Q1 2020 Earnings Call
We have the team the products the network and the financial flexibility to continue with fortitude as the North American leader in the pressure treated wood industry.
Change in pricing for those two categories.
So Amir, I want to be cautious about giving April results cuz you know, we're technically here to discuss q1 results. But you know, if I refer back to our our general Outlook, you know, regarding, you know, if I take both of them individually for Railway ties, we've seen no major pull back from from class one customers. Although we are seeing a bit of softness dog show the reduction in volume that has been included in our ebitda Guidance with regard to utility poles. I guess what are the the the first thing that comes to mind really is the fact the impact of the reduction of the the price of oil it has had an impact on any oil driven projects for the word demand for utility poles that are related to those projects and objects see the current economic context and pandemic context has you know creates a bit of a a bit of softness the the man on project that would require
transmission and distribution poles
Great. Thanks Eric. That that's helpful. Just turning to the lumber business. But if you are in our companies are pointed to two very strong demand in a category. I'm just curious giving your exposure, you know, largely to Canada and I suspect Ontario and Quebec where you know lockdowns more severe than the North America. Have you seen your res Lumber business regionally. Have you noticed some differences in in April? Um that that you'd call out off the it's a it's a great question the government impose restrictions as you mentioned on the construction business as well as on our customers, you know, you know has cross has created some some some some challenges, I guess for them to service their customers, you know, I think the dealer Network and the big boxes that we service have been enough standing job.
To you know, get product to to the homeowners into the The Renovators and the contractors and you know even able to do a great job in in in April, but you know, we're now looking at the month of May and June which are the two strongest months for us for digging and fencing and you know, that's again related back to our Outlook. That's why we know we we use a bit of softness or or cautiousness in our volume is difficult to predict how well our customers will be able to service the demand for the two peak months of the for the two peak months that are upcoming not knowing got you know, there's there's some constraints around their ability to service clients.
Turn off that I just the final one for me Silvana. Could you you know on the capex front what would be bare-bones maintenance capex for for Stella off? The Bare Bones that we were estimating is twenty million dollars for a year.
Okay, perfect. That's that's all I had. Thanks guys. Your next question comes from the line of Walter spracklin of RBC Capital markets. The line is dead. Yeah. Thanks very much. Good afternoon, everyone. Hope everyone is keeping keeping safe. And well, I guess my question comes back to capex budgets starting with your boss real Road customers, you know that ties tend to be part of Maintenance capex and and as a result in a have less variability, and I know you've softened volume, but pretty much stuck with with last year in terms of your overall business activity. I know your competitors indicated at least, you know, one railroad is starting to you know, cut their capex and and perhaps if not cut type purchases are deferring them to what extent do you think a railroad can defer cap to further capital investment in in ties?
If they have to and and and to what extent is your current?
Volume reduction really a function of the reduction in growth ties as opposed to to to maintenance dies. You call it therapy. They helpful. Thanks. All right. Thank you. I'll try to ask her best. I can it was a lot in that question and you can follow up if I don't you know hit all the all the topics you had there. So, you know or or volume right now or we're looking at maintenance. So, let's call it no growth in all related to to maintenance replacement.
I you know, most of our customers to your point of most of the class ones, you know have a capex budget that set up for the year. The maintenance piece of it is typically a smaller part of it. And from what I understand. It's something that you know, our our customers like to execute throughout the year unless they really have to push it out as you might have read some some some classroom customers have actually stated that they would take the the slow down right now to increase some some of their maintenance. So try to answer to think about your your question with regards to you know, how much can you push it out? They can certainly push it out. I assume and I guess it would have an impact on the ability then to improve to run certain volumes of trains or at certain speeds on on their Rail lines, but now most likely being a great opportunity to do some maintenance is they do have some some down time.
And then I guess in the in the same vein a lot of companies across all sectors are are are looking at conserving cash and to what extent would you say the say? How how would you answer that that same question with utility your utility customers, I guess safety is less of a a driving factor of their motivation and and and and one would argue that they have much more flexibility to to defer any any major reinvestment or or maintenance capex on poles. How would you characterize your conversation so far to date with with your customers on the utility pole sidewalk given everything going on with covid-19. Thanks. So our our our major customers that we have under contract. I would say during the month of of April hath adjusted a bit, you know internally their organization as we have some of them had have you know, some of them has slowed down slightly to to adjust keep in mind that with a lot of people working from home.
It's kind of difficult to cut electricity to do maintenance or they've been mindful of that. None of our customers have spoken right now about delaying capex. You're right that they could they are in majority Faith with aging infrastructure and they're all mindful of executing that that that that part of the maintenance but you do hit an important point is that you utilities do service and customers that might be that might have certain constraints on the calf right now and so they might be a bit long, uh, the our utilities or customers might want to preserve their own cash, since they they're cash inflow might be slowed down and that took a bit of a consideration. We were looked at or volume that they were will some of the abilities sort of slowed down slightly, but you know, we see that, you know really as our assumption said really for the the second quarter.
Okay, appreciate the time. Hope everyone is keeping safe. Thank you. Thank you Walter.
Kind of Marco to form of security your line is open.
Thank you. Good afternoon. Hey Michael, Eric first question just to clarify on the guidance of 300 to 325 million of ebitda wage. That's is that include the the unadjusted ebit sixty-three million from the first quarter in in that number or or is it the the adjusted number of 70 million. 63 we you know, we I guess when we talk about it, we we call it out, but we don't necessarily do adjusted it but does so it's based off the 63 million dollar dividend. Okay. And the the derivative impact that you experienced in the first quarter related to the the diesel contracts. I mean, I guess it's probably hard to to call we're off we're a oil prices go from here. But at the same time giving that word pretty low levels is it just directionally, is it fair to think about the situation for the rest of the year as a likely a situation where you're
You know if prices have risen off kind of the Lowe's and and don't fall back down. We should not be seeing further mark-to-market losses in in in those contracts. Is that the right way to think about that? Yeah, exactly. So, you know you to your point these old prices have dropped significantly and I think we've pretty much taken the the biggest impact we could we could think of at this point in time in terms of the utility poles growth you experienced in q1 the organic growth very very strong. Can you break that down and sort of approximate terms between how much of that was Volume vs price. It sounds like both were were a factor in terms of the driving that growth
Right. Yeah, I would put the percentages, you know, so obviously volume would have been a significant driver and pricing would come in. I can call it A $64 sixty on volume and forty on pricing.
Okay, and then when we look at the reduction in the guidance that that you announced can you talk about which of your product categories would have been off the greatest had the greatest impact in in terms of driving that reduction. I it sounds like your your caution and you know on volume volumes kind of across all product categories. But but if it's possible to talk about, you know, we is there one or two that had a a more significant impact in terms of driving the the reduction in the guidance. She gave the greatest volume declined my life, you know in in our in in scenario that we're we're looking at at both range at both ends of that range are really with the residential number, you know long as I you know, I mentioned earlier on a question our our customers have been challenged with you know.
different restrictions as far as being able to distribute and as you know
Big box stores or hardware stores in Ontario. We're actually closed still not too long ago and we're only able to do curbside deliveries in although they've been everything doing everything you could possibly do to service their customers that issue has been some, you know, some some challenges their construction has also, you know been been tied down in Quebec and Ontario and there there is some relief coming up. So as we're going through our scenarios and potential no volume adjustments, I guess residential number has that, you know was the greatest exporter to to to to volatility. I guess it in in the volume they can be serviced to the demotion. Okay, and and I know you I mean you're asked about April demand and volumes earlier in the call. Just trying to get a sense when you when you took the guidance down. I mean you you did give us some of your life options in terms of effects and and other things and and you did talk about a gradual lifting of
Your next question comes from the line.
Government restrictions by the end of the second quarter. But so that that that's helpful. But as far as the reduction you took in the guidance is that you know, is that based on the kind of what I saw in April across the business in terms of any changes in demand and your sort of extrapolating that out over the rest of the quarter and and maybe assuming it deteriorates a little further or or is this sort of all very prospective and you know, you're just trying to take your best guess at what May and June are going to look like so the, you know, the current plan that mechanic anomic pull back home then you know, hopefully will be shortly live economic pull back most likely be a bit longer. So as we we took a look at our all of our three product categories, you know, how long did the deeper dive to customer contracts and sort of tried to figure out if there were certain concerns are or issues that that could put some softness in our sales and and that's truly how we wage.
About it and you know, so we did use you know looking at obviously the future is quite unpredictable. So we had to take the assumptions and I guess if you want to put pick a point in time, you know, we did our forecast maybe 15 days ago and you know, then we worked with with that that set of numbers but it's based off of assumptions of what we we were reading in into the the balance of the year at that point in time sort of based on conversations you'd have with your customers conversations and you know our review of our of our over a customer base exactly and and try to understand how how the man the man could gain weight, you know in in the current context.
Okay, that's helpful things and then just just lastly as it relates to the Outlook. There's no specific comment about any thoughts or changes in views on pricing. So is it is it the case that you were that your views on pricing and what what that would have done and contributed for the business this year of those unchanged or have you modified those in any way?
The well, two things actually on the pricing front. It's a good question. So when we looked at our pricing a residential number, if you recall at the end of the first quarter, there was a sharp sharp decline in in in lumber prices in in general markets and and we use it that Assumption of that low price thing as being the the standard for the balance of the year. And we did at that point. He was in that assumption assume that there would there there could be some pricing wage is for the balance of the year.
Okay, but nothing on.
Sighs and pulls side in terms of updated assumptions, they're not unfold, you know, we've had pricing gains last year which obviously are flowing through into this year the owner, you know item or thought I would add on the the is on the railways high side. We're seeing some more competitiveness on the non class one business at this point. So it may be a bit of tightening their, you know in the back half of the Year. Okay, great. So it's helpful in fact
The next question comes from the line of Mona Nazir of Laurentian Bank, please go ahead your line. Again. Thank you for taking my question. So just firstly on the revised guidance. I'm just wondering what percentage is ultimately a sales reduction versus margin deterioration. Is there a heavier waiting on one of the sides or is it purely sales driven? It's mostly volume. Okay, it's it's mostly volume. And you're right. We did, you know, there is a common in there about a bit of margin erosion, and that's, you know, really driven by two things one what I just explained to Mike Mike wrote a poem about, you know, using an assumption of lower lumber prices in the market that could lead to to certain price deterioration in the year that will have to track but also we're seeing some fiber fiber Club.
Increases on the utility pole side which you know, we had we had considered some increases in our original guidance, but they're they're the increases are a bit more than than what we thought originally, I will have to wait for the the anniversary of the contract if you want to be able to to readjust the pricing. So I just want to be clear on the margin side. There is there is a bit of that there but it's the guidance is mostly influenced by volume.
Okay, that's very helpful and not to belabor the point. But I'm you you just touched on having to forecast and then re forecast and then re re forecast in the current environment wage. And so when we're thinking about the guidance of 300 to 3:20 million and you touched on the residential side and you haven't seen much decline on the Thai side, but I'm just it's for my own clarification. Has there been some Breathing Room factored in or is it just based on how things were sitting 15 days ago? The breathing room is really off the two extremes of the scenario of of of the range, right, you know, you know, if if we if if our for the year ends up at three hundred million dollars, you know, we would have had you know, significant headwinds and you know the upper range obviously, we'll we'll we won't have we'll have not seen as as well as many headwinds as as as described. So I guess dead.
the breeding rooms comes within the range
Okay, that's great. And just lastly for me and the last call you touched on your continued desire to grow by Acquisitions and they mean in the current context. We're seeing a lot of change. I'm just wondering if that still Rings true or with guidance down, you know m&a is on hold or inversely. If you could be opportunistic off once described covid-19. It returns back to normal. Right? Well, I think the guidance we provided today will lead and it should guide everyone to change the fact that will still be generating strong cash flows between now and the end of the year the m&e project that we had initiated. Let's say earlier in the year and have been paused slow down simply because you know right now we can't travel, you know due diligence has really restricted or face-to-face negotiations are obviously not happening that being said, you know, God
Projects we were working on our field.
Very much alive and you know might be pushed out, you know a quarter or two, but you know, it's still there's still project that there were looking at and we do plan on utilizing our strong cash to be able to to take you know to make best to take better opportunity of of a available transactions.
That's helpful. Thank you.
Again to ask a question. You will need to press star one on your telephone keypad.
Your next question comes on the line of being apart of the the line is open. Yeah. Good afternoon, Savannah. Good afternoon. I'm just I'm just to come back on the non class one railroad. You mentioned kind of more competitive landscape these days, but are they taking advantage of the 45 G pag infrastructure maintenance tax credit right now as as a result.
Yes, I mean the managers healthy and and you know, we're definitely very active on the coding front. What we've seen is well, you know as as we've been talking for the last two quarters that we've been replenishing ties in your in our inventory to be able to dry so has the entire industry and we're now seeing a lot of our competitors, you know, the smaller Traders and the bigger players in off the street with inventory and now wanting to I guess secure volume for the the balance of the year and perhaps the the the aggressiveness and quoting now come back from a bit more to fact there's there are uncertain times when current economic conditions there is strong demand, but I you know, I guess it treaters want to secure the volume for the balance of the year.
Okay, perfect. Okay, that's great color. And when we look at residential Lumber, I understand the the potential softness that might come in in your biggest months. But the other side I was wondering if you believe that depending make might increase spending as more people stay at home this summer and look to invest in their backyard. I mean looking at who sells it's just that it's being up significantly year-over-year. So I was wondering if it fits on the other side provided positive read through for the residential number the the young man from the homeowners is definitely their industry data on taking in fencing is showing strong demand, you know for for that raw material, so it's definitely flowing through Thursday being cautious in our approach simply as we're coming into the two strongest months of of of the year. You know, we're we're really hoping our customers taken service all the demented our customers with the constraints. That's put on them right now dead.
So you're right that they're you know, if the I'll say differently if tomorrow all the constraints are lifted and you know, we're back to back in quote-unquote normal normal business. I would say that you know, there's there there would be strong strong demand for residential number and we would have good sales. Okay. So it's more a matter of logistic constraints as opposed to a German. Let's put that way. Yeah. Yeah, of course. I mean I referred to earlier. Yeah, exactly. Okay, perfect and could you talk about the opportunity to walk in large your residential lumber sales through programs with non big box customers. It seems that over the past month you you've receive an increased interest from non big bucks Club. So are you still showing some momentum on that side?