Good morning, ladies and gentlemen. Welcome to the Hammond Power Solutions 2023 first quarter financial results conference call. Certain statements that will be discussed in the 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 unduly rely 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 the 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 not limited to such things as impact of general industry conditions, fluctuations of commodity prices, industry competitions, availability of qualified personnel and management, stock market volatility, and mostly in cost-effective access to sufficient capital from internal and external resources. The risk 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 an assurance that such expectations will prove to have been correct. Listeners should not place undue reliance upon any forward-looking statements information discussed in the call. I would now like to turn the call over to Bill Hammond, Chairman and CEO of Hammond Power Solutions. Please go ahead, Mr. Hammond.
Thank you, operator. Good morning to everyone. Welcome to Hammond Power Solutions first quarter financial results conference call for 2023. Joining me today is Richard Vollering, our Chief Financial Officer. For today's call, I'll start out with some high-level commentary on the quarter and our business. From there, I will hand it over to Richard for a review of our first quarter results and financial highlights. After which, I'll outline what we expect for the balance of 2023 before turning it over to the analysts for any questions. A month and a half ago, we reported we had finished the year with very strong results. I am pleased today to report that the tailwinds we benefited from in 2022 have been strong to start 2023, and we see them persisting for the balance of the year.
Sales and profits are both higher as our business continues to experience growth in our key markets here in North America and in India. We are experiencing the combination of a favorable product mix and high factory utilization, which both drive gross margins to industry-leading levels within the transformer market. Our biggest growth engine in the quarter has been our U.S. distributor channel. Quotation activity is up significantly over both Q4 and the same quarter a year ago. Our booking rates remain high as diverse markets like renewable power generation, EV charging, energy storage, data center construction, silicon chip manufacturing, industrial expansions, power quality, and institutional projects like hospitals and industrial buildings drive our year-over-year growth.
The expansion of our U.S. and Mexican distributor networks continues with the addition of new distributors and more branches, which we expect will contribute to our growing distributor platform and provide further growth opportunities in the months and years ahead. Turning to our Indian operations, we continue to see increased volumes and delivered a record first quarter. We continue to see expansion in our domestic business in industrial sectors like cement manufacturing, food and beverage, pharmaceuticals, steel production, marine power, hospitals, and solar power generation. As we announced late last year, we are in the process of planning and executing a significant expansion of our production capacities throughout North America. This additional CAD 40 million will be deployed over the next two years and will add capacity to accommodate sales growth of CAD 250 million over the next five years.
These investments are being made in both existing plants as well as construction of a new manufacturing facility to build small products in Mexico. Our expansion program started late last year, and we are already benefiting from those early investments. In addition to giving us the capacity to be more aggressive in growing our business and market share, it will also allow us to reduce our lead times and improve service to our OEMs and distributors. I will now hand the call over to Richard to provide details on our financial progress. Richard.
Thank you, Bill, and good morning, everyone. We achieved a new record of CAD 171 million in sales in the first quarter, which is 34% higher than the first quarter of 2022. Sales were higher in part due to the recognition of shipments from India produced and shipped in 2022, and by the stronger U.S. dollar. Excluding these items, sales were approximately 22% higher than Q1 2022. Of that increase, we estimate that 9% is due to organic growth. The sales increase was mainly driven by growth in the U.S. distribution channel, but we also saw growth in our OEM private label, LATAM, Mesta, and India businesses. We saw a small decline in Canada, mainly attributable to the timing of shipments and the fact that the Canadian market has generally been weaker than that of the U.S.
Gross margins were 32% in the quarter versus 29% in the first quarter of 2022. We attribute these strong margins to high factory throughput, a favorable product mix, as well as the lingering effects of last year's price increases. Selling and delivery expenses were higher in Q1 2023 due to higher freight and commissions as a result of the higher volumes. General and administrative expenses were primarily higher due to the effect of a higher share price on long-term incentive programs. EBITDA on the quarter was CAD 24,000,145 or 14% of sales, compared to CAD 14,000,458 or 11% of sales in the first quarter of 2022.
Net income in the quarter was CAD 15,726,000, and the earnings per share were CAD 1.32, an increase of 83% versus the Q1 2022 EPS of CAD 0.72. Our net cash position fell to CAD 7.1 million in the quarter, mainly due to higher working capital requirements as a result of shipments and invoicing being weighted towards the end of the quarter. Capital expenditures were CAD 2 million in the quarter, which we expect to ramp up during the course of 2023 as we add capacity. We have started 2023 off on the right foot with strong sales and margins and sustained demand.
The growth in the quarter was across a number of channels, products, and geographies, and we believe that this diverse sales profile, along with prudent price and supply chain management and improving execution in terms of service levels, have all combined to produce these strong results. Thank you.
Thanks, Richard. In closing, quotation activity, improving bookings, and increasing backlog look to extend their strong run into at least the back half of 2023. Looking ahead, HPS remains cautiously optimistic for the future as there are many macroeconomic trends favoring the electrical industry, including onshoring, investment in renewable energy, infrastructure, electrical vehicle charging, semiconductor production, and natural resources, all of which the company participates in. Tempering this optimism is the possibility of a general economic decline as a result of rapidly rising interest rates, which could affect one or more of the sectors noted above. We believe our market-leading products and service, our customer and geographic diversification provide a competitive advantage in all market conditions. Thank you, and I will now turn the call over to the operator to take questions. Operator, please.
Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star one one on your touch-tone telephone. To ask a question, please press star one one. One moment for our first question. Our first question comes from the line of Matthew Lee of Canaccord. Your line is open.
Hey, morning, guys. Thanks for taking my question. I wanted to start on the Canadian side. Obviously, there have been capacity issues in the quarter compared to a year ago. Are you expecting that to be made up in Q2 like you've done in India, or is there just generally demand weakness that we're seeing in the Canadian market relative to last year?
Hey, Matt. Richard here. Thanks for your question. Yeah, I think it's a bit of both of those things. You know, I think a lot of it was really just due to the timing of shipments. It's not as if we've seen any severe drop-off in bookings in Canada, but I would say generally speaking, Canada hasn't been as quite as strong as the U.S. I think from our perspective, it's really just something to keep an eye on, but I don't think we see that as a significant threat going forward.
Do you still expect the Canadian market to see year-over-year growth in 2023?
Modest growth, yes.
Okay, great. You know, when you think about the run rate in the U.S. business, you know, you reached $100 million in the quarter for the first time this quarter. Is that range kind of sustainable given your improved channel distribution, just assuming no pullback in FX?
Yeah, I mean, I think, you know, I mean, even, you know, even now I think demand is, you know, remaining strong and, yeah, I mean, I think, you know, as we've talked about a lot in the past, it is an area that we've been focused on growing. We still think we have opportunities there to grow in terms of adding distributors. I don't know, Bill, if you wanna add anything to that.
Yes, Matthew. We believe that the additional capacity that we are in process of putting in place will allow us to be more aggressive in terms of going after business that we may have shied away from because we're trying to support a number of strategic pillars as well as, I would say, traditional customers and markets. You know, we're quite confident that A, the trends that we've referred to will continue to fuel our growth, and we believe that if we can reduce our lead times and improve our service in terms of service from the largest inventories of dry-type transformers in North America, that we'll be able to not only continue our positive trends, but also, continue to take market share in a number of areas in terms of through the distributor business at the OEM level as well as private label.
You know, we're cautiously confident at this point in time. We're obviously mindful of what's happening with, you know, the U.S. banking industry and things like that. Again, as we've said, we believe that the diversification that we have in terms of geography, channels and markets will help us even if things slow.
Okay, great. Maybe just one more for me. In your kind of commentary, you kind of mentioned SG&A growth relating to strategic investment. Can you just kind of help us understand what type of investments are included under that umbrella?
Yeah. That would include things like, you know, the Mesta acquisition, which obviously comes with some SG&A. We've been investing in the Mexican market in terms of sales resources, trying to build the business out there. You know, those are sort of the two key ones, as well as some other sort of internal things. You know, we've been sort of focused on our learning and development programs internally. We've been focused on, you know, improving our ERP system so that we can run our business effectively as we scale up.
Okay. Thanks, guys. Congrats on a good quarter.
Thank you, Matt.
Thank you, Matt.
Thank you. One moment, please. Our next question comes from the line of Jim Byrne of Acumen. Your line is open.
Good morning, guys. Richard, maybe just one for you on the gross margins. Obviously been very strong the last couple quarters. It seemed to me they're kind of running well ahead of, I think the 28%-29% number that you've talked about in the past. Is this kind of the potential new run rate we should expect going forward or what do you think about on the gross margin side?
Yeah, I think. Thanks, Jim. I mean, I think, yeah, in the short term, I think, you know, we believe that's the case. You know, we think that's the case because we, as I, as I mentioned, will still benefit from some of the lingering effects of the price increases. You know, demand remains strong. As I said, in the short term, we believe that's true. Looking out to 2024, there might be some factors that cause them to moderate back into that 27%-30% range. One, of course, is the prospect of a recession, and a resulting pullback in demand. Of course, that's still a little bit foggy for us, but we'll see what happens.
In the second is that factory utilization should decline as we expand to support future growth. Of course, longer term offsetting this is the higher volume we'll be able to achieve, and the focus on our higher margin businesses like induction heating, which should help the overall margin increase over time.
Okay, that's great. Maybe just back on some of the capacity and constraints. You mentioned the Canadian side is kind of constrained at these levels of sales. You said you're seeing some improvements. Can you kind of either quantify that or, you know, where are those capacity improvements starting, I guess, here in the second quarter?
We've got our key investments and, I'll just remind everybody that the, you know, the two sort of broad groupings of investments that we're looking at are, one, you know, buying machinery and equipment to fill in the existing bricks and mortar. The second is in building new facilities, one in Mexico and then expanding our Mesta facility. You know, in the first category, you know, buying machinery and equipment, that can, that can happen fairly quickly, and we expect that to start to take effect in this second quarter. That will help our facility here in Guelph, as well as our Mexican facilities, in the short term.
Longer term, you know, with the new factory in Mexico and the Mesta expansion, we won't really see the benefits of those until 2024, about the middle of 2024.
Okay, that's great, Richard. Maybe just last one on, you mentioned, the dramatic increase in AR. Is that nothing unusual there? You expect that to come back to you in the next couple of quarters?
Yeah. Yeah, I don't think there's anything really concerning there. It was really just the timing of a lot of the shipments and invoicing in the quarter. It's just very back-end weighted, that's all.
Okay, perfect. Thanks, guys.
Thank you.
Thank you.
Thank you. One moment please. Our next question comes from the line of Maxwell Carr of M Partners. Your line is open.
Good morning, gentlemen. A couple questions from me. First question would be regarding some of the new hiring activity you had mentioned sort of at the tail end of last year. Are you seeing any sort of significant revenue pull forward from second half of 2022 into Q2 as a result of the sort of, I guess, increasing speed at which you're seeing these developments?
I mean, I don't. Sorry, Max, just to understand your question, you're asking about the investments in capacity or investments in?
In personnel. I believe at the end of last year, you said you expected to see some incremental revenue gains based on hiring in the second half of 2023, if I'm not mistaken or maybe I'm mistaken there?
Well, that would be. Yeah, I mean, certainly that would be true of hiring on the factory floor, but that goes along with, you know, adding the machinery and equipment. It all really just ties in together. Some of the other investments we're making in personnel are really, they're longer term investments. You know, for instance, you know, in, as I said before, in Mexico, you know, power quality, Mesta, and that type of thing. Those are really just building, you know, a stronger foundation for the business to grow going forward.
Okay, perfect. Sort of on the line of credit side, I saw a little bit of a draw on the line of credit and sort of some decreasing cash positions here as you're starting to ramp up the investment schedule. Do you see any need for debt in the near term? Or are you still fully confident that you can fund the expansion plan through cash flow?
Yeah, for everything that we've announced, so far, Max, we can fund through operating cash flows. You know, we can tap into a little bit of debt if we need to. For the most part, we'll, you know, fund it through operating cash flows.
Perfect. I guess last question here from me. The I guess India wet transformers, you had the big order coming out of Q4, some mention of relationship building with regards to that. Is there any updated information you can provide with regards to potential future orders coming from India or any relationship development on that front?
Yes, we remain positive about how this first very large order dealing with an American integrator will be a beachhead to more business in 2023 and possibly beyond. We're not, I guess, at this point, disclosing what we think that potential will be, but we remain very positive with again, the opportunities that we are seeing with the long lead times of North American oil-filled transformer companies creating a window of opportunity here for us.
Glad to hear. Great quarter, gentlemen. Thanks for answering my questions.
Thanks, Max.
Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star one one on your telephone. Again, to ask a question, please press star one one. One moment, please. Our next question comes from the line of Greg MacDonald of LodeRock Research. Your line is open.
Thanks. Good morning, guys. How are you?
Very well, Greg. Yourself?
I'm good, thanks. Congrats on a good quarter and on the divvy hike. I think that's starting to show a nice growth trend there, and I think that's the right message to be sending with this situation. Wanted to ask a question just on overall demand, Bill. You made comments in your opening remarks on what's going on with the economy vis-à-vis interest rate hikes. I'm looking at this order backlog at 74%, and I wanna highlight that's on top of a 92% number last year. That's a pretty strong indicator of sustained demand and growth. Help us understand what's going on there. Is there anything you can tell us about messaging from your channel partners on what they're seeing? I'm most interested in any indication of whether there are any cracks.
Is there anything going on in the U.S. economy that they're starting to worry about? Is there any pushback on pricing that you're hearing at all through the distributors at all?
Okay. First of all, we're not seeing any pushback on pricing. Material costs, particularly some of the critical things like core steel, which are used by all transformer companies, remain high. And I think availability is certainly more important at this point than price, given the long lead times in the industry. That remains positive and certainly will support higher gross margins than we've historically seen. Secondly, our distributors remain actually very positive or cautiously positive about the economy and the business that they see ahead, especially in the United States. The Biden infrastructure bill certainly is fueling a continued investment in renewable energy, electrical storage, EV charging and things like that, which we're certainly benefiting from, particularly through our distributor network.
We continue to see very strong activities at the industrial level, and also in the resource sector, mining, oil and gas, pumping, drilling, pipelines, et cetera. Generally speaking, the markets, the major markets that we serve have not so far been hit by any of the general concerns or issues that are out there with rising interest rates.
Certainly, we hear from the industry and from our distributors that there is and has been a slowing of the residential construction market and also some aspects of commercial construction. You know, that's one reason why our Canadian business has slowed relative to the last couple of years, is the commercial activity at this point in the year is slower than it has been. There's a sizable number of institutional projects on the books for hospitals and government buildings and things like that, which will, you know, continue as we go towards the end of this year and into next year.
So far, the business that we serve and the opportunities that we see, don't seem to be slowing because of the cracks in the economy out there. Again, we're just, you know, mindful that these current conditions, could certainly lead to a more pronounced slowdown. We're just being cautious and conservative.
I believe that, you know, we have opportunities to continue to grow our business, you know, not only to possibly compensate for any slowdowns that we might see in the commercial side of things, but also I believe that we have an opportunity to grow our business, you know, on top of the current momentum, as a result of going more aggressively into Mexico and Latin America, as well as going after some of these other opportunities that we've been hesitant to serve because we don't have the capacity. As I mentioned, bring that capacity online in the middle of the year and towards the end of the year, then we'll be able to more aggressively pursue new distributors, more branches and new customer opportunities.
We remain cautiously optimistic and again, very positive about the remainder of the year. I think a lot of these positive trends and momentum will continue into next year. We're just trying to again, be cautious and conservative in how we approach things.
Okay, that's really good color. Thanks, Bill. A quick follow on the channel distributors, you made comments in the past on how many you have right now and what the growth profile of that looks like. I can take this offline if you don't have the numbers off the top of your head, but can you just give us an update on that?
Are you asking with regards to the number of branches or the growth rate?
Yeah
... that we're seeing through our distributors or what specifically.
Yeah.
I can get you answered, Greg.
Yeah, just an update on how many branches you have right now in your distributor channel and what the expected growth. I think it was something like 300 expected growth in branches over the next 12 to 18 months. Is that still the case? What level is the base on that?
That is still the target. We believe that we can add more to that once we have the capacity in place. We have in excess of 3,000 branches now in Canada and the United States. We're also looking at adding another 15-25 branches in Mexico, for example. That's, you know, an important growth opportunity for us as well. The distributor channel has been a major driver of growth for us over the last number of years, as you know. We're also growing our OEM business as well as private label business very substantially as well. Again, the distributor channel is in excess of 60% of our business.
We see that continuing to remain strong, for the next year at least, which is kind of the window that we're using right now.
Okay. Yeah, those were the numbers I was looking for. Thanks, Bill.
Thank you. I'm showing no further questions at this time. Let's turn the call back over to Bill Hammond for any closing remarks.
Thank you for your interest and your time this morning. We are very optimistic, but cautiously so, not only of our performance this year, which we believe is stellar, but the trends and the momentum continue for us. We believe that again, we'll have a strong 2023. We're already planning and working on how we can continue to grow and improve our service in 2024 and beyond. We are certainly proud of the results that we're delivering here, and we're working hard to continue these results and this trend of positive financial performance in the quarters ahead. Thank you for your interest, and thank you for being shareholders in Hammond Power Solutions.
We look forward to talking to you, at the next conference call. Thank you.
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.