Q2 2025 Hammond Power Solutions Inc Earnings Call
Good morning, ladies and gentlemen, welcome to Hammond Power Solutions, second 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.
Speaker Change: I'd like to hand the call over to Mr. Adrienne. Thomas Chief Executive Officer of Hammond Power Solutions.
Mr. Thomas.
Speaker Change: Thank you, operator. And good morning everyone. Thank you for joining us for our second quarter update. I'm pleased to share that Hammond Power Solutions, delivered, another strong quarter in Q2 2025 achieving record quarterly, sales of 224 million.
Speaker Change: 14% growth compared to Q2 2024.
Speaker Change: Driven primarily by us shipments. All 3 of our channels to Market saw strong gains.
Speaker Change: at the same time, as our rapid sales growth, we saw faster than expected material cost increases,
Speaker Change: We implemented our annual price increase in April, which will partly offset these costs.
Speaker Change: We will see the net effects of our pricing more fully in Q3 as pricing flows through our backlog.
Speaker Change: Despite these cost headwinds, our gross margins ended, the quarter at 31%.
Speaker Change: Our customer and Market activity remains resilient with continued, quotation and orders momentum. And we delivered growth in all 3 of our Market channels.
Speaker Change: Healthy demand was seen across core markets and increase production capacity, allowed for higher shipments.
Speaker Change: While our increased shipments reduced our backlog on a quarter over quarter basis, our backlog, remains strong on a year-to-date basis.
Speaker Change: The US market experienced its strongest growth of all regions up, more than 18% compared to the same quarter last year. Driven by strong standard product sales in the quarter.
Speaker Change: The Canadian Market continued to grow at a rate of approximately 5% with our distribution Channel, contributing to both standard product and custom product sales.
Speaker Change: Large projects in a diverse set of Industries, contributed to the sales of custom products.
Speaker Change: Looking at our recently acquired Micron brand. We continue to see strong sales from their products and they are performing as expected and margin slightly ahead of our expectations.
Speaker Change: Together, we offer a broader array of solutions to our customers and enhance our reputation for quality products and services particularly within our OEM markets.
Speaker Change: As mentioned during our last call while demand for some of our messed up products has slowed due to a temporary pause in EV and Chip manufacturing projects.
We are making exciting progress in new areas.
Our Market development and sales efforts around power quality Solutions, especially active harmonic filters are gaining traction with new customers and projects.
Speaker Change: This positive trend in active, harmonic filter sales is expected to balance out any softness in induction heating sales for the year.
Speaker Change: New facilities in Mexico.
Speaker Change: We are now in the process of loading, our newest facility expecting shipments in the second half of the year.
Speaker Change: as we ramp up production in this facility and as we load up the other equipment and plants to meet the market demand, we expect to see benefits to our operating costs
Finally, I would like to share 2, great external recognitions earned this quarter.
Speaker Change: We are pleased to announce that Hammond has again earned the great place to work certification. Now, including our Mexico facilities for the first time.
Speaker Change: This recognition demonstrates, our dedication to employee engagement and workplace culture.
Speaker Change: We believe this recognition and the underlying employee culture will support us in our staffing, growth and retention rates in Mexico and across our organization.
Speaker Change: I would like to close by mentioning that we were recently honored by Ted magazine as recipients of the best of the best marketing Awards.
Speaker Change: An Accolade that acknowledges Distributors and manufacturers for excellence in marketing strategy and execution across multiple categories.
Speaker Change: We are proud to be 1 of this year's winners with that. I will turn it over to Richard for some Financial detail on the quarter. Richard
Thank you, Adrian and good morning, everyone.
Speaker Change: As Adrienne mentioned, we are pleased with the strong Topline performance in the second quarter of 20125.
Speaker Change: This was a continuation of the growing momentum. We spoke of at the tail end of the first quarter,
Speaker Change: gross margin while still historically strong at 30.7% was lower than expectations. There were 2 main reasons for this.
Speaker Change: 1 is the higher material cost referenced by Adrian earlier and the other is the cost of ramping up our new facilities in Mexico, as we set up equipment and trained and expanded Workforce.
Speaker Change: These costs had an impact of approximately 123 basis points on the gross margin in the quarter.
Speaker Change: As we load the factories in the coming quarters, the impact of these costs will diminish
Speaker Change: While it is difficult to ascertain, what cost increases, we might experience in the coming months, we will continue to monitor them and be prepared to adapt.
Speaker Change: Moving on to overhead costs selling and distribution costs increased in the quarter by 4,074,000 due to higher shipping volumes and were slightly higher as a percentage of sales.
Speaker Change: With respect to General and administrative expenses. Our first highlight that the rapid share price increase since the end of the first quarter resulted in a share-based expense of 9,144,000 in the second quarter.
Speaker Change: On a year-to-date basis. There's a recovery of 1,752,000
Speaker Change: The remaining General administrative. Expenses were generally flat in the quarter.
Speaker Change: Adjusted debit doll, which excludes the impact of share-based compensation, and foreign exchange gains. And losses was 33,396,000 in the second quarter of 2025.
Speaker Change: versus 32,587,000 in the same quarter of 2024, an increase of 2%
On a year to date basis. Adjusted debit de was 64,312,020 in 2025, versus 6355590 in 2024 and increase of 1%.
Speaker Change: Adjusted DPS was a $1.72 in the second quarter of 2025 and $3.32 on a year basis by comparison. Adjusted EPS in the first 2 quarters of 2024 was $3.37.
Speaker Change: Net income was 13,376,000 in the second quarter and 39,598,000 on a year-to-date basis.
Speaker Change: Working capital increased in the quarter mainly due to higher accounts, receivable due to higher Sales Inventory levels that remain historically high and significant cash outlays in the quarter due to share based compensation payments and income taxes.
Speaker Change: We expect the net cash will increase and the third quarter.
Capital expenditures rate million in the quarter and 20 million year to date. This is in line with our expectations of capital expenditures of 35 to 40 million dollars for 2025.
Speaker Change: Our Financial Focus in the coming quarters will be to monitor margins closely, and be prepared to react quickly to maintain them.
Speaker Change: Ensure that we are managing our overhead costs prudently and manage working capital closely to bring it below. 20% of sales.
Speaker Change: Thank you for your time and attention. I will now hand things back to the operator, to open the line for questions.
As a reminder to ask a question. Please press star, 1 1 1 on your telephone, and wait, for your name to be announced.
To withdraw your question. Please press star 1 1 1 again.
Speaker Change: Please stand by while we compile the Q&A roster.
Matt Lee: Question comes from the line of Matt Lee with kic or genuity.
Matt Lee: Hey morning guys, nice to see my questions. Um maybe just starting on margins. Uh it sounds like gross margin pressure was mainly due to supply chain costs but can you just maybe walk through how much of that cost increase year-over-year is related to the Mexican ramp up and then you know, maybe a secondary question on that, you know how much of the additional supply cost, do you think you can pass on to customers via price increases over time?
Matt Lee: Good morning, Matt. Uh,
Richard: It's Richard here.
Richard: So uh, yeah, the factories. So we pointed out that the impact of gross margins from the 2
Richard: Uh, new factories in Mexico was about 1233.
Richard: Basis points and and that isn't unexpected. Um, you know, as I mentioned, we have to, you know, we have to get people in. We have to, we have to train them and then some some processes on the factory floor. That takes a little more time. So, um, the the good news is that the progress has been has been
Richard: Good and, um, you know, we are going to start, um, making and shipping product out of there very soon.
Speaker Change: Go ahead. Sorry. And the second part of your question was related to costs and and and you know how effectively we can pass those, those costs increases on and
Richard: and so,
It's always going to be um, you know, it's always going to be, of course, our objective to maintain margins as best we can, Matt. But as we talked about many times before,
Richard: um, that doesn't happen overnight and
Richard: you know, respect to custom product. Um,
Richard: the lead times tend to be longer, um,
Richard: but changes to pricing can be implemented quickly on the catalog product that that typically takes
Richard: a few months. So
Richard: Uh, what I can tell you is that we are we are watching where costs are going very closely and uh we will make decisions accordingly.
Richard: That's that's really helpful. So if I think about margins you know if the Mexican facility was up and running at at at kind of capacity levels and your margin would look kind of closer to 32 if I just at the 1233 basis points
Speaker Change: Yeah, I think so. I I think so Matt and, and, you know, the
Speaker Change: the thing that'll make that happen of course is is loading up those new factories um which which will take some time and that'll
Speaker Change: um, you know, it'll happen over the course of the course of the remaining quarters this year and then, um, probably a larger impact going into 2026
Speaker Change: Okay, that's super helpful. And then maybe Adrian on the demand side. Um, sounds like quotation activity was really robust. Um, can you maybe break down that down into demand from data centers versus sort of your more traditional clients and then any sort of changes that you're seeing uh with a bit more stabilization of the US economy right now.
Speaker Change: so, I think, uh, a couple things to note, um,
Speaker Change: A lot of the growth came from the US. Um, and, uh,
Speaker Change: Still, we see, uh, a lot of activity on the on the custom side and that's project related. Um, without giving you an exact percentage, I would say, a large portion of that growth was coming from from data center activity. So we do see that
Speaker Change: As fastest growing segment. Um, but I would remind you, we're, we're quite Diversified so we can continue to quote participate across all the markets and we had made was that we saw a broad-based uh, support, um, particularly diverse in Canada, um, but also but also in the US. But yes, data centers was the fastest growing piece and the indications from our customers. In that space is that they see, um,
Speaker Change: A lot of opportunity moving forward as well.
Speaker Change: Right. Okay. So is that if I'm being, can I go ahead? No and then with respect to standard products, we we saw a good volumes on our standard products and and as we've mentioned before, that sort of related to, um, we sell those products everywhere. Uh, every sort of construction project, that is electricity will have a standard Transformer. Um, so that's just in, in general. I think a result of, um, kind of how the economy is is uh, continuing to momentum in the US.
Speaker Change: Okay, that's really helpful. Then maybe just 1 last housekeeping. Question. Uh, can you remind me, how much of the New Mexico facilities are online right now and then maybe where your total capacity is right now?
Speaker Change: In terms of ramped up. So, um,
Speaker Change: The the 2 facilities. So, um,
Speaker Change: 1, 1 1st, uh, certification products uh, will be building some um,
Speaker Change: um, for stock out of there to help, um, get the workforce accustomed to
Speaker Change: Um, building and and the skills that they need to produce, uh we would expect that, we would start producing, um, probably September time frame, starting to ramp up, um, some small volume by the end of the year and really, um, loading that factory for for next year. So we're, we're sort of in the, the training phase. Uh, so we'll ramp up, uh, if you make a comparison to a restaurant, sort of like a soft opening, uh, just to make sure that we have the, the skill sets that we're producing quality products. So we'll limit the volumes out of that facility. While we make sure that we have the right, uh, trained Workforce, and skill sets, and then it should be more fully ramped up, uh, starting first quarter next year.
Speaker Change: And that full ramp up is 9 to 950 million in terms of Revenue still, or is it maybe a little higher now?
Speaker Change: What we get mine for ramped up, Matt.
Yeah, yeah. Oh no it it'll it'll be close to 1.1 billion, right, okay. With Micron included. Yeah.
Speaker Change: Okay. Got it. Thanks, I'll pass them on.
Speaker Change: Our next question comes from Nicholas boy.
Let me check with core Mark securities.
Thanks good morning guys. Uh just want to come back to the Dynamics between the 3 channels you had and the cost. So obviously the commentary suggested that your private label and OEM segments, they're strong, uh yet selling and distribution costs as a percentage of sales was flat quarter of a quarter. So can you maybe expand or talk a little bit about any changing dynamics that you're seeing within that? Is it maybe becoming a little bit more expensive to onboard, uh new Distributors. Um any any color there on on that Dynamic is uh, is helpful.
Speaker Change: Uh, yeah. Good morning. Nick. Um,
Speaker Change: yeah, so I I wouldn't I wouldn't say
Speaker Change: There's a whole lot changing, uh, in that dynamic.
Speaker Change: Um, in the quarter. Anyway, I don't think there's anything really to call out, or to speak of that's notable.
Speaker Change: You know with respect to the Distributors. We we you know we are still adding uh branches as time goes by um but our real focus is on uh increasing
Speaker Change: The sales within the existing, uh, distributor branches that we have.
And, you know, the best way to do that for us is, is to uh, not only perform well.
In our delivery quality and price on standard product. Um, but also to grow the custom product aspect of it.
Okay, so we'll continue to do that as we go forward.
But in terms of this quarter, there wasn't anything unique in terms of that mix with those Distributors, that would make the gross margin profiles, so that sgna profile a little bit heavier.
Speaker Change: Uh, no no I wouldn't I wouldn't call anything out that's notable. Okay, um, on the raw material and commodity input cost pressure. Um, obviously as you input this new Mexican facility, your scale is starting to really get to a point here where I'm assuming you have a little bit more leverage with some of your suppliers are there opportunities. You guys are exploring to maybe procure things on a little bit of an advanced lead time. Maybe fixed. Um, pricing in terms of purchases things that could maybe prevent some of the volatility and swings quarter over quarter.
Speaker Change: I I would say Nick that um our our view of the pricing I wouldn't, I wouldn't look at material cost inflation as a quarter of a quarter. I I think there has been
Speaker Change: um,
Speaker Change: Faster, inflationary cost pressures. In the first half of this year than maybe was anticipated when we were exiting last year. Um, I I do believe our um,
Speaker Change: Where we'll land in terms of cost.
Speaker Change: Um,
Speaker Change: Is is slightly higher but um you know we'll we'll see how that flows through. Yes, we we definitely have scale. We've been using that scale to diversify our supply base to create.
Speaker Change: more robustness, um, in in terms of
Speaker Change: Uh, reliability of supply and having options. If, if we have issues with with our supply base and um, it also does give us more flexibility in terms of where we're sourcing materials, which I think is an important flexibility right now.
Speaker Change: So a lot of our folks have been on on the robustness but we continue to look at at ways that we can uh minimize uh or take advantage of our scale to to get some Leverage.
okay, thanks and then we talked a little bit about Mesa and Micron can you give us a little bit of an update on the the overall power quality m&a Market any updates on Pipeline opportunities at valuations
Speaker Change: I, I think a couple things to note on, um, Power quality, um, I called out, um, you know, we, we were focusing, uh, significantly and in terms of, uh, promoting and, uh, training and and educating customers in our, in our sales reps, and our sales teams around that, that product line since the second half of last year. Um, we've seen, um, compression in, um, quote to ship Cycles. So it seems that uh,
Speaker Change: You know, some of the cycle time from when we're uh participating or quoting projects or, or shrinking. So that's positive. And that's led to some acceleration of of our volumes on on the filter side. Um,
Micron, uh, is is going well, as we mentioned, um,
Speaker Change: and uh, you know, we'll continue to look for for more uh,
Speaker Change: Acquisitions. In that space. I, I think Micron, um, is is a good example that we can execute, uh, an acquisition integrate, it successfully. So we'll continue to, to work there, we have an active pipeline, um, and, uh, can't can't talk too much more about that. But, uh, yes, we we continue to be active, um, and I think I had mentioned at 1 Point, um, we, we have a dedicated business development person, um, on our team, um, Norm Bates who, um, was, was leading Micron, who's helping us, uh, in that business development as well. So we're, we're fully active, in developing a pipeline.
Speaker Change: Okay, thank you.
Speaker Change: I see.
Speaker Change: Our next question comes from Jim burn with acumen.
Jim Burn: Good morning, guys.
Speaker Change: Um uh Richard, you're kind of highlighted the, the shipping costs. Um, and you just wanted to maybe get a a better sense of of what you're seeing there. Obviously volumes are up, um, we hear from a number of the truckers, um, that that rates are actually down. Um, I'm wondering if you're actually seeing that or is it is it just strictly volume. That is that is pushing that number up as it as you mentioned, the percentage of sales it's actually been climbing. So I just wanted to get a sense of
H where you are on that shipping cost.
Yeah, it's really it, it really is just the volume. Um and uh,
Um, you know, we're we're still, we're kind of at the tail end of our warehouse strategy as well, um, but not completely done, but um, so we're not realizing the full benefit benefits of that quite yet. But, um, you know, it's my expectation, that that will improve in the coming quarters.
Jim Burn: Okay. And then on the right, are you seeing any uh, cost inflation on the on the shipping rate?
I I don't really see too much moving either way.
Jim Burn: Okay. Um, and then Adrian, um, obviously we're still seeing strong Demand on data centers, Power Generation. Um, projects seem to be uh announcements coming up. Uh I noticed I think Enbridge uh signed up for a large solar project. Um, you know maybe just on the solar and renewable side are any uh any major uh project lens or anything that you can note on the solar side.
Jim Burn: um,
Jim Burn: what I, what I would say is that
Jim Burn: You know globally because we we do serve that not only, uh, North America but also from our India operations. So, um, I would say generally speaking, we see renewable activity, I, I wouldn't say we see the drop off, um, in in the US.
Jim Burn: and uh, we
um,
Jim Burn: You know, I, I think there were, there were some changes in tax codes and things like that. So, um, I would expect, um, you know, the US might be subdued for a while by those projects get reevaluated. Um, elsewhere, in the world, we see that for no rules continues to be, um, stable business.
Jim Burn: Okay and then maybe just lastly um can you talk with the the FX impacts here in the second quarter and and have a Canadian dollars and strengthening here? Um how you anticipate that here for for Q3 and maybe the back half of the year?
Jim Burn: Yeah, that's a that's a tough 1 to predict Jim as you can probably imagine. So
Jim Burn: um, maybe I'll just highlight you know, our major currency pairs are are
Jim Burn: Uh, Canadian dollar US dollar and US dollar peso.
Jim Burn: And uh, here's some some Euro US dollar as well but too much lesser expense. So those are sort of those are our major currency pairs.
Jim Burn: and um,
Jim Burn: so, you know, we've seen a general strengthening of the peso and uh
Jim Burn: um,
Jim Burn: you know, in in terms of what the uh,
you know, the respective gains and losses and all those currency pairs might be
Jim Burn: that that 1 Thing, 1 Thing, just to sort of highlight again for
Jim Burn: Um, is, is that?
Jim Burn: You know, when it comes down to US Dollars, we do have a, we still have a pretty good natural hedge in place. So we don't, we don't have a tremendous amount of exposure on on US Dollars. Um, by the time you look through the whole pnl,
Jim Burn: Okay, that's it for me guys. Thanks.
Speaker Change: as a reminder, if you'd like to ask a question at this time, please press star 1 1 1 on your touchtone phone,
Speaker Change: Our next question comes from the line of beige CDU with National Bank of Canada.
Speaker Change: Hey, good morning guys. Um, this is a follow-up on on on some of the 5 questions here. So on commodity volatility, are we seeing this transcend and other areas outside of just aluminum wiring? Um, and then the other notable inflationary items outside of aluminum wiring and then the Mexican facility ramp
Speaker Change: Yeah, I I I mean insulation would be the other 1. Um
Speaker Change: Voltage and then so. But, but yeah, I think those are sort of major ones and, and, you know,
Speaker Change: the thing to remember, too is that the, you know, Supply chains are are, are
Speaker Change: quite long and we Source from a lot of different places and and um,
Speaker Change: so, um,
Speaker Change: It it it seems like there's inflation creeping in and a lot of different places. Um but yeah, you've called out the major ones.
Speaker Change: Yep, that's right. And then, um, just on the sequential backline declogging in Q2, um, due to record shipments, which which makes sense how do we think about the trajectory going forward from here? Are you seeing ordered intake, uh, keeping Pace with elevated shipment levels? And, and just second, are there any signs or, or moderations, or disease, and customer decisions. Um, just give me the current environment that we're in
Speaker Change: Um, so excluding Renewables. Um,
Speaker Change: You know, we're we're not seeing any shift in sort of activity. Um,
Speaker Change: We we ended um q1 with some significant um, order bookings. And at that point, I I sort of mentioned think about that as a sort of on a half. Uh, there were some timing there where stuff got booked. Um, so what I would expect going forward, we we continue to see good, uh, orders momentum and quotation activity around.
Speaker Change: Our custom products.
Um,
Speaker Change: we are ramping up but that's not going to give us a tremendous amount of extra capacity until next year.
Speaker Change: So, I I think, on balance, we, we should expect to see that, um, pretty consistent, uh, shipment rates for the rest of this year.
Speaker Change: Perfect. And then just on pricing power just getting the the cost measures that we're seeing. Have you pushed in any additional pricing increases since Q2, um, or is the price that we saw and the increase in, uh, April. Um, we should see that continue going through Q3 and Q4 here.
Speaker Change: So, generally speaking, um, we would do a an annual price increase in early in the year this and, uh, this year if that was in April, uh, as Richard mentioned, um, it it takes a little bit for that price, increase to flow through our shipments. Um, so we will see more of that in Q3 then what we, we realize, some, some things in Q2, but we'll see more of that realizing in Q3 and Q4. And uh we'll just continue to look at where we see the material cost inflation and we'll have to take decisions going forward based on on how we see material cost Rising. But um that would be outside our normal course of uh of operations.
Speaker Change: Perfect. Thank you. That's all for me.
Adrian Thomas: 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.
Uh, we're proud of our record shipments, this quarter and and the work of the teams to increase our capacity of our factories, over the last 2 years. What we'll continue to look for opportunities for Acquisitions. I believe that our expanded capacity gives us the opportunity for continued growth in a market that seeing the Boost of the world's desire for data and electricity.
Adrian Thomas: Thank you everyone for joining us today.
This concludes today's conference call.
Adrian Thomas: Thank you for participating. You may now. Disconnect