Q3 2019 Earnings Call
Morning, Ladies and gentlemen, thank you for standing by welcome to still a Jones Q3 2019 earnings conference call. At this time all participants on the listen only mode. Following the presentation. We will conduct a question and answer session instructions will be provided at that time free to queue up for questions. If anyone has any difficulties hearing the conference. Please press star.
Followed by zero for operators the since that anytime.
Before turning meeting over to management. Please be advised this conference call will contain statements that are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated I would like to remind everyone that this conference call is being recorded on Thursday November 7th 2019, I will now turn the conference over to ethics actually.
<unk> and CEO . Please go ahead Sir.
Good morning, ladies and gentlemen.
Thank you for joining us for this discussion on the financial and operating results for stellar Jones with third quarter ended September Thirtyth 2019.
Our press release reporting Q3 results was published earlier this morning.
It along with our end DNA can also be falling on our website at www dot stellar Jones Dot com.
And will be posted on SEDAR today as well.
Let me remind you that all figures expressed on today's call ARINC and he didn't dollars unless otherwise stated.
Before we begin I would like to also remind you that on January one 2019, the company retrospectively adopted I first 16 leases, but has not restated comparatives for 2018 reporting period.
Please refer to our Mdna for further details.
Let me I'll begin with a brief overview of the quarter.
We're pleased with our third quarter results, which saw EBITDA up 22% to $96.1 million and increase in net income in diluted EPS to $53.7 million.78 per share respectively.
We saw solid performances in our utility pole railway toy and industrial product categories, all of which generated increased steels stemming from a combination of higher pricing and volume.
While sales in this third quarter reached $626.6 million decreasing slightly by $3.4 million from 2018 profitability increased we generated solid margins, even when adjusting for the impact of idea for 16 and maintain strong cash flow, which we use.
Was primarily to reduce debt and repurchase of shares.
The decrease in overall sales for the quarter was due to lower sales in the logs in lumber category, which was unfavorably impacted by lower lumber market cost, resulting in the sales decline over $20 million for the category.
Excluding this impact overall sales for the quarter would have increased 2.5%.
Sales in the residential lumber product category also declined because of lower lumber costs, but the impact was less pronounced as it was largely offset by higher sales volume.
Looking at the third quarter results by product category.
[noise] utility pole sales reached $211.5 million up 5.4% from sales of $200.6 million last year.
Excluding the currency conversion effect utility pole sales increased $9.6 million or 4.8%, primarily driven by increased sales prices coupled with healthy replacement demand.
Railway Tei sales amounted to $190.7 million up 1.6% from sales of $187.7 million last year.
Excluding the currency conversion effect railway tei sales increased $2.3 million or 1.2%.
While we expected the delta to be more significant into quarter due to ongoing strong demand and high selling prices growth was partially offset as a result of the tight supply market for untreated railway toys, which has required us to treat railway ties that are not air season, resulting in longer treating cycle times.
In addition, during the quarter, we manufactured finished product for a customer who later informed us they would only be taking delivery in the next few months.
As a result, some third quarter sales have been pushed out to the next quarters.
Consequently railway Tei sales were 2019 will be flat year over year and in turn profitability will be impacted.
Sales in the residential lumber category total $158.2 million down 1.4% from sales of $160.5 million last year.
Excluding the currency conversion effect residential lumber sales decreased $2.8 million, 4.5%.
This variance is primarily explained by lower lumber prices, partially offset by higher sales volumes.
Industrial product sales reached $37.6 million compared with $32.4 million last year.
Excluding the currency conversion afek sales increased $4.9 million or 15.1% largely as a result of stronger rail related and piling product sales.
Sales in the large in lumber category totaled $28.6 million compared with $48.8 million last year.
Excluding the currency conversion affect sales decreased just over $20 million as discussed earlier. This variance as a result or reduced selling prices, which is passed through to customers driven by lower lumber market caused a decrease in lumber transaction volumes as well as lower log sales due to the timing of harvesting it.
Yes.
Turning now to profitability.
Gross profit amounted to $110.2 million or 17.6% of sales into third quarter of 2019, compared with $97.4 million or 15.5% of sales last year.
The increase is explained by higher selling prices lower lumber costs, when compared to last year and improved operational efficiencies.
These factors were partially offset by higher volume for utility Poles higher production cost for railway ties given the longer treating cycles and the effect of currency translation.
EBITDA stood at 96.1% pardon me EBIT dusted at $96.1 million or a margin of 15.3% versus $78.5 million or a margin of 12.5% last year.
The increase in EBITDA is explained by increased gross margins and the adoption of I have for a 16, which effectively substract at 8.4 million in right of use acid depreciation and $1.1 million in financing expenses from cost of sales.
With the adoption of IR for a 16, it becomes difficult to compare our EBITDA to last year.
As a general rule of thumb, you can substract the reclass from cost of sales or in disguise $9.5 million from our QC 2019, EBITDA to make it more comparable.
Are you doing this you can see that our EBITDA increased over 10% year over year very healthy growth rate on a true comparable basis.
Operating income stood at $78.6 million or 12.5% of cells in the third quarter.
Fair to $67.9 million or 10.8% sales last year.
Net income for the third quarter of 2019 was $53.7 million or 78 cents per diluted share up from $45.8 million or 66 cents per diluted shares last year.
Turning now to liquidity and capital resources.
Cash flow from operating activities before changes in noncash working capital components and interest and income taxes paid reached $97.4 million into third quarter up from $81.3 million when compared with the same period last year.
The increase primarily reflects higher net income and the impact of I FRS 16.
Combined with favorable changes in working capital items, we generated strong cash flow from operating activities of 110 $23.7 million versus $91.3 million last year.
As always we continued to be mindful of our capital allocation.
Containing a prudent use of leverage ensuring sufficient maintenance capex, making acquisition at reasonable multiples buying back shares and paying dividends are all key priorities.
We intend to maintain an optimal balance amongst all of these fast.
In the third quarter, we use our cash flow to reduce debt by $64 million and in the absence of M&A. We use our normal course issuer bid program opportunistically to repurchase shares for $30 million.
We also supported purchase of property plant and equipment for $14 million and paid dividends of $10 million.
We concluded the third quarter into very healthy financial position.
As at September Thirtyth 2019, our long term debt, including the current portion was $562.8 million versus $513.5 million as at December 30, Onest 2018.
The increase mainly reflects higher working capital requirements higher capital expenditures and financing required for the acquisition of a residential lumber facility in Sheldon, Ontario, partially offset by the effect of local currency translation on us dollar denominated long term debt.
On the dividend front the board of director of stellar Jones yesterday declared a quarterly dividend of 14 cents per common share payable on December 19th 2019 to shareholders of record at the close of business on December 2nd 2019.
Turning now to our outlook.
For 2019, excluding sales from the logs in lumber product category, we expect higher year over year overall sales based on current market conditions, the current level of lumber prices and stable currencies.
This increase is driven by stronger pricing for railway ties and utility Poles as well as an increase in market reach for the utility pole product category.
More specifically into utility pull product category sales and margins for 2019 are expected to increase year over year, driven by both pricing and healthy demand for replacement programs.
In the railway type product category sales for 2019 are expected to be comparable year over year explained by improved pricing, but offset by lower volumes as mentioned earlier.
Management believes that the increasing cost of untreated railway ties combined with a tighter supply market will lead to continued upward selling pricing adjustments for the quarters ahead.
In the industrial lumber product category sales for 2019 are expected to be slightly below last year. Given this full started the year and lower selling prices to customer.
As a result of decreased lumber costs.
Management closely monitor is variations of these commodity prices and adjust its procurement practices. Accordingly in order to maintain dollar margin on a similar volume.
In the industrial product category for 2019, we expect higher sales driven by healthy demand for rare related projects and piling products.
It is important to highlight that sales for the log and lumber product category and activity used to optimize procurement and it which does not generate margin is closely tied to the market price of lumber.
For 2019, we expect lower year over year sales for this product category explained by lower lumber prices when compared to 2018 and reduced volumes.
The decrease in sales for logs in lumber product category will favorably impact overall margins as a percentage of sales when taken as a whole with other product categories and vice versa.
Okay.
For 2019, we also expect improved year over year margin on a consolidated basis higher margin will be primarily driven by increased pricing for railroad ties coupled with improved product mix and demand for utility Poles.
Having said this getting that some railway tei sales have been pushed out over to the next quarter's profitability for 2019 will be impacted.
As a result, we have adjusted EBITDA guidance range to be between 310 million to $315 million.
Adjusting for this impact of IMF are a 16 this will represent a year over year increase of over 11%.
Furthermore, we plan on spending $60 million to $70 million of capital expenditures. In 2019. This includes the plant expansion at Cameron, Wisconsin, as well as a Shelburne acquisition and upgrade.
For 2020 based on current market conditions, and assuming stable currencies, we expect higher year over year overall sales for Stella Jones, driven by stronger pricing and increased market reach into utility pole railway tie and residential lumber product categories. As a result operate.
The margins in absolute dollars and as a percentage of sales are expected to improve over 2019, primarily driven by pricing improvements in operational efficiencies.
Our strategy remains intact as we will continue to focus on optimizing our operations across the organization, while seeking acquisitions to further expand our presence in our core product categories.
This concludes my prepared remarks, and I will now be pleased to answer any questions you may have.
Thank you at this time as you would like to ask a question. Please press star followed by the number one on your telephone keypad. Your first question comes from the line of Walter Spracklin from RBC capital markets. Please go ahead.
Yeah, Thanks very much.
Thanks for taking my question.
I guess focusing here on the 2020 with a push forward of.
Of the sales into 2020.
Would we see and the reduction in EBITDA associated with that would we see a kind of similar lift to what we would have otherwise expected in 2020 as a result of that that push forward and I don't know if you can give any color around what your view is around the.
Current consensus being around let's call. It three 335 340 for next year, if that's consistent with with what you're seeing in terms of what you can see looking forward in 2020, so far.
Great. Thank you all to refer to question.
So.
Sure you got multiple aspects to two to your question. So the to the push of sales forward. We'll we'll obviously be accompanied with the EBITDA margin into next year. So you're completely correct that door sales will move some of them will move into Q4, and Q1 of next year and the EBITDA margin will follow as well with through.
Regards to quantifying EBITDA levels for 2020 .
I will defer to our call we'll have for Q4 in March.
Going next week.
To meet our team at a budget meeting where all have better.
Better guidance and better view on next year's numbers.
Okay with data plan as well for Capex program at this point or can you give us some indication as to whether just directionally do you see it being.
Being up or down relative to 2000, 2019th.
I'd be happy to guide you on Capex, we believe a $50 million Mark.
In line with our historical spin.
Okay, all a queue. Thank you very much.
Thank you.
Our next question comes from the line of Hamir Patel from RBC capital markets. Please go ahead.
Good morning.
Eric could you speak to the state of the M&A pipeline and if you see any more opportunities in any particular product category.
Perfect. So thank you here, we so as we've discussed in the past there are.
Several targets that the company has identified into North American market.
That we are continually in discussions with and.
We're working diligently and discussions with some of these sellers two we look to establish a deal, which obviously would be in line with historical disciplines that we have with regard to multiples.
Okay, great. Thanks, Thanks, Eric and I wanted to turn to the type side.
From your discussions with customers do you have a sense yet as to whether volumes will be up or down next year and any differences you're seeing maybe between the class ones in the short lines.
Certainly so the so obviously as we stated in our outlook, we're seeing improved sales next year and improve margins. So although we're going to budget next next week I do have a sensor preliminary numbers that we based our outlook on.
So for class ones overall, we're seeing growth growth in volume and.
In the details, there's plus and minuses in there, but net it would be an increase for US next year and we see demand for the non class one market to continue to be strong and we do plan on taking.
Taking an opportunistic approach to to that market since will most likely will be doing less mobilizing next year since our dry inventory program is that much healthier that than it was last year at the same time.
Great. Thanks, Thanks, Eric that's that's all I'll I'll turn over thank you.
Your next question comes from the line then what plucky some day Sheldon capital markets. Please go ahead.
Good morning Indeed.
Just to come back on the previous question related to bolt on acquisition could you maybe provide some color about.
The percentage of your railway ties that the is using bulk of monetization and where should we see the.
The improvement going into next year in winter, we are looking for a normalized bolt on ization going back to 2021.
Right so.
All but all without quantifying it I can tell you did this year Q2 in Q3 heavily usable rising process as we saw depletion in our inventory levels and that is related to availability of product.
In the market or the untreated tie into market, what we've seen in the last few months, our key procurement areas have dried up and we are seeing hardwood logs made available to saw mills and our procurement team is quite happy quite pleased actually with what we've been able to procure on a monthly basis. So we are building our dry program slowly.
But surely going coming into closing the year and going into next year.
So definitely to bolt rising process will be used much less they gain there for us is the throughput or the quantity of ties we can produce at a given facility in one month.
As we've discussed in the past when you both NYSE your cycle time as much longer than when you use a dry.
A tie that has properly air season, therefore, having more products being available for sales. We can probably we will most likely make that take better advantage of.
Requirements in the non class one business.
Okay, perfect that's great color and it could you maybe provide some color about the.
Railway ties the composite aspect winner, there's there's been some change in India. The market demand given the we are dealing with the with environment have you seen any change on the composite tied demand retrospect do that.
Great question Bill. Thank you so we have ongoing discussions with.
With.
Other railroads in North America, being class ones and the short lines and so on and we're not seeing a shift in all from from wood or away from would too.
Two.
To substitute products, so theres no change in trends.
Several of our clients do not spec either comp is it or concrete and did though those that do well actually will procure small quantities annually simply for their own maintenance purposes.
Okay, that's pretty good and when we look at utility Poles, given the no wildfire, we've seen some strong growth so far but could you comment about the.
They do do organic growth expectation for utility pole and also given the technology that you have.
In terms of putting a mashaw on the award.
The an update on this success so far.
Okay. So.
Well, obviously, the wildfires on us wescos or are very unfortunate we have our emergency teams.
Ready 24 hours seven and we've been supporting our clients for.
Quick quick adjustments to supply product.
Then it will come to phase of rebuilding and that will stretch over several quarters before so it's not as if we will see a huge spike it will be it will be a lift.
Over over let's say three or four next quarters of next year, but you should not expect us to have a big spike in comment in a conference call that we've got increased sales because of these events. This is always also great opportunity for us to leverage our network into demonstrate to our customers that we've got strong inventory levels in our and have the ability to serve them.
From different locations.
Okay, and when we look at 2024 residential lumber what would you expect given the dynamics.
Talking here pricing versus volume for 2024 residential lumber any color you could provide a 80.
Well, it's always difficult to predict the cycle in the under lumber markets and we've seen sawmills closed.
In Canada in recent months and hard to predict that impact as well.
What so.
We're seeing now as we're where we're seeing an opportune time now to procure lumber add at a reasonable price and we're actually getting into more longer term commitments to ensure that we're building next year's program. So I would suspect that on the revenue side, what is going to be driving the increase is a very much related more to volume.
Okay. Okay, that's great color and when we look at your inventory at the railway ties could could you maybe provide some color about the what we should expect in terms of working cap for the full year end 2019, but also next year given as you might be able more you'll be success.
Full in building more inventory.
Just wondering if there's a big impact we should expect came terms on the working capital.
So I do it I do expect a cash draw in our cash flow.
Inventory line.
Last call I guided around $40 million.
I'd say, it's in that range of 40 to 45, obviously, if we can procure more railway ties. We will it's also a question of so the the hardwood logs or have become available. The saw mills are cutting them and we're buying everything we can to build our dry program, but also keep in mind that there is or isn't through which the saw in those can deliver but if for any reason we could.
We didnt.
Optimizing get more inventory and we will definitely take that opportunity so but right now I will guide to 40 to 45 million.
For 2019, and Nick or even for next year no for 2019, and honestly made probably most likely for next year because it is going to take us several months into next year to to continue rebuilding that dry inventory level.
Obviously depends on the pace, but yes, I would suspect there could be a drug and again next year, Okay. Perfect in 400 total working capital and.
And with respect to do CFO role could you provide an update onto CFO searcher.
Certainly well so we have engaged a third party firm to help us.
Recruit new we're we're we're right now in the pick of the process.
Things are moving along very well im quite pleased with the process and it's always difficult to predict with these processes conclude but let's say I'm hopeful that into next few months, we'll be making it an announcement to the market for a replacement for the CFO position.
Okay. That's great color. Thank you very much weren't if I mean.
My pleasure been.
Is there any additional questions at this time. Please press star one on your telephone Keypad. Your next question comes from the line of Michael Telephone from TD Securities. Please go ahead. Thanks good morning.
Let me Mike.
Thank you.
Can you.
Provide any further details around the customer decision to defer sales and.
If you do have a sense.
Possible to share that.
But also is it fair to say that this is not anyway indicative of any kind of a general trend it's a specific situation.
So thank you Mike So I want to talk cut customer specific so but I did mentioned the fact that it's a customers or is it isn't it is not industry spread.
Trend and there is no change in trend as much or they can say you know we have good relationship with its customers and with this customer have long term relationship and we're supporting them in this change.
My understanding is that they're better managing their their own internal inventory and we're just pushing some sales and into next year, but.
We know what it will have strong demand from them in the coming year.
Okay.
You've talked a little bit about improving conditions on the procurement side in terms of.
Fiber availability.
Just wondering what you've also talked about expecting some price driven growth in the ties segment in 2020.
Just trying to square those two comments if availability of raw materials improving.
You are still you're still confident and seeing some pricing growth.
Is that just that the the comps are a little bit easier maybe in the first half or is this a function partly of your commentary about.
Trying to be more opportunistic in the in the non class one market.
Yes, and Thats exactly its into non class one market because the first half of 2019 saw some price increases in the railway ties so year over year in the first half of next year in that non class one business will how opportunity to two to nudge up pricing.
Just a bit exactly so youre spot on okay, perfect and then.
With respect to the utility Poles segment.
Still healthy growth this quarter, but it did come down from where it was in the in the second quarter and if I recall.
The last conference call you had talked about the potential for for seeing double digit organic growth for for the full year 2019.
Any commentary on.
Sort of it there's been any changes in the.
I guess any outlook or the where they fit your organic growth outlook for for the utility pole segment.
No not none at all so when you compare year over year I can say as much as.
In 20 and 2018, we did have the in Q3, a an important that transmission project, which we do obviously ended last year and we did we do not have a replacement project. If you want for that that.
For that specific so sales volume for this year, but demand remains healthy and to your point.
I am hopeful to see strong strong close to the year.
Call it.
The mid single digits, but it's still will be very healthy.
Okay.
Perfect and then just lastly, the 2019 EBITDA guidance range that you provided.
Just to be clear in terms of.
Sort of whats driving towards that that type of range versus what you'd previously communicated is that is that mainly a function of this.
The shift in deliveries for this one particular customer into next year on the tie side or are there other factors that went into that change.
That is the main factor there Mike Okay.
Thank you.
Pleasure.
Your next question comes on line of Maxim Sytchev from National Bank Financial. Please go ahead, hi, good morning.
Good morning.
Eric I just had one question and I'm not sure. If you can provide this data point, but in terms of some if you if you're going to doing less Bolton rising next year can you maybe walk us through in terms of how we should be thinking about this in terms of the margin impact at the potential lift from that can can you maybe quantify that.
Quantifying it is difficult so.
There's two aspects to it so one is.
Where do we where do we have to usable lighting process. It is an accord with our customers and we do get a bit more of a compensation for it were to cost efficiencies are a bit higher is there's less absorption of fixed cost because we absorb our fixed costs based on volumes produced so theres definitely a better allocation of our fixed costs and they're definitely and.
Uplift difficult for me to quantify it. It's a good question I mean that could have whatever analysts to run some some some models on it I could follow up with you eventually, but it's not a data point I would have at this point, but still just in terms of how we should think directionally. It should help the margin profile is that a fair assessment.
Oh, yes, it would but no it would be like in in in decimals of a percentage point right. We're not we're not taking significant significant lift okay. Okay. That's great. That's it from me. Thank you very much.
Thank you.
No further questions at this time, the eventually turn call back over to you for closing remarks.
Thank you for joining us on this call and we look forward to speaking with you again at our next quarterly call.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.