Q4 2025 Hammond Power Solutions Inc Earnings Call

March 20, 2026

Operator: Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions' Q4 and Year-End 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.

Speaker #1: 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 are 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.

Speaker #1: 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.

Speaker #1: 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.

Operator: 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'd like to hand the call over to Mr. Adrian Thomas, Chief Executive Officer of Hammond Power Solutions. Mr. Thomas.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: Mr. Thomas?

Speaker #2: Good morning, everyone, and thank you for joining us today. I'm pleased to share Hammond Power Solutions' fourth quarter and full-year 2025 results. Joining me is our CFO, Richard Vollering.

Adrian Thomas: Good morning, everyone, and thank you for joining us today. I'm pleased to share Hammond Power Solutions' Q4 and full year 2025 results. Joining me is our CFO, Richard Vollering. When we look back on 2025, it was truly a defining year for HPS. As I noted in my letter to shareholders, this was a year where accelerating demand met the capacity and operational foundation we've been building for several years. Our theme, Expanding Our Horizons, reflects both our progress and our growing role in global electrification and digital infrastructure. Three factors defined the year. Strong demand across key markets, continued expansion of our manufacturing capacity, and disciplined execution across our operations to support growing customer requirements. Let me start with the numbers. For the full year, revenue reached CAD 898.3 million, up 13.9% from 2024.

Speaker #2: When we look back on 2025, it was truly a defining year for HPS. As I noted in my letter to shareholders, this was a year where accelerating demand met the capacity and operational foundation we've been building for several years.

Speaker #2: Our theme—expanding our horizons—reflects both our progress and our growing role in global electrification and digital infrastructure. Three factors define the year: strong demand across key markets, continued expansion of our manufacturing capacity, and disciplined execution across our operations to support growing customer requirements.

Speaker #2: Let me start with the numbers. For the full year, revenue reached $898.3 million, up 13.9% from 2024. Growth was broad-based but most pronounced in the US and Mexico.

Adrian Thomas: Growth was broad-based, but most pronounced in the US and Mexico, where sales increased 18.1%, driven by strong results in distribution, private label programs, and especially custom-engineered solutions in data center and technology applications. Canada grew 8.6%, supported by infrastructure, utilities, and industrial activity. India shipments were down. However, it continues to contribute positively to our business as we remain disciplined, prioritizing margin over volume. In Q4 alone, we generated $254.1 million in revenue, reinforcing the demand we're seeing for higher value custom solutions, a theme that has been consistent all year. Perhaps the strongest indicator of our trajectory is backlog. By year-end, backlog was up 122% year-over-year, and 74% versus Q3, reaching the highest level ever in our company's history.

Speaker #2: Where sales increased 18.1%. Driven by strong results in distribution, private label programs, and especially custom-engineered solutions in data center and technology applications. Canada grew 8.6%, supported by infrastructure, utilities, and industrial activity.

Speaker #2: India shipments were down; however, it continues to contribute positively to our business as we remain disciplined, prioritizing margin over volume. In the fourth quarter alone, we generated $254.1 million in revenue, reinforcing the demand we're seeing for higher-value, custom solutions, a theme that has been consistent all year.

Speaker #2: But perhaps the strongest indicator of our trajectory is backlog. By year-end, backlog was up 122% year over year, and 74% versus Q3. Reaching the highest level ever in our company's history.

Speaker #2: This includes several large, multi-year custom projects in the data center ecosystem, which give us strong revenue visibility as we move into 2026. Now, turning to margins, gross margin for the year was 30.3%, down from 32.8% last year.

Adrian Thomas: This includes several large multi-year custom projects in the data center ecosystem, which give us strong revenue visibility as we move into 2026. Now turning to margins. Gross margins for the year was 30.3%, down from 32.8% last year. This change reflects higher input costs, tariff impacts, and unabsorbed overhead associated with ramping up new manufacturing capacity. These are primarily timing-related impacts, and we expect factory absorption to improve as utilization ramps in 2026. Even with these pressures, earnings remain stable. Net earnings came in at CAD 72.2 million, and adjusted EBITDA reached CAD 133.3 million, up from last year. This resilience speaks to careful management, linking pricing discipline and cost management to operating leverage and commercial focus on driving demand.

Speaker #2: This change reflects higher input costs, tariff impacts, and unabsorbed overhead associated with ramping up new manufacturing capacity. These are primarily timing-related impacts, and we expect factory absorption to improve as utilization ramps in 2026.

Speaker #2: Even with these pressures, earnings remain stable. Net earnings came in at $72.2 million, and adjusted EBITDA reached $133.3 million, up from last year. This resilience speaks to careful management, linking pricing discipline and cost management to operating leverage and commercial focus on driving demand.

Speaker #2: As I already commented on new manufacturing, 2025 was also a major investment year for us. We successfully brought over $100 million of new capacity online at Monterey 4, ahead of schedule and on budget, providing us a facility that is already contributing to backlog conversion.

Adrian Thomas: As I already commented on new manufacturing, 2025 was also a major investment year for us. We successfully brought over CAD 100 million of new capacity online at Monterrey Four ahead of schedule and on budget, providing us a facility that is already contributing to backlog conversion. We also approved additional projects that will lead to a combined CAD 100 million in custom transformer capacity across our footprint through 2026 and early 2027 to ensure we stay ahead of demand. We expanded our North American logistics network with our new Dallas distribution hub, and we fully integrated Micron Industries, including the final ERP cutover, improving service levels, responsiveness, and efficiency across the region. These steps strengthen our platform for scale and support long-term margin expansion. Now I'd like to talk about our portfolio because this is an area where we are taking a major strategic step forward.

Speaker #2: We also approved additional projects that will lead to a combined $100 million in custom transformer capacity across our footprint through 2026 and early 2027 to ensure we stay ahead of demand.

Speaker #2: We expanded our North American logistics network with our new Dallas distribution hub, and we fully integrated Micron Industries, including the final ERP cutover. This improved service levels, responsiveness, and efficiency across the region.

Speaker #2: These steps strengthen our platform for scale and support long-term margin expansion. Now, I'd like to talk about our portfolio, because this is an area where we are taking a major strategic step forward.

Speaker #2: As announced earlier this year, we signed a definitive agreement to acquire AEG Power Solutions for $365 million Canadian. This is a transformative addition to HPS.

Adrian Thomas: As announced earlier this year, we signed a definitive agreement to acquire AEG Power Solutions for CAD 365 million. This is a transformative addition to HPS. AEG is a global leader in industrial UPS, uninterruptible power supplies, rectifiers, inverters, and power conversion technologies. With approximately CAD 326 million in revenue, more than 780 employees, and 5 manufacturing facilities across Europe and Asia, AEG significantly expands our scale and global reach. Just as important, AEG brings a substantial installed base, and with it, a meaningful recurring services and aftermarket revenue stream. This further diversifies and stabilizes earnings while deepening long-term customer relationships. The acquisition also broadens our exposure to high-growth end markets like transportation electrification, industrial infrastructure, data centers, and energy transition projects, markets that are experiencing long-cycle structural demand.

Speaker #2: AEG is a global leader in industrial UPS—uninterruptible power supplies—rectifiers, inverters, and power conversion technologies. With approximately $326 million Canadian in revenue, more than 780 employees, and five manufacturing facilities across Europe and Asia, AEG significantly expands our scale and global reach.

Speaker #2: Just as important, AEG brings a substantial installed base, and with it, a meaningful, recurring services and aftermarket revenue stream. This further diversifies and stabilizes earnings, while deepening long-term customer relationships.

Speaker #2: The acquisition also broadens our exposure to high-growth end markets, like transportation electrification, industrial infrastructure, and data centers and energy transition projects—markets that are experiencing long-cycle structural demand.

Speaker #2: When you add AEG to our existing transformer and power quality portfolio, along with the expanded capacity we brought online this year, HPS becomes a more diversified, more resilient, and more globally relevant integrated electrification solutions provider.

Adrian Thomas: When you add AEG to our existing transformer and power quality portfolio, along with the expanded capacity we brought online this year, HPS becomes a more diversified, more resilient, and more globally relevant integrated electrification solutions provider. Our portfolio becomes broader, our end market reach becomes deeper, and we establish a significant recurring revenue base. Looking ahead, 2026 will mark 25 years since HPS became an independent public company, and we're entering that milestone year with record revenue, historic backlog, expanded capacity, and a significantly strengthened product and technology offering, including soon AEG Power Solutions. Before I turn the call over to Richard for the financial review, I want to thank our employees for their dedication, our customers for their trust, and our shareholders for their continued confidence in our long-term strategy. Richard, over to you.

Speaker #2: Our portfolio becomes broader, our end market reach becomes deeper, and we establish a significant recurring revenue base. Looking ahead, 2026 will mark 25 years since HPS became an independent public company.

Speaker #2: And we're entering that milestone year with record revenue, historic backlog, expanded capacity, and a significantly strengthened product and technology offering, including soon AEG Power Solutions.

Speaker #2: Before I turn the call over to Richard for the financial review, I want to thank our employees for their dedication, our customers for their trust, and our shareholders for their continued confidence in our long-term strategy.

Speaker #2: Richard, over to you.

Speaker #1: Thank you, Adrian. And good morning, everyone. Let me start by acknowledging that 2025 began with a fair amount of market uncertainty. As the year unfolded, we encountered several unexpected challenges due to shifts in the global trade environment.

Richard Vollering: Thank you, Adrian, and good morning, everyone. Let me start by acknowledging that 2025 began with a fair amount of market uncertainty. As the year unfolded, we encountered several unexpected challenges due to shifts in the global trade environment. Notably, we saw copper prices rising and tariffs, both direct and indirect, putting pressure on our input costs. In Q4, the Section 232 tariffs had a direct impact on our finished goods, which contributed to the decline in our gross margin as the year progressed. Despite these headwinds, I'm pleased to report that we delivered a strong outcome for the year. Our sales increased by 13.9% year-over-year, led primarily by robust growth in the US, where data center activity continued to lead overall economic activity.

Speaker #1: Notably, we saw copper prices rising, and tariffs—both direct and indirect—putting pressure on our input costs. In the fourth quarter, the Section 232 tariffs had a direct impact on our finished goods, which contributed to the decline in our gross margin as the year progressed.

Speaker #1: Despite these headwinds, I'm pleased to report that we delivered a strong outcome for the year. Our sales increased by 13.9% year over year, led primarily by robust growth in the US, where data center activity continued to lead overall economic activity.

Speaker #1: Our Canadian operations also performed well under challenging circumstances, with infrastructure and data center projects remaining particularly strong. These positive trends continued into the fourth quarter, with sales reaching a record $254 million.

Richard Vollering: Our Canadian operations also performed well under challenging circumstances, with infrastructure and data center projects remaining particularly strong. These positive trends continued into Q4, with sales reaching a record $254 million. This quarter's growth was driven by strong underlying demand, the shipment of projects that had been delayed from Q3, and the benefit of price increases we put in place in September. Gross margin for the quarter came in at 29.2%. This was impacted by the Section 232 tariffs implemented in August and by unabsorbed overhead from ramping up our new facilities in Mexico. While we took pricing actions to help offset these costs, we weren't able to fully recover them in the quarter.

Speaker #1: This quarter's growth was driven by strong underlying demand, the shipment of projects that had been delayed from the third quarter, and the benefit of price increases we put in place in September.

Speaker #1: Gross margin for the quarter came in at 29.2%. This was impacted by the Section 232 tariffs implemented in August, and by unabsorbed overhead from ramping up our new facilities in Mexico.

Speaker #1: While we took pricing actions to help offset these costs, we weren't able to fully recover them in the quarter. SG&A expenses totaled $168 million for the year, and $52 million for the quarter, reflecting the higher share-based compensation and increased sales volumes, particularly in the U.S. distribution channel.

Richard Vollering: SG&A expenses totaled CAD 168 million for the year and CAD 52 million for the quarter, reflecting the higher share-based compensation and increased sales volumes, particularly in the US distribution channel. If we exclude share-based compensation, SG&A for the quarter was CAD 43 million. Adjusted EBITDA reached CAD 133 million for the year, including CAD 38.7 million in Q4. For the year, this represents a 2% increase over 2024's adjusted EBITDA of CAD 130 million. We also made progress on working capital, which improved by CAD 9.5 million in Q4, despite higher sales volumes, thanks in part to inventory reductions. As a result, our net debt position improved to CAD 15 million at year-end, down from CAD 28 million at the end of Q3.

Speaker #1: If we exclude share-based compensation, SG&A for the quarter was $43 million. Adjusted EBITDA reached $133 million for the year, including $38.7 million in the fourth quarter.

Speaker #1: For the year, this represents a 2% increase over 2024's adjusted EBITDA of $130 million. We also made progress on working capital, which improved by $9.5 million in Q4 despite higher sales volumes.

Speaker #1: Thanks in part to inventory reductions. As a result, our net debt position improved to $15 million at year-end, down from $28 million at the end of the third quarter.

Speaker #1: Cash provided by operations was $32 million in the fourth quarter. Capital expenditures for the year were $35.5 million, which was within our expected range of $35 to $40 million.

Richard Vollering: Cash provided by operations was CAD 32 million in Q4. Capital expenditures for the year were CAD 35.5 million, which is within our expected range of CAD 35 to 40 million. These investments focus primarily on expanding capacity on our Monterrey Three and Four and Guelph facilities, as well as maintenance capital. During Q4, we made minority investments in Verdyn and SmartD totaling CAD 3 million. These strategic investments allow us to partner with innovative technology leaders and open new opportunities for HPS in the power quality market. In summary, 2025 was a challenging year that required us to adapt and recalibrate in several areas. Thanks to our engaged and agile team, we navigated these challenges effectively. As we move into 2026, our strong backlog and expanded capacity position us well to maintain the momentum we built at the end of 2025.

Speaker #1: These investments focus primarily on expanding capacity at our Monterey 3 and 4 and Guelph facilities, as well as maintenance capital. During the fourth quarter, we made minority investments in Verdine and SmartD totaling $3 million.

Speaker #1: These strategic investments allow us to partner with innovative technology leaders and open new opportunities for HPS and the power quality market. In summary, 2025 was a challenging year that required us to adapt and recalibrate in several areas.

Speaker #1: Thanks to our engaged and agile team, we navigated these challenges effectively. As we move into 2026, our strong backlog and expanded capacity position us well to maintain the momentum we built at the end of 2025.

Speaker #1: Thank you. I will now hand the call back to the operator to take any questions from our participants.

Richard Vollering: Thank you. I will now hand the call back to the operator to take any questions from our participants.

Speaker #2: If you'd like to ask a question at this time, please press *11 on your touch-tone telephone and wait for your name to be announced.

Operator: If you'd like to ask a question at this time, please press star one one on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from the line of Matthew Lee with Canaccord Genuity.

Speaker #2: To withdraw your question, please press star-one-one again. Our first question comes from the line of Matthew Lee with CGF.

Matthew Lee: Hi, guys. Thanks for taking my question here. Backlog, very impressive this quarter. I know there were some lumpier contracts in there. Maybe talk to us about the level of demand you're seeing right now, the bidding activity, and h ow we should be thinking about backlog growth as you work through the year.

Speaker #3: Hi, guys. Thanks for taking my question here. Backlog—very impressive this quarter. I know there were some lumpier contracts in there, but maybe talk to us about the level of demand you're seeing right now, the bidding activity, and how we should be thinking about backlog growth as you work through the year.

Speaker #1: Thanks, Matt. It's Adrian. We continue to see good quotation activity. We were able to attract a number of large projects as we opened up Mon4 because of immediate capacity.

Adrian Thomas: Thanks, Matt. It's Adrian. We continue to see good quotation activity. We were able to attract a number of large projects as we opened up Monterrey Four because of immediate capacity. We continue to see large projects, particularly in the data center business. I would say that quotation activity for custom remains high.

Speaker #1: But we continue to see large projects, particularly in the data center business. I would say that quotation activity for custom remains high.

Speaker #3: Okay. Any pockets of weakness in terms of that demand? I mean, I think earlier last year there was some talk about commercial and industrial maybe being a little slower.

Matthew Lee: Okay. Any pockets of weakness in terms of that demand? Like, you know, I mean, I think earlier last year, there was some talk about commercial industrial maybe being a little slower. Are you seeing similar trends today?

Speaker #3: Are you seeing similar trends today?

Speaker #1: I think that's a similar trend, Matt—that sort of commercial construction, more office tower work and things of that nature, tends to be slower. We do see pockets of infrastructure spending; things like water treatment, healthcare, and hospitals, depending on the region, have some activity.

Adrian Thomas: I think that's a similar trend, Matt, that sort of commercial construction, more office tower work and things of that nature tends to be slower, where we do see pockets of infrastructure spending, things like water treatment, healthcare, and hospitals, depending on the region, have some activity. But generally commercial construction, light industrial tends to be a little bit lighter from what we see.

Speaker #1: But generally, commercial construction, light industrial tends to be a little bit lighter, from what we see.

Speaker #3: Okay, that's helpful. And then maybe just in terms of capacity—I think you mentioned $100 million in additional capacity from recent initiatives. My math suggests that puts you at like $1.3 to $1.4 billion of capacity at today's pricing.

Matthew Lee: Okay, that's helpful. Then maybe just in terms of capacity, I think you mentioned CAD 100 million in additional capacity from recent initiatives. My math suggests that puts you at like 1.3 to 1.4 billion of capacity at today's pricing. If you think about how data centers are emerging and other emerging markets are evolving, it seems like you could probably reach that capacity as early as maybe 2028. How are you thinking about adding capacity right now, and how long would it take you to add, say, CAD 100 million of capacity?

Speaker #3: But if you think about how data centers are emerging, and other emerging markets are evolving, it seems like you could probably reach that capacity as early as maybe 2028.

Speaker #3: How are you thinking about adding capacity right now? And how long would it take you to add, say, $100 million of capacity if you had announced it today through a new facility?

Matthew Lee: If you'd announced it today through a new facility.

Speaker #1: So our capacity outlook is something we continually look at, Matt, and you saw that even with the addition of Mon4, we anticipated that there would be some additional.

Adrian Thomas: Our capacity outlook is something we continually look at, Matt, and you saw that, you know, even with the addition of Monterrey Four, we anticipated that there would be some additional. As you mentioned, we added some CapEx for equipment, as well as some productivity actions, to give us additional capacity. We will generally think about capacity additions in two ways. Adding equipment to existing footprint is usually, you know, depending on the backlog from equipment vendors, something that would usually take 9 to 12 months to ramp up. Building a new facility is probably something in the order of magnitude of 2 years.

Speaker #1: So, as you mentioned, we added some CapEx for equipment, as well as some productivity actions to give us additional capacity. We generally think about capacity additions in two ways.

Speaker #1: So, adding equipment to existing footprint is usually dependent on the backlog from equipment vendors. It’s something that would usually take 9 to 12 months to ramp up.

Speaker #1: Building a new facility is probably something in the order of magnitude of two years. And so, Mon4, we were able to do that quicker, working closely with a developer we'd worked with in the past and having a building that was ready to be transformed.

Adrian Thomas: At Monterrey Four, we were able to do that quicker, working closely with a developer we'd worked with in the past and having a building that was ready to be transformed. Anywhere between that nine months to two years timeframe is sort of what you should be thinking about in terms of time to add capacity.

Speaker #1: So anywhere between that nine months to two years timeframe is sort of what you should be thinking about in terms of time to add capacity.

Speaker #3: And do you feel like you still have space to add additional equipment to the facility you have today?

Matthew Lee: Do you feel like you still have space to add additional equipment to the facilities you have today?

Speaker #1: Yeah, I think that if we need more capacity, then we'll pull the trigger on additional capacity expansions.

Adrian Thomas: Yeah, I think that, you know, if we need more capacity, then we'll pull the trigger on additional capacity expansions.

Speaker #3: All right. That's helpful. Thanks. I'll pass the line.

Matthew Lee: All right. That's helpful. Thanks. I'll pass the line.

Speaker #2: Our next question comes from Nicholas Boychuk with ATB Coremark Capital Markets.

Operator: Our next question comes from Nicholas Boychuk with ATB Cormark Capital Markets.

Speaker #4: Thanks. Morning, guys. Sticking with the capacity question and relating it though to margins, you mentioned here that there was a 140 basis point negative impact this quarter just from unabsorbed factory overhead.

Nicholas Boychuk: Thanks. Morning, guys. Sticking with the capacity question and relating it to the margins, you mentioned here that there were 140 basis points negative impact this quarter just from unabsorbed factory overhead. I'm curious how fast that's gonna be utilized, and if it already has, given these new orders into the start of 2026, how should we be thinking about gross margins for the rest of the year?

Speaker #4: I'm curious, how fast that's going to be utilized and if it already has, given these new orders into the start of 2026? How should we be thinking about gross margins for the rest of the year?

Speaker #1: Yeah, great question, Matt. I'll hand that one over to Richard to answer.

Adrian Thomas: Yeah, great question, Matt. I'll hand that one over to Richard to answer.

Speaker #5: Hey, good morning, Nick. Yeah, it is a good question. So, Mon4—we talked about it being two factories, Mon3 and Mon4. Mon4 is starting to ramp up in Q1.

Richard Vollering: Hey, good morning, Nick. Yeah, that's a good question. So Monterrey Four, you know, we talked about it being two factories, Monterrey Three and Monterrey Four. Monterrey Four is starting to ramp up in Q1, and we should see that really take hold in Q2. You know, as for Monterrey Three, we should see that linger a little bit longer into the year. That's just, you know, due to the nature of the product that's made in that particular factory. We are making some. You know, Adrian talked a little bit about, you know, our ability to add equipment and, you know, create additional capacity that way. That's one of the things that we're looking at for that particular facility.

Speaker #5: And we should see that really take hold in the second quarter. And as for Mon3, we should see that linger a little bit longer into the year.

Speaker #5: And that's just due to the nature of the product that's made in that particular factory, and we are making some—Adrian talked a little bit about our ability to add equipment and create additional capacity that way.

Speaker #5: That's one of the things that we're looking at for that particular facility. So that's going to take some time to work through, and we should see that hopefully by the tail end of the year—something like fourth quarter.

Richard Vollering: That's gonna take some time to work through, and we should see that, hopefully by the tail end of the year, you know, something like Q4. Yeah, that about sums it up.

Speaker #5: So yeah, that about sums it up.

Speaker #4: Okay, understood. And is it split roughly 50/50 between the two, or is 140 basis points maybe tied a little bit more to one of the two facilities?

Nicholas Boychuk: Okay, understood. Is it split roughly 50/50 between the two, or is it a 140 basis points maybe tied a little bit more to one of the two facilities?

Richard Vollering: It's probably split evenly between the two.

Speaker #5: It's probably split evenly between the two.

Speaker #4: Okay, and then sticking again with margins but switching down to the OpEx line, there was a bit of an increase this year, just given higher freight costs and some additional warehouse costs.

Nicholas Boychuk: Okay. Then sticking again with margins, but switching down to the OpEx line, there were a bit of an increase this year just given higher freight costs and some additional warehouse costs. How should we be thinking about that relative to new capacity that comes online, potentially outside of Monterrey, Mexico? Is there gonna be an advantage, either given the source of some of the demand that you're seeing and where those pockets might be geopolitically or, sorry, geographically, where you would be more incentivized to build a facility outside of Mexico, and if you've started to do preliminary work, where that might be and what that might look like?

Speaker #4: How should we be thinking about that relative to new capacity that comes online, potentially outside of Monterrey, Mexico? Is there going to be an advantage either, given the source of some of the demand that you're seeing and where those pockets might be, geopolitically—or, sorry, geographically?

Speaker #4: Where would you be more incentivized to build a facility outside of Mexico, and if you've started to do any preliminary work, where might that be, and what might that look like?

Speaker #5: That's all under evaluation right now, Nick. I don't have an answer for you, but once we've worked out how much capacity is required, then we determine where to put it.

Richard Vollering: That's all under evaluation right now, Nick. I don't have an answer for you. Once we've worked out, you know, how much capacity is required, then we determine where to put it. They'll, you know, when we have answers for you, be sure to communicate that.

Speaker #5: And so they'll—when we have answers for you, we'll be sure to communicate that.

Nicholas Boychuk: Okay. I guess just if I could ask it in a different way, does AEG happen to have any domestic presence in North America? If you can remind us if they've got something here that might make things a little bit faster, closer to that nine months instead of two years?

Speaker #4: Okay. And I guess, just—if I could ask it in a different way—does AEG happen to have any domestic presence in North America?

Speaker #4: If you can remind us if they've got something here that might make things a little bit faster, closer to that nine months instead of two years.

Speaker #5: No, AEG's production capacity is all in Europe and Asia Pacific.

Richard Vollering: No. AEG's production capacity is all in Europe and Asia Pacific.

Speaker #4: Understood. Thanks, guys.

Nicholas Boychuk: Understood. Thanks, guys.

Speaker #2: Our next question comes from Baltaj Sidhu with National Bank of Canada.

Operator: Our next question comes from Baltej Sidhu with National Bank of Canada.

Speaker #6: Hey, good morning. Just on the additional $100 million capacity expansion that was announced, how are conversations going with respect to taking orders to fill that capacity?

Baltej Sidhu: Hey, good morning. Just on the additional CAD 100 million capacity expansion that was announced, how are conversations going with respect to taking orders to fill that capacity? Have you started to sign or onboard customers there?

Speaker #6: And have you started to sign or onboard customers there?

Speaker #1: Hey, Baltaj. It's Adrian. I think it's a similar question to what Matt asked earlier, just in terms of quotation activity. We see a lot of demand for custom products, our standard products continue to grow, and that capacity—we had previously added capacity into Monterey and other areas to serve that.

Adrian Thomas: Hey, Baltej, it's Adrian. I think similar question to what Matt asked earlier, just in terms of quotation activity. We see a lot of demand for custom products. Our standard products continue to grow. That capacity, we had previously added capacity into Monterrey and other areas to serve that, so we still have capacity for our standard products. As we look out for custom products, certainly data center, but we see diverse industries as well. Across all the sectors that we've been servicing our customers, whether it's mining, oil and gas, and other electro-intensive industries, we continue to see that demand for custom products. That's how we see going forward. There's still a fair diversity in terms of the customers that we serve.

Speaker #1: So we still have capacity for our standard products. As we look out for custom products—certainly data center, but we see diverse industries as well.

Speaker #1: So, across all the sectors that we've been servicing our customers—whether it's mining, oil and gas, or other electro-intensive industries—we continue to see that demand for custom products.

Speaker #1: So that's how we see going forward. There's still a fair diversity in terms of the customers that we serve. And so, traditionally speaking, a lot of that is more of about a six-month sort of backlog timeframe, Baltaj.

Adrian Thomas: Traditionally speaking, a lot of that is,

Adrian Thomas: More about a 6-month sort of backlog timeframe. That's sort of the visibility we have there.

Speaker #1: So that's sort of the visibility we have there.

Speaker #6: Great. And then, just turning over to March—this was touched on earlier, but it seems that Q4 could represent a trough and then sequentially expand.

Baltej Sidhu: Great. Then just turning over to margins, and I think this was touched on earlier, but it seems that, you know, Q4 could represent a trough and sequentially expand, just given where commodities are. Aluminum's still running, but copper has kind of stabilized. Is that a fair assessment when we're looking forward?

Speaker #6: Just given where commodities are, aluminum is still running, but copper has kind of stabilized. Is that a fair assessment when we're looking forward?

Speaker #3: Richard, why don't you take that one?

Adrian Thomas: Richard, why don't you take that one?

Richard Vollering: Hi, Baltej. You know, this has happened before. I mean, it is somewhat reminiscent of what happened post-pandemic, when we had quick changes in our input costs. In this case, you know, input cost is one element, and tariffs are another element. You know, in terms of taking pricing actions, things always get behind simply because, you know, price changes take time to implement. I think that's one element that affected Q4. You know, and then of course the under absorption. Those are two things that we will be keeping an eye on as we move into 2025.

Speaker #5: Hi, Baltaj. Yeah, so this has happened before. I mean, it is somewhat reminiscent of what happened post-pandemic, when we had quick changes in our input costs, and in this case, input costs is one element and tariffs are another element.

Speaker #5: And in terms of taking pricing actions, things always get behind simply because price changes take time to implement. And so, I think that's one element that affected Q4.

Speaker #5: And then, of course, the under-absorption. So those are two things that we will be keeping an eye on as we move into 2025, and I think all other things.

Richard Vollering: I think all other things being equal, we would hope to see those two things improve, you know, barring any other changes. Of course, we may have more tariff changes coming down, which, you know, we can't really say how that might affect us. I think it's safe to say that, you know, to the extent that, you know, tariffs go up, that will create another lag in margins. More to come, but I think all other things equal, I think those are the two main things that we're keeping an eye on going into 2026.

Speaker #5: Being equal, we would hope to see those two things improve, barring any other changes. And of course, we may have more tariff changes coming down, which we can't really say how that might affect us, but I think it's safe to say that, to the extent that tariffs go up, that will create another lag in margins.

Speaker #5: So, more to come, but I think, all other things equal, I think those are sort of the two main things that we're keeping an eye on going into 2026.

Speaker #6: Okay, thanks. And then, of the current backlog, how much do you expect to realize within '26 versus '27? And can you provide any details on the percent exposure to customers and data centers?

Baltej Sidhu: Okay, thanks. Of the current backlog, how much do you expect to realize within 2026 versus 2027? Can you provide any details on the percent exposure to customer and data centers? Seems like that the backlog would be heavily skewed to that.

Speaker #6: Seems like the backlog would be heavily skewed to that.

Speaker #5: So yeah, the split between—one thing that's, I think, one of the dynamics of the backlog is that it is extending longer than it has in the past.

Richard Vollering: One thing that's, I think, one of the dynamics of the backlog is that it is extending longer than it has in the past, and that's simply because we have larger projects. There is a portion of that backlog, a significant portion, that extends into 2027. I think, you know, we've always sort of talked about the tenor of the backlog. There's this, you know, sort of short-term backlog, which turns around in six to eight weeks. There's the standard lead time backlog, which kind of turns around in, you know, roughly two quarters. Now we've got this element that stretches, you know, sometimes into four quarters and beyond. The tenor of the backlog has definitely gotten longer from that respect.

Speaker #5: And that's simply because we have larger projects. So there is a portion of that backlog—actually, a significant portion—that extends into 2027.

Speaker #5: And so I think we've always sort of talked about the tenor of the backlog. There's sort of the short-term backlog, which turns around in six to eight weeks.

Speaker #5: There's the standard lead time backlog, which kind of turns around in roughly two quarters. And now we've got this element that stretches sometimes into four quarters and beyond.

Speaker #5: So the tenor of the backlog has definitely gotten longer from that respect. And sorry, Baltaj, the second question was?

Richard Vollering: Sorry, Baltej, the second question was?

Baltej Sidhu: Just the percent exposure to customer and data, but I think you hinted on that just given that it'll be longer lead time items.

Speaker #6: Just the percent exposure to customer and data, but I think you hinted at that, just given that it'll be longer lead time items.

Speaker #5: Yeah, yeah. I mean, it's getting closer to 30% now. In the past, it's sort of been 10 to 15, roughly.

Richard Vollering: Yeah. I mean, it's getting closer to 30% now. It was sort of, you know, in the past it's sort of been 10% to 15% roughly. Now it is definitely getting higher. That really just, frankly, just stems back to the level of economic activity that derives from that particular business more generally.

Speaker #5: Now it is definitely getting higher. And that really just, frankly, stems back to the level of economic activity that drives from that particular business more generally.

Speaker #6: And sorry, could you confirm that you noted that 30%? Would that 30% be the percent of the backlog that's attributed towards data centers, or would that 30% relate to kind of the sales volume?

Baltej Sidhu: Sorry, could you confirm that you noted that 30 percent? Would that 30 percent be the percent of the backlog that's attributed toward data centers, or would that 30 percent relate to kind of the sales volume?

Richard Vollering: The sales volume. Yeah.

Speaker #5: The sales volume. Yeah.

Baltej Sidhu: Okay. Got it. Perfect.

Speaker #6: Okay. Got it. Perfect.

Speaker #5: Backlog. Backlog growth is probably more heavily weighted towards data centers.

Richard Vollering: Backlog growth is probably more heavily weighted towards data centers than that.

Baltej Sidhu: Fantastic. Okay. Thank you.

Speaker #6: Fantastic. Okay. Thank you.

Operator: As a reminder, if you'd like to ask a question at this time, please press star one one on your touchtone phone. Our next question comes from Jim Byrne with Acumen.

Speaker #7: As a reminder, if you'd like to ask a question at this time, please press *11 on your touch-tone phone. Our next question comes from Jim Burn with Acumen.

Speaker #3: Yeah, good morning, guys. You mentioned the investments in SmartBee and, I think, Verdant or Verdine. Maybe just give us an update on how SmartBee has been over the past couple of years, how they are progressing, and what products they are focusing on?

Jim Byrne: Yeah. Good morning, guys. You mentioned the investments in SmartD and I think Verdyn. Maybe just give us an update. I know SmartD's been a couple years. How are they progressing and kind of what products are they focusing on?

Speaker #6: Sure. Hey Jim, it's Adrian. Both of those investments were part of our interest in products that are helping customers solve power quality issues. I would say there's a small product base and then there's a large system base.

Adrian Thomas: Sure. Hey, Jim, it's Adrian. Both of those investments were part of our interest in products that are helping customers solve power quality issues. I would say there's a small product base and then there's large system base. SmartD is the small product-based approach, and Verdyn is more of the large project-based approach. With SmartD, their primary product is a harmonic-less drive, variable speed drive or a motor controller. This is very important in a couple of applications. One, retrofits, where you have existing infrastructure that can't handle the harmonics from a traditional drive. That enhances retrofit applications.

Speaker #6: And so SmartBee is the small, product-based approach, and Verdine is more of the large, project-based approach. So with SmartBee, their primary product is a harmonic list drive, variable speed drive, or a motor controller.

Speaker #6: This is very important in a couple of applications. One, retrofits where you have existing infrastructure that can't handle the harmonics from a traditional drive.

Speaker #6: And so that enhances retrofit applications. It can also reduce complexity and cost of installations for new projects and particularly projects that are susceptible to harmonics, whether it's critical infrastructure or if it's things with situations that create difficulties with harmonics, such as having very long cable lengths to the motor.

Adrian Thomas: It can also reduce complexity and cost of installations for new projects, and particularly projects that are susceptible to harmonics, whether it's critical infrastructure or if it's things with situations that create difficulties with harmonics, such as having very long cable lengths to the motor. SmartD is really a niche drive supplier, and it's sort of in startup mode and developing opportunities with customers.

Speaker #6: So SmartBee is really a niche drive supplier, and it's sort of in startup mode and developing opportunities with customers. Verdine takes a slightly different approach.

Adrian Thomas: Verdyn takes a slightly different approach. Verdyn is addressing larger scale, I would say, in industrial facility-wide power quality issues. Issues that are difficult to identify and difficult to mitigate. They work sort of on a turnkey basis almost, helping the customer identify where the problem is stemming from, how to create a solution for that. With Verdyn, you know, developing that systems basis, we share some mutual customers as well as many of their projects utilize transformers and other electromagnetics, so there's sort of a natural synergy there. Thanks for the question, Jim.

Speaker #6: Verdine is addressing larger-scale, I would say, industrial facility-wide power quality issues that are difficult to identify and difficult to mitigate. And so they work sort of on a turnkey basis, almost, helping the customer identify where the problem is stemming from, and how to create a solution for that.

Speaker #6: And with Verdine, developing that systems basis, we share some mutual customers, as well as many of their projects utilize transformers and other electromagnetics. So there's sort of a natural synergy there.

Speaker #6: Thanks for the question, Jim.

Speaker #5: Yeah, that's great. And maybe it's been, I guess, about a month here since the announcement at AEG. Any update on the firm closing date, or any update with AEG?

Jim Byrne: Yeah, that's great. Maybe it's been, I guess, about a month here since the announcement of AEG. Any update on the, you know, firm closing date or any update with AEG?

Speaker #6: No, the plan is still we're anticipating closing in Q2, Jim. And things continue to progress.

Adrian Thomas: No, the plan is still, we're anticipating closing in Q2, Jim. Things continue to progress.

Speaker #5: Okay, that's great. And then, Richard, maybe a couple for you. CapEx came in kind of at the low end of expectations, I think, for 2025.

Jim Byrne: Okay, that's great. Then Richard, maybe a couple for you. CapEx came in kind of at the low end of expectations, I think, for 2025. What are you seeing for 2026? On the working capital side, what should we expect over the course of the year?

Speaker #5: What are you seeing for '26? And then, on the working capital side, what should we expect over the course of the year?

Speaker #4: Good morning, Jim. So, on CapEx, I think going into 2026, we're talking about roughly the same as 2025. We've got more capacity, projects included in the plan.

Richard Vollering: Good morning, Jim. On CapEx, I think going into 2026, you know, we're talking about roughly the same as 2025. We've got more capacity projects included in the plans. I don't anticipate too many changes in that respect. In terms of working capital, I think, you know, number one, that's gonna depend on growth. You know, some things we are taking a harder look at in terms of inventory levels. I think that's somewhere where there's some opportunity for us going into the year.

Speaker #4: So, I don't anticipate too many changes in that respect. In terms of working capital, I think, number one, that's going to depend on—it's going to depend on growth.

Speaker #4: But some things we are taking a harder look at in terms of inventory levels. And I think that's somewhere where there's some opportunity for us going into the year.

Speaker #3: That's great. That's it for me. Thanks, guys.

Jim Byrne: Okay. That's it for me. Thanks, guys.

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

Speaker #7: That concludes today's question and answer session. I'd like to turn the call back to Adrian Thomas for closing remarks.

Speaker #6: Thank you, operator. And thank you to everyone joining us today. I would like to just make a comment again, thanking our employees, customers, and investors for your trust in our vision of electrification.

Adrian Thomas: Thank you, operator, and thank you for everyone joining us today. I would like to just make a comment again, thanking our employees, customers, and investors for your trust in our vision of the electrification. We continue to invest in the future, and we look forward to providing more updates as we go further. Thank you.

Speaker #6: We continue to invest in the future, and we look forward to providing more updates as we go further. Thank you.

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

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