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

Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions Second Quarter 2026 Financial Results Conference Call. Certain statements that will be discussed in this conference call will constitute forward-looking statements. The forward-looking information and statements included in this discussion are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements will be based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information and statements. These factors include, but are not limited to, such things as the impact of general industry conditions, 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 and 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 now like to hand the call over to Mr. Adrian Thomas, Chief Executive Officer of Payment Power Solutions. Mr. Thomas?

Good morning, everyone, and thank you for joining us. I'm pleased to share Hammond Power Solutions Second Quarter 2026 results. Joining me today is our CFO, Richard Vollering, who will walk through the financial results in more detail after my remarks. We'll then open the line for questions. The second quarter was another strong quarter for HPS. We delivered record sales of $324.8 million, improved profitability and continued making progress on several important priorities that we believe will support growth for years to come. Demand remained healthy across North America. The U.S. and Mexico continued to perform well, supported by activity in data centers, industrial electrification and power liability applications, while market conditions in Canada were more challenging. Over the last several years, we've invested heavily in expanding our manufacturing capacity. This quarter, it was clear that we started to see those investments show up in the numbers. We shipped more product than ever, improved our responsiveness to customers and converted more backlog into revenue. These are exactly the outcomes we were expecting when we decided to make our capacity investments. Backlog remains very healthy and was nearly double where it was a year ago, primarily driven by larger project orders, particularly in data centers. Backlog declined sequentially as higher production enabled us to meet customer delivery schedules and convert more orders into revenue. It is also an important proof point that our capacity investments are performing broadly in line with expectations, and that the ramp-up in production and onboarding of people is progressing well. We continue to see strong quoting activity across the business and healthy engagement from customers. Data centers are becoming a larger part of our custom business than they were just a few years ago, and we expect that trend to continue. These projects often require highly engineered solutions and involve scheduled deliveries over an extended period of time. The capacity investments we've made allow us to support those customers while continuing to serve our traditional customer base at the same time. This growth is supported by the breadth of our business. HPS serves customers across commercial and industrial construction, mining, oil and gas, utilities, infrastructure, renewables, OEMs and other markets benefiting from electrification and increasing power demand. Shortly after quarter end, we completed the acquisition of AEG Power Solutions. This is an important milestone for HPS. It builds on our leadership in transformers and strengthens our position in power quality, power conversion and critical power applications. EEG brings a strong portfolio of UPS systems, battery chargers, rectifiers, power conversion technologies and other critical power solutions. It also adds a meaningful services business and a large installed base around the world. The acquisition broadens the ways we can create value for customers. It expands our technology portfolio, increases our recurring service exposure, extends our geographic reach and creates opportunities to bring AEG's technology and capabilities into North America over time. Our immediate focus is straightforward. We want to integrate the business well, support AEG's employees and customers and execute with discipline while positioning the combined organization for long-term success. Looking ahead, our priorities are clear. We need to keep converting backlog into shipments, maintain strong operational execution manage working capital carefully and integrate AEG successfully. We also need to continue evaluating our manufacturing footprint to ensure we're positioned for the demand opportunities we see developing across the market. The long-term fundamentals of the business remain attractive, electrification, power reliability, infrastructure investment and the growing complexity of power systems continue to create opportunities for companies that can help customers solve those challenges. Richard will now take you through the financial results in more detail.

Thank you, Adrian, and good morning, everyone. As Adrian mentioned, we delivered another strong quarter with record sales and improved operating performance. I'll spend a few minutes walking through the key financial highlights. Sales were $324.8 million in the second quarter up 44.7% compared to $224.4 million in the second quarter of 2025. Growth was driven primarily by the U.S. market, where sales increased significantly due to higher data center shipments improving price realization and modest improvement in industrial markets. The U.S. and Mexico continued to drive our growth, with sales increasing 73% over the prior year. Demand remained particularly strong in custom products supporting data centers and other critical infrastructure projects, while production from our expanded Mexico facility continued to ramp up during the quarter. Canada was down 23.7% compared with last year, primarily due to the timing of larger projects, soft market conditions and more competitive pricing. India was slightly below the prior year for the quarter due to normal project timing. Increased production also allowed us to convert more backlog into revenue. Backlog declined 6.9% from the first quarter as shipment volumes increased or remain 96.9% higher than a year ago. Together with continued quotation activity, this provides good visibility through the balance of 2026. Gross margins improved during the quarter. Gross margin increased to 31.5% compared to 30.1% in the first quarter of 2026 and 32.7% in the second quarter of 2025. This improvement reflects price realization, a higher proportion of custom sales, stronger operating leverage and improved factory overhead absorption as volumes increased. Tariffs and input cost inflation remain factor as we are managing, but our pricing actions and operational improvements are helping offset these pressures over time. Adjusted EBITDA was $53.2 million, or 16.4% of sales compared with $33.4 million or 14.9% of sales in the second quarter of last year. The increase reflects the combined benefit of higher volumes stronger gross margin and improved operating leverage. Reported net earnings were $9.4 million compared with $13.4 million in the prior year quarter. Reported results included acquisition-related costs associated with AEG, foreign exchange losses and higher share-based compensation expense. Adjusted earnings per share increased to $2.76 and from $1.72 last year, which better reflects the strength of the underlying operating performance. General and administrative expenses were higher, largely due to share-based compensation and acquisition-related costs. Excluding these items, expenses remained well controlled relative to the growth of the business. Net debt at the end of the second quarter was $36 million, which is higher than the net debt balance at the end of the first quarter. The increase is primarily the result of higher working capital requirements due to the higher sales level, particularly in the month of June. Working capital as a percentage of sales declined from the first quarter of 2020 and reflecting improving working capital management. The AEG transaction closed on June 29, and the second quarter results included only transaction costs incurred to date and included no associated revenue or operating costs. The third quarter will include a full quarter of AEG results, along with the remaining closing costs and associated debt. As we move through the second half of the year, our financial priorities are to maintain strong operating discipline, improved working capital performance and support a successful integration of AEG while continuing to invest in the growth opportunities ahead. We believe HPS enters the second half from a position of strength with solid demand visibility, improving operating performance and a broader platform for long-term growth. With that, I'll turn the call back to the operator so we can begin with the question-and-answer session.

[Operator Instructions] Our first question comes from Matthew Lee with Canaccord Genuity.

I wanted to maybe start on the demand side. Revenue was up $6 million sequentially. And I think our math suggests that even though backlog was down, orders actually grew as well. So just can you maybe talk about what you're seeing in terms of quotation activity right now relative to Q4 or Q1? And is it all data centers? Or is it maybe kind of more widespread?

Matt, so it's Adrian here. We continue to see a lot of activity, particularly in the U.S., not all of it is data centers. So that continues to play into our order book. On the data center side, we continue to see a number of large orders, but project timing and complexity of those jobs is not easy to predict. But from sort of a quotation, the robustness of our quotation activity, we continue to see a lot of customer engagement. So -- but the diversity of our -- across North America, -- we continue to see activity in a broad set of sectors, particularly in the U.S.

Like would you say it's kind of ramping versus what you saw in Q4 and Q1? Or is it kind of like plateauing at discounting, maybe give us a magnitude of direction?

I would say it would be consistent with the end of last year.

Okay. That's fair. So the market remains pretty active. And I guess in that context, I just want to ask about capacity on kind of the other side of the coin. If I analyze the quarter, it's about $1.3 billion in revenue that you're at right now. I think you've sort of mentioned in the past that $1.2 billion, the high-water mark for what your facilities can do right now. So just like is there a space to reorganize the facility a little more to squeeze a bit more juice out? Or is it time for another facility or another extension?

Yes. I think when you -- when we look at expansion, we don't -- it's not like one thing we look at as more multiple things you mentioned -- we've done a lot of footprint optimization. We have now some ability to add additional equipment. And then I think the conversation around footprint expansion is also very active. So I think it will be a combination of factors. I think what we're excited about, the ramp-up of [indiscernible] has happened quite smoothly. And so the efficiency out of that factory has looked very well. And so we're excited about that. The mix of the products going through that factory also allows us to get some better efficiencies. So I think we're optimistic on maintaining our customer responsiveness and we're actively looking at how do we continue to increase our capacity for the customers.

Our next question comes from [indiscernible] with RBC Capital Markets.

Congrats on a strong quarter. First question, so just to follow up on Matthew's question. So I think last time you talked about data centers being like roughly 30% of revenues. Has that changed? Like are we still in that ballpark? Or is it a little bit higher now?

Nelson, it's Richard. Yes, it's actually gone a little bit beyond 30% now. And that's largely A lot of that product will be coming out of the Manto facility. So we've crossed over that 30% threshold.

Okay. And then just on just in terms of Mexico. So are you fully ramped in Mont? Or are you still ramping up...

No. We're fully ramped in on.

Okay. Got it. And then just on the revenue growth is probably a difficult question to answer, but like in terms of, call it, 45% revenue growth, is there a way to kind of roughly break that down into like price, volume and product mix.

Yes. There is, Nelson, and price is certainly an important factor. It's also becoming a more competitive factor.

So yes, so I guess the same product last year, like would it be like 10% more or 15% more this year? Like how should we think about the revenue growth? Like was pricing...

It's more -- it's certainly more than -- I mean, I think if you sort of look conventional price increases over the typical inflationary price increases and kind of be sort of low single digits. What we're experiencing, if you recall, we had a price increase last fall. And then we had another price increase in the spring. And so they are higher than they would they would typically be. So I won't get too specific on a number, Nelson. But just to say that it is more significant than it would normally be. But I'll also add that volumes have improved, not just in data centers, but other markets as well.

Okay. Got it. And then I think you -- yes, are you -- like I know it's only been about a month of closing -- and I think when the acquisition was announced, you mentioned that in 2025, the revenues were about $326 million, but could you talk about AEG revenues in the past 6 months, how they've tracked.

So yes, so that's the number you quoted that, that was very close to the 2025 revenues. And so 2026 should -- it should be tracking very close to that, Nelson. Although the first half of the year, they've been affected by they do for a bit of business in the Middle East, and they've been affected by that. And their profile is typically a little bit more back-end loaded in any case. But I think the number, EUR 200 million roughly in terms of order of magnitude is the right number.

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

Coming back to Nelson's question on price there. I'm curious, given the strong demand profile you're seeing and the fact that you and it seems like everybody else in the industry is pretty capacity constrained. How how aggressive could you get with price? Like could you start to really price these things as value and use and recognize that data center operators need what you have, your expertise, your track record it's worth more than what another competitor could produce? Or is there another dynamic at play here in terms of the competitive environment that kind of puts the capital and how high you can get with pricing?

Nick. So I think just a few things. I think one Richard mentioned, we're more than 30% of our revenue is data center, but that means probably 60%, 70% of our revenue is nondata center business, and that's a completely different dynamic, particularly, I think, in the standard products. So while there is -- on a project for project, I think the dynamics are different. So it's hard to say based on the scenario with the exact project. So I think you have seen that we've been able to price up over time. we built out the capacity to serve the customers. And I think, in some cases, capacity and lead time are very important customer, which allows for a different commercial situation and then other times, it's more like, I might say more like a frame agreement, in which case there's more opportunity for competition. So there's not a single answer to that, but I would just say, although it's becoming a bigger piece of our revenue and there is strong demand there, we're pretty diversified. And so it doesn't necessarily apply across our whole business.

Totally fair.Let's dig into the data center stuff. Is that 1/3 of your business now that's a very meaningful part of it. And so if we're talking back to, I think, the earlier point of if you're ceiling is kind of $1.3 billion of kind of utilization on the existing footprint under normalized pricing, but 1/3 of that business is now extremely in demand and very capacity constrained, is it fair to assume that, that 30% could see materially higher pricing, such that, that $1.3 billion is now $1.4 billion, $1.5 billion.

I think you can give us a lift to our total custom business, Nick, I think you're -- the specific number, I don't know.

Our next question comes from Razi Hasan with Paradigm Capital.

Just maybe if you can comment a little bit on the drivers that led to improvements in operating leverage. Was it just a stronger top line that kind of flowed through? Or is there anything else there?

Yes. Yes, it's mostly the stronger top line. When we've got both the on, month 4, I mean, MONI, we talked about it, that's essentially operating at capacity. On tree is not operating at capacity, but it is getting much better ramping up quickly as well. So I'd say those are to biggest contributors to the improved operating leverage.