody placing an order. It's not a firm deposit. But given that these data center contracts that came in subsequent to Q3 are much larger than you've historically seen, were you guys able to get them to place an actual cash deposit or make this a little bit more of a firm order that you can then bank on versus an indication in the past? Yes, these orders have deposits and firm commitments. Excellent. Thanks, guys.

OPERATOR - (00:18:18)

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 Jim Byrne with Acumen.

Jim Byrne - Equity Analyst - (00:18:31)

Good morning. Guys. Richard, could you maybe just help us quantify the Mexico impact here on Q3 margins? Is it, you know, 1%, you know, 100 basis points from kind of a drag from where you would expect margins to be or just help us understand that, Jim. Yeah, so in the MD&A, we talked about the impact of absorption, having a 233 basis point impact on the margins. Okay, that's helpful. And then just thinking about the stock product and kind of distribution, maybe just starting with Mexico, I know that that was something that was kind of a goal of yours, you know, to implement more and achieve more product distribution down there. How is that? How's that going? So we continue to develop customer relationships. We have been able to develop some relationships because of our custom product down there. And then that drives some interest in customers working with us on standard products. I would say, Jim, overall, particularly with how much the us has been growing recently, it's small in the total dollars, but we're making incremental progress. Okay, and then maybe just lastly, I didn't see or didn't hear any commentary just kind of on stock product in general in the us you know, are we past kind of the construction slowdown that kind of was, you know, impacting results earlier in the year and you're kind of seeing, you know, a more normal market down there. Yeah. So it's interesting because, you know, I think generally a lot of the segments in the market are showing some weakness and that hasn't really trickled through to our standard product sales. There is business out there. I think maybe one of the things to remember is that, you know, construction, you know, it can be office construction, it can be data center construction, but they all need transformers. They need. They need the large custom transformers, but they need smaller distribution transformers as well. So, I mean, that demand comes from a lot of different places. But, you know, the short answer is no, we haven't seen a slowdown in stock products. It's been doing quite well. Okay, that's it for me, guys. Thanks.

OPERATOR - (00:21:18)

This question comes from Baltez Sidhu with National bank of Canada.

Baltez Sidhu - (00:21:25)

Hey guys, just one more for me here. So private label sales strength continued into Q3 from Q2. What would be driving that demand? And could we see this sustained going forward? And would it be fair to say that this would be typically custom product? As you cut out on our end, could you repeat your question? Yeah. So private label sales strength continued into Q3 from Q2. What would be driving that demand there? And. And could we see this as sustained? And would this be fair to say that that product mix would be orientated more towards custom. Yeah, almost all of that is custom. And generally speaking, it's commercial construction. There is some data center in there as well, but predominantly it's general commercial construction activity. So I think, as Richard mentioned, you know, we continue to see sales on stock product that's going into general construction and we saw good volume in the private label side. But there is a mix of data center business in there as well. So we would expect the private label volume to continue either way. Great. Thank you for that. I'll leave it there.

OPERATOR - (00:22:46)

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

Adrian Thomas - Chief Executive Officer - (00:22:52)

Thank you, operator. We're proud of what we've accomplished over the last few months and are motivated by our major customer projects to continue driving our growth trajectories and expanding our organizational capacity. While we'll continue to explore acquisition opportunities, I believe our ongoing production initiatives and capital expansion plans position us well for sustained growth in a world increasingly driven by demand for data and electricity. I thank everyone for joining us today.

OPERATOR - (00:23:21)

This concludes today's conference call. Thank you for participating. You may now disconnect.