A Message from the CEO

Q2 Report – 6 months ending June 30, 2018

Fellow Shareholder:

Hammond Power Solutions Inc. (“HPS”) experienced an unexpected setback during the second quarter which hurt our financial performance.  Unforeseen elements came together in the quarter and culminated in a significant drop in profitability.  The last six months have seen a significant rise in the costs of key raw materials such as copper and aluminum wire, core steel and insulation, as well as a variety of components used in the manufacturing of transformers.  We acted as quickly as possible to increase our prices however there is always a lag time for these increases to take effect with new shipments.

Our financial performance in the quarter was also affected by lower sales than anticipated.  The biggest drop in sales was in India where our shipments suffered from several internal execution issues and customer delays.  Sales were lower in Europe compared to a year ago, but much of this was the result of a refocusing of the business and the closure of one of our plants in Italy.

Despite our disappointing and unexpected Quarter 2, 2018 results, we are very positive about a strong finish to the year.  Bookings continue to grow in North America the highest levels of sales in both Canada and the U.S. ever seen.  A stronger second half is expected in India as we work through the internal issues that affected our shipments.  What is most encouraging is that our backlog continues to grow and sits at unprecedented levels.

We are anticipating that marketing margins will improve during the last half of the year as price increases that have been implemented over the last four months are beginning to flow through to the bottom line.  The customer and product mix is expected to drive higher margins as markets using more highly customized transformers like mining, drilling, utility and public infrastructure strengthen in this stage of the economic cycle.

The tough quarter was totally unexpected and although these results are not as predicted, we remain confident in our business model in these volatile times.  As we have seen, we are not immune to the challenges facing North American manufacturers but our diversity of geography, markets, channels and products puts HPS in a strong position to weather the volatility and recover moving forward.

Willam Hammond signature


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