Good morning, ladies and gentlemen. Welcome to Hammond Power Solutions' fourth quarter 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.
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.
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. 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.
Growth was broad-based, but most pronounced in the U.S. 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 the fourth quarter alone, we generated CAD 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.
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 remained 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.
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 4 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.
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, and data centers, and energy transition projects, markets that are experiencing long cycle structural demand.
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.
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 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. 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.
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. 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. 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.
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 U.S. 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 the fourth quarter. 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 the third quarter.
Cash provided by operations was CAD 32 million in the fourth quarter. Capital expenditures for the year were CAD 35.5 million, which is within our expected range of CAD 35 million-CAD 40 million. These investments focus primarily on expanding capacity on our Monterrey 3 and 4 and Guelph facilities, as well as maintenance capital. During the fourth quarter, 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. Thank you. I will now hand the call back to the operator to take any questions from our participants.
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 CGF.
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.
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 4 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.
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?
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. Generally, commercial construction, light industrial tends to be a little bit lighter from what we see.
Okay, that's helpful. And 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, CAD 1.3 billion-CAD 1.4 billion of capacity at today's pricing. 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. How are you thinking about adding capacity right now, and how long would it take you to add, say, CAD 100 million of capacity, if you were to announce it today through a new facility?
Our capacity outlook is something we continually look at, Matt. You saw that, you know, even with the addition of Monterrey 4, we anticipated that there would be some additional. As you mentioned, we added some CapEx for equipment and 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 9-12 months to ramp up. Building a new facility is probably something in the order of magnitude of 2 years.
At Monterrey 4, 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.
Do you feel like you still have space to add additional equipment to the facilities you have today?
Yeah. I think that, you know, if we need more capacity then, we'll pull the trigger on additional capacity expansions.
All right. That's helpful. Thanks. I'll pass the line.
Our next question comes from Nicholas Boychuk with ATB Capital Markets.
Thanks. Morning, guys. Sticking with the capacity question and relating it though to margins, you mentioned here that there were 140 basis point 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?
Yeah, great question, Matt. I'll hand that one over to Richard to answer.
Hey, good morning, Nick. Yeah, that's a good question. So, Monterrey 4, you know, we talked about it being two factories, Monterrey 3 and Monterrey 4. Monterrey 4 is starting to ramp up in Q1, and we should see that really take hold in the second quarter. You know, as for Monterrey 3, we should see that linger a little bit longer into the year, and 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.
That's gonna take some time to work through. We should see that, hopefully by the tail end of the year, you know, something like fourth quarter. Yeah, that about sums it up.
Okay. Understood. Is it split roughly 50-50 between the two, or is there a 140 basis points maybe tied a little bit more to one of the two facilities?
It's probably split evenly between the two.
Okay. 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 sort of 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?
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. You know, when we have answers for you, be sure to communicate that.
Oh, 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?
No. AEG's production capacity is all in Europe and Asia Pacific.
Understood. Thanks, guys.
Our next question comes from Baltej Sidhu with National Bank of Canada.
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 on or onboard customers there?
Hey, Baltej, it's Adrian. I think similar question to what Matthew asked earlier, just in terms of quotation activity. We see a lot of demand for custom products. Our standard products continue to grow and, in 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, 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.
Traditionally speaking, a lot of that is more of about a six-month sort of backlog timeframe, Baltej. That's sort of the visibility we have there.
Great. Then just turning over to the margin, 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?
Richard, why don't you take that one?
Hi, Baltej. You know, this has happened before. I mean, it is somewhat reminiscent of what happened post-pandemic, when we had, you know, 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. You know, those are two things that we will be keeping an eye on as we move into 2025.
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.
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.
One thing 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 in that respect.
Sorry, Baltej, the second question was?
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.
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%-15% roughly. 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.
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?
The sales volume, yeah.
Okay. Got it. Perfect.
Backlog growth is probably more heavily weighted towards data centers than that.
Fantastic. Okay. Thank you.
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.
Yeah, good morning, guys. You mentioned the investments in SmartD and I think Verdyn. Maybe just give us an update on SmartD. It's been a couple years. How are they progressing and kind of what products are they focusing on?
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 base approach, and Verdyn is more of the large project base 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.
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. Verdyn takes a slightly different approach. Verdyn is addressing larger scale, I would say, in industrial facility-wide power quality 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.
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?
No, the plan is still, we're anticipating closing in Q2, Jim. Things continue to progress.
Okay, that's great. 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?
Good morning, Jim. On CapEx, I think going into, you know, 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, you know, working capital, I think, you know, number one, that's gonna depend on growth. Some things we are taking a harder look at in terms of, you know, inventory levels. I think that's somewhere where there's some opportunity for us going into the year.
Okay. That's it for me. Thanks, guys.
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, and thank you for everyone joining us today. I would like to just make a comment again, thanking our employees and 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.
This concludes today's conference call. Thank you for participating. You may now disconnect.