Hammond Power Solutions Inc. (HPSA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions 2023 Third Quarter 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 now like to turn the call over to Adrian Thomas, CEO of Hammond Power Solutions.

Thank you, operator, and good morning, everyone. Welcome to Hammond Power Solutions Third Quarter Financial Results Conference Call for 2023. Joining me today is Richard Vollering, our Chief Financial Officer. My first 3 months with Hammond Power Solutions have been exciting and rewarding for me personally. I've spent this time meeting our customers and hearing about their future plans and learning about the development of our market offers. And most importantly, meeting the global Hammond Power Solutions team. The team is a set of truly passionate people making a difference in every day. I've traveled to many of our facilities and have seen firsthand how our team members are working to make Hammond Power Solutions a leader in the electrification of our world. I sit here today very confident in our ability to meet our current goals and to expand beyond our traditional markets. Turning to our operations. Our third quarter of 2023 has been another noteworthy quarter for Hammond Power Solutions. Most importantly, we continue to deliver record financial results, and we are reinvesting in the expansion of our production capacities which in turn is improving our ability to serve the needs of our distributors and our customers. While we are running at full or near capacity at every facility, continuous improvement programs and increased hiring have progressively increased plant productivity, incrementally increasing our production rates. These higher production levels are reducing stock outages and increasing shipments. Underpinning our financial achievements, we recorded the largest quarter and single month September of ship product in the history of Hammond Power Solutions, which bodes well for our continuing growth. Again, progress on previously announced capital plans continue, and thanks to the excellent work of operations and project teams, we have already completed the installation of additional cells in our Monterrey one facility and expect to see additional production benefits from these sales in the fourth quarter and into next year. Our new small products plant located in Monterrey, Mexico is also progressing well. As the footings are complete and the steel structure is currently under construction. We expect this factory to be complete early next year. In parallel, we approved an additional $12 million of capital spending, which will give us 50 million to 60 million of additional low voltage capacity to address expected long-term demand in this market for new business, which we are currently turning away due to capacity constraints. Orders and backlogs continue to remain strong, driven by our activity in various key market segments and resumed the growth of our distribution channel, adding more branches throughout the U.S. in the quarter. We see strong demand across our portfolio, especially in custom power units that serve renewable and data center applications. I will now hand it over to Richard to take you through some of our financial highlights. Richard?

Thank you, Adrian. Hello, and thank you for joining us this morning. Sales increased by 20.5% in the third quarter to a record $179 million. This new level of volume was only made possible by the capacity additions that we have been discussing and implementing over the past year. As Adrian mentioned, we've recently approved further capital spending of $12 million to expand our capacity to produce power transformers to support high demand in this market. We believe that these investments will allow us to increase our raw capacity to between $900 million and $950 million by the end of 2025. Sales in the quarter increased by approximately 13% due to volume increases, 5% due to higher prices held over from prior year price increases and 3% due to the stronger U.S. dollar. On a year-to-date basis, sales increased by 26.3% overall. Breaking that down, 13% was due to volume increases, 8% due to higher prices and 5% due to the stronger U.S. dollar. Volume increases versus prior year were driven primarily by increased sales in the U.S. distribution channel and private label sales. The backlog continued to grow versus the prior year and more meaningfully grew by 11% versus the end of the second quarter, indicating that demand for our products remains healthy. Gross margins remained strong at 31.7% in the quarter. Pricing is holding due to the continued strong demand and our facilities continue to operate at close to our full capacity. There was also a slightly favorable product mix in the quarter towards custom and power quality products, helping margins to a lesser extent. SG&A expenses were $36 million in the quarter, driven by higher freight and commissions because of higher volumes, compensation costs related to share-based compensation and the addition of key personnel, including the CEO and higher costs related to elevated business activity, including warehousing, travel and entertainment. Net income for the quarter was $14.4 million, resulting in an EPS of $1.21. This brings our year-to-date net income to $43.5 million and an EPS of $3.65 per share. EBITDA margins were 13.2% in the quarter, in line with our target range of 12% to 15%. Working capital improvements in the quarter improved our cash position. Working capital as a percentage of sales was at 18%, within our target range of 17% to 18%. Capital expenditures rose to $9.2 million in the quarter, a trend that we expect to continue into Q4 due to cash outlays for our expansion program. At the end of Q3, we had a net cash position of $22 million. We are pleased with our ability to ship close to $180 million in the quarter, while at the same time, maintaining strong margins and cash flow. Over the coming quarters, we will continue to invest in our business to meet growing demand and to work to improve our operating performance through investments in our people, our products and technology. Thank you. Back to you, Adrian.

Thanks, Richard. I'm convinced that Hammond Power Solutions is in a great position to capitalize on the growing demand for clean and efficient energy solutions. We currently see strong demand across the geography. However, we continue to watch carefully for the potential of economic moderation in North America. As we look ahead, we are confident that we can continue to deliver value to our shareholders, customers and employees. As was launched with our rebrand long term, we have a clear vision and strategy for the future of Hammond Power Solutions, which is to expand our power quality solutions, continue to develop our distribution partners, especially in the U.S., Mexico and LatAm markets. We will continue our culture of excellence and flexibility that drives us to constantly improve and exceed customer expectations. And we have a commitment to sustainability and social responsibility that guides us to make a positive impact on the environment and society. I would like to close by extending my gratitude and thanks to Bill Hammond, our Senior Executive Team and our Board for their tremendous support in this transition. I'm honored and humbled to lead this amazing company. I look forward to our exciting future. Thank you. And I will now turn the call over to our operator to take questions. Operator?

[Operator Instructions] And our first question will come from Jim Byrne of Acumen.

Just a couple for me. Thanks for the details on the increased capital. Maybe just wanted to get a handle on what is giving you the confidence, I guess, to make that further investment if you could -- if there's any particular details around that.

Sorry, Jim, are you referring to the additional $12 million capital investment over and above the $40 million that we announced in December.

That's right, Richard. Yes.

Okay. Well, we talked a lot about the strong demand that we're seeing in several applications. Data centers is a good example. And the demand has moved to what we would refer to as sort of larger low-voltage power units. And we see that demand being strong for the next several years. Adrian, do you want to add to that.

No, I mean the only thing I would add is we have space in existing facility to add equipment. We see the long-term demand is there. So yes, I think it's simple as that.

Okay. So is it -- are you seeing that in your current backlog? Or is it just something that you're anticipating in the future?

Yes. Yes. Yes, we see it in the demand of our current order bookings and what we expect from the markets going forward.

Okay. And then just on the distribution side, I think in the MD&A, you mentioned you did add some in the recent quarters. Maybe if you could quantify that -- and then maybe help us understand what the future plans are? I know in the past, Bill spoke of -- I can't remember the numbers off the top of my head, 250, 450, 500 million new distribution channels. Maybe if you could help us quantify that.

Yes. No, we're making good progress on that and our ability to ship more has allowed us to bring on additional distributors. So we've been increasing our inventories, which allows us to be able to serve them. And in Q3, we added roughly order of magnitude 70 U.S. branches of distributors. So not -- those would be multiple brands, but a total of 70 branches in the U.S., plus or minus and around 9% in Mexico. So I think we're on track to the forecast we had in terms of total coverage for expanding in the U.S.

Okay. That's great. And then I think there was a mention of gross margins and margin improvement in India. Is there any further details around that?

No. I think this is something, Jim, that's been going on for a number of years now, and it really relates back to some changes that we've made both in the Indian management team, but also in the type of business that we're pursuing there. And we're trying to focus our efforts on higher-margin business. And it's -- now the demand has come on strong there, that's an easier thing to do.

Okay. And then maybe last 1 for me, if I could. Just on the labor front, we've heard from a few companies now that feels like the labor market is opening up a bit more and guys availability is improving. You guys mentioned that, is that something you're seeing? Or you obviously still have hiring to do with these new expansions? You're pretty comfortable on the labor front?

I think we've seen I think a couple of things. We put a lot of effort and focus in recruiting and employee referrals and things of that nature. So we are seeing improved hiring for labor. And then I think when we look at engineering and some of these others, they're still very tight labor market. So I would say it's more stable, but it's something that it's not easy.

And our next question will be coming from Matthew Lee of Canaccord. Matthew, if you could please state your name and your company name before asking your question, please.

Matt from Canaccord. Great quarter. I just wanted to quickly ask about revenue. You've been in the $170 to $180 range for about 3 quarters now. But it does sound like the CapEx investment is in kind of hold our revenue. Can you maybe talk about what level of revenues do you expect to move to and then maybe the impact on gross margins there.