Q3 2020 Stella-Jones Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to spend the Jones thought what that's when it's when the earnings conference call. At this time, all participants are in listen only mode.
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Before turning the meeting over to management. Please be advised that this conference call. We compete fitments that affordable King on subjects with Nobel freeze 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 2020.
I will now turn the conference over to you like social President and CEO. Please.
Please go ahead Sir.
Good morning, ladies and gentlemen.
I'm here with Silvana traveling Chief financial Officer of Stella Jones.
Thank you for joining us for a discussion of the financial and operating results Stella Jones's third quarter ended September Thirtyth 2020.
Our press release reporting Q3 result was published earlier this morning.
Along with our Mdna can also be found on our website at www Dot Stella Jones Dot com and will be posted on SEDAR today as well.
In addition, I'd like to mention that yesterday, we published our 2019 in environmental social and governance report it has been posted on our website as well.
Let me remind you that all figures expressed on todays call are in Canadian dollars unless otherwise stated.
Let me start my thinking our employees, who continue to work diligently every day to service our customers during these challenging times there.
There aren't a wavering dedication combined with the proven resiliency on her business.
Helped deliver another record performance this quarter with growth in sales EBITDA and cash from operations.
The continued growth demand across most of our product categories and the exceptional rise in the market price of lumber led to an 18% increase in sales and as a result, EBITDA rose to a quarterly record of $132 million.
EBITDA margin also rose to 17.8% in 2.6% improvement compared to the same period last year.
During the quarter, we generated strong cash from operations, allowing us to continue to invest in our network return cash to shareholders and reduce our leverage.
We ended the quarter in a very solid financial position with ample liquidity in order to continue to drive sustainable growth for our shareholders.
Let me now turn to a brief overview of our third quarter results by product category.
Utility pole sales amounted to $252 million up from $216 million generated in the third quarter of 2019.
The increase this quarter is primarily driven by project related volume as well as higher pricing.
The pricing improvement stems from upward price adjustments in response to raw material cost increases and better product mix, which includes the impact of greater fire resistant rep pull volumes.
[noise] railway Tei sales amounted to $189 million down from $193 million in the same period last year.
Respectively. The.
The significant increase in profitability was driven by the exceptional sales price increases for residential number which exceeded the higher cost of lumber given the rising market price of lumber throughout the quarter, coupled with stronger residential lumber demand and improve pricing product mix and volumes for utility.
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Net income rose, 46% for the third quarter to $79 million or one dollar and 17 for sure.
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Turning to liquidity and capital resources.
Cash flow generated from operating activities totaled $148 million in the third quarter compared to $124 million generated in the same period last year.
The increase is mainly due to improve profitability offset in part by an increase in taxes paid following the deferral of tax installment to the third quarter as permitted by COVID-19 tax relief measures.
Redeployed the cash generated to reduce our long term debt by $102 million.
Return $25 million of capital to our shareholders through dividends and share buybacks and invest $14 million in our network.
In the quarter as part of our normal course issuer bid, we repurchased 334653 common shares at an average price of $46 and <unk>.
Compared to 2020, while real retire sales in this industrial product sales are projected to be relatively comparable to those generated in 2020.
The demand for new construction and outdoor renovation project is expected to be strong in 2021, which should continue to benefit sales into companies residential lumber product category.
Wild the current context has created some headwinds are mne pipeline as active and we continued to pursue north American acquisition targets that will strengthen our position in our core product categories. The company's strategic vision focused on network efficiencies and continental expansion remains intact, we believe that the long term funding.
Mentals of each product category will stay strong.
We are committed to delivering sustainable long term value to our shareholders and are healthy financial position allows us to take advantage of internal growth and acquisition opportunities as well as returned capital to shareholders.
This concludes our prepared remarks, we will now be pleased to answer any questions you may have.
So ask you questions you really need suppressed star one on your telephone.
So we try your question press the pound all husky placed on by why are we compiled the queue on email Sir.
Your first question comes from a mute that'll all CIBC Cup Telemarket. The line is open.
Hi, good morning.
U.S., which adjusts every week or on a regular basis to to market market prices. So that has a bit of that downturn effect also remember that although we do expect the stronger volumes into residential number for the fourth quarter, it's not our highest.
It's not our highest quarter as far as volume goes.
Couple of other things I'd like to point out is that.
Although we had strong sales in in our utility pole business in the third quarter as we center in DNA. It was generated by project product related volumes.
But also with the sales of more fire resistant.
Utility Poles.
The maintenance piece of it was actually slightly down in the quarter, but was offset by demand that was driven.
By West Coast Wildfire and storm events, so we're still seeing a bit of spot.
Spotty demand on on.
On the maintenance front in the third quarter it has gotten better than what we've seen in the second quarter, but the the the uptick I guess in Corbett cases that we've seen in the last month have create still creates a bit of that cautious across approach and last but not least I just want to point out that we do expect higher.
Year over year as Ginny expenses.
In 2020, and essentially stemming from the fact that we are in the midst of our ERP implementation and we are incurring some.
Onetime costs as far as staffing and.
To be able to proper support the product transition.
Great. Thanks, or can you just a final question for me.
For 2021 before any potential M&A.
Do you think total EBITDA next year could be inline or higher than the one than the 365 $375 million range that you're you're guiding for this year.
So I mean, I would like to point out that actually next week.
Meeting with the whole team as Stella jolted virtually as we're doing our budget planning for next year, it's a bit early to come up with that guidance, but.
But I like the fact that youre thinking it could be similar or a bit higher.
I don't want to at this point jump into it will be quantifying that a bit better in our when we come up with our Q4 results.
Okay fair enough. Thanks, I think to start but that's all I have my my pleasure here.
Your next question comes from Walter Spracklin of RBC capital markets. Your line is open.
Thank you very much operator, good morning, everyone. Good morning, Walter and.
So I was wondering if you could perhaps guidance a little bit on the on your visibility into residential lumber I know you've kind of can.
Can you talk a bit about what your how far out do you see which certainly with a good degree of certainty how sales are coming in they were the reason I ask obviously is with the big boom that we've got in in.
Renovations and so forth and construction that is where where where can you and at what point can you start to see that level off or come down on.
As we go through the pandemic is this a number it was at weeks is it months.
Just curious if you could hear your thoughts on on on on how much visibility you have in that in that segment.
Certainly Walter so.
In talking with our major customers for.
For that product category.
They are indicating a strong year for next year volume wise.
To being fully transparent they actually look at it six months at a time and they're providing guidance that the that H. One next year would be stronger than each one of 2020.
So that being said you know, we're actually now adjusting our our capacity and our workforce to be able to address that demand, but so the our guidance really comes from discussions that we're having currently right now with our customers, but we're also in the process of.
I guess firming up the program for 2021, so there is lots of discussion going on with.
Current customers and potential customers.
I guess I would like to point out that.
Our ability to service our customers in 2020.
Has gotten us a lot of credibility in our industry and I would say that our although Q3 was it was not an easy quarter, we had challenges with procurement, but we were able to supply our customers.
And as a result.
We.
We have a feeling that with the current inquiries that we have an opportunity to increase our market presence. So that also would contribute to the volumes into next year the pricing piece of it obviously as I discussed.
The previous caller, we will tend to drop compared to what we're seeing today, but it drops at a much lower rates. So it will enable us to sustain margins.
That's great color moving over to ties.
During the railroads.
We're keenly aware of a lot of congestion now.
Spiking demand for transportation services in general.
Generally that doesn't allow for a lot of work to be done on on maintenance repair understanding that this is a vital and important part of safety I know it can be indefinitely deferred but I'm wondering if.
In an average year, where you might see some.
Some variance year to year in the amount of ties replaced in a given year.
Could we with the recent congestion and significant demand.
The.
I see it at the lower end.
For your customers.
Given that congestion.
So for the class one customer.
2020 would I would say would be the low end as far as what we've seen in in many of the recent years.
A couple of weeks ago at the railway tie Association conference most of the class ones presented or provided and the indication for their 2021.
Maintenance in terms of volume and it's it's pretty flat, it's comparable year over year and that was part of.
How we deal or guidance for next year that being said I agree with you actually what I agree with you that there seems to be a pickup in traffic, which is typically a good thing an increase in revenue over the mid term would indicate most likely bigger appetite to increase maintenance profit maintenance programs.
So that's how we're viewing it right now.
It makes sense last.
Last question here.
Looking at your.
Shareholder return policy, obviously, having a very strong year here this year looking at another strong year next year.
Does this change at all your your your capital allocation. If you look at how you distribute free cash flow after your growth Capex.
When you look at buying back stock dividend increases and.
And potential M&A.
Judging by the pipeline you are seeing in the M&A side now how would you expect free cash flow post capex to be divided up.
As you go into 2021.
Well, obviously top of mind is the M&A and I know weve.
It looks like we will not have an M&A in 2020, although we are working on a project right now and in discussions with a with a couple of other targets that being said it is top of mind and when we say we want to.
Expand our network and grew our north American presence theres still opportunities for that and the opportunities are.
Within reach so that being said, it's always top of mind.
Answer a bit better your questions dividend is something that we discuss with the board. The board has a commitment of revisiting the dividend and have a continued approach in increasing it I can't speak for them, but given the strong cash flows I think my recommendation will be two to increase it.
I would also like to provide our shareholders a bit of the benefit of the fact that we're buying back shares. So for the same absolute dollars of dividend huge we should definitely be able to provide a higher dividend per share.
Theres less shares so that's the way, we're viewing it and last but not least the NC Ivy So weve.
We initiated our program in.
Last August and we do intend to run it as a continuous program. So.
Something that we don't want to do a fast sprint into short term just at the spike It up I think we want to run it as a regular program and keep deploying capital that way.
That makes sense I appreciate the time as always think my pleasure Walter.
Your next question comes from Mark Museum of Scotia Bank. Your line is open.
Hi, good morning.
Good morning, Mark.
Good quarter.
I guess my first question.
Just one on the guidance I guess I'm, just trying to square Q4 to the 2020 outlets.
I guess, if my math is correct.
The implied guidance for Q4, EBITDA was roughly flat year over year.
I would think residential still up so I think that would imply holes ties are down.
And you can correct me if I'm wrong and then but then the 2021 I will look for Poles.
Sort of mid to high single digit growth.
So just seems a little Williams.
Seems a little counter intuitive are little tougher.
Square lots if you can help me with that I appreciate it.
Certainly so for Q4.
I mentioned earlier, so theres a few drivers there I guess one of the items that you know it.
Could be unexpected is the fact that we will be heading higher as Ginny expenses. So thats the driver the percentage down is it compared to percentage to 2019.
I would argue that 2019 EBITDA margin as a percentage was was much better than in previous years. So I know, we've been increasing pricing on pause and so on over the last three years to get better margins, but we're we're.
Still comping against a strong.
A strong year.
Last but not least there.
There is a bit of the.
In our guidance as I explained for the maintenance on utility Poles.
It's still uncertainty impact of covered there. So we had a bit of a flattish approach there.
With regards to.
Two 2021 guidance for pulls I believe was the last part of your question.
We do expect to see more of the fire resistant pull volumes to increase so that would be.
Good.
An additional contribution if you want to to to our annual volumes, we do expect maintenance too with our customers to resume.
Two for regular maintenance programs and we still see some healthy demand there as we have for the last several years and I would also argue that our market reach for utility Poles.
It is growing every year, we tend to.
Be very competitive and be able to perform to to win new customers over.
So that would be a bit of the thought behind the guidance.
Sure.
Mid to high single digit proposal volume or that includes pricing.
That would be both.
Sorry, its gotcha, Okay, and then I guess the fire resistant Bowl volume.
Is that in Q is that sort of more special project or is that sort of capture a portion of replacements as well.
How should we think about.
So no it does it is.
It is part of the replacement.
As we were looking at.
I guess, our third year of wildfires on the West Coast. This year being the most significant one it's not really special project not it's part of our customers matrix. When you look at what they want to order when you look at the region, where they've got to install new polls what are the one of the the line of questioning. It is it is it an area that is subject.
The wildfires and should we put or not the fire resistant poles.
So that's where those customers, but we're also gaining a lot of interest from other customers in North America for the same product.
Okay.
I don't know if you can share, but like roughly speaking only comes hires the price point on that.
No.
Completely right. If we don't we don't provide some indication it is a value added product obviously and since it has there is more to pull obviously their domestic it was around it there's the labor. So it's obviously a higher priced priced item.
Maybe just a loss on this already but the DNA, but Q4 was.
Thats sort of a one time thing or is that like a structural increase or is it like a catch up on comp and some stores without us.
No there was a bit of catch up on call, but we're seeing that in our Q3 year to date numbers as well, it's really more in line with the efforts that we need to put into support.
Our.
Implementation of our new ERP system, So and you are completely right and actually we can see a bit of that we will see a bit of that into next year and then it will curtail.
Okay.
Great. Thanks for taking my questions Bridget.
Thank you.
Your next question comes from all non deal of moving some bank. Your line is open.
Good morning, congratulations on the quarter thank him on.
Just wondering if you could provide a little greater insight into the residential strength, which continues to be significantly ahead of large home improvement players.
I like to break out the 39% cross between volume and pricing how are those two kind of reversing currently.
Hitting in Q3 Youre announcing.
Correct.
Yes.
So to be clear you're talking year to date for now for the first nine month of 2020.
Whatever clarity you could provide the framework.
Yes.
Thank you for you, but if you Wanna gave me the whole year to date at that point.
I can give you both so for the quarter I would say, 75% is pricing and 25% is related to volume, but for the nine months of 2020, I would say a third of it is related to to pricing and two thirds is related to volume.
Okay, that's much appreciated.
Hi.
I'm grateful for the impact that you provided into the discussions.
That you're having with the customer on the residential side.
I'm thinking about residential goals, even anecdotally tumor everyone and putting in new fences every year, even if work from home continued its effects on the longevity to the product.
You spoke about increasing their market presence I'm, just wondering did that will potentially moving more into the U.S. or you're going to be keeping that kind of same footprint that.
So the.
The interest in our product offering and remember that in the residential there is treated lumber as well as accessories like composite decking and stares triggers and railcar systems. So that the interest in our product offering has.
As significantly increased over 30 sort of year as we've been getting a lot of calls from I would call non current Stella Jones customers looking for pressure treated lumber this year and obviously, we serve as the customers that had agreements with us for the Twentytwenty program, but a lot of these these potential partners are calling us up now as well.
Theres scheduling our 2021.
Programs and.
We'd like to become a partner with Stella Jones that being said there are current customers of which we don't have 100% of the demand, which we service extremely well this year customer satisfaction is very high and therefore were also potentially looking at increasing our part of the program with them for next year.
Okay perfect. Thank you and just lastly terminal.
We saw a significant reduction in leverage on a sequential basis I know M&A, Ron Paul just given some of these will be but we now eight months and some initial shutdown and just wondering what your.
Okay, greater comfort rounding financial targets.
Due diligence process that.
And I know that you mentioned M&A is the area that you want.
First area, where you want to.
Capital toward.
I'm just wondering if those targets channels a lot.
Call. It your games, yes, so the targets have not targets have not changed.
Although we were still living with the presence of covered in North America that daily numbers, either stable or tend to increase.
We are I guess.
In general terms I would like to believe we restart learned how to live with that in that context. So.
So thats whats driving forward the business it might be at a slower pace, but.
We are having regular exchanges with with potential targets.
So some due diligence is moving forward.
It's taken its own it's taking its own course, but things are progressing.
Did I answer your question one how that's perfect. Thank you.
[music].
Your next question comes from been lumped walk off the shelf and capital markets. Your line is open.
Good morning, Erik and good morning by now and congrats for the good quarter.
Good morning.
With respect to the previous question. This 70, 525% I think you were referring to the mix between volume and pricing on the residential lumber right.
It's 40 year, yes, so it was 25% for the for the nine months, 25% sorry, It was for the quarter I apologize let me.
Let me take that Oregon, So for Q3, 25%. It was volume increased 75% was pricing, but for the nine months of the year. It's reversed if you want it's 33% on pricing and 66% on on volume.
Okay and no no unique I know you've been looking at growing your exposure to non big box customer now you have the better network to serve better value. So I would just be curious about how the mix between big box among big box gets the customers.
Has evolved.
Hey.
I guess I'd like your definition of Big box right, because you know some bigger retailers considered sales big boxes, but I.
If we think about national banners, if you want like significantly the market. It's still it's still a very strong mix, we do sell to to certain buying groups and at the smaller banners, but I would say, it's very heavily weighted towards.
A select few national National banners.
Okay, but did you see the same strength from the non big box retailer.
In the current market conditions.
Definitely a definitive but we look to to be honest. We also we will deal directly like certain independent owners that owns 10 stores in a wheel deal directly with because it's good volume if it's regionally.
Make it make sense for where our plants are and it did strong demand been across the border.
Okay and could you talk you can a little bit about the market dynamics in the us residential lumber and whether the strong performance you've been able to do in Canada, whether it could help you to to better tap the us market eventually.
We're definitely seeing as in Canada, when I look at our US business, we're definitely seeing increasing interest in our product offering.
The the limitation there I would say that we only have one facility in the us that produces residential lumber in the northwest so and we've actually taken steps this year to increase the capacity.
Thats actually to be able to produce more residential lumber but to to to grow its significantly we would need to.
To to add more and more production assets.
Okay and with respect to this sourcing of lumber could you talk a little bit about your ability to secure lumber for next year and also the your ability to ramp up production and may be silvano, how we should be thinking about working capital changes going.
Through Q4, and next year as you rebuild the inventory.
Or if they take you been us I'll take the first part and I'll, let sylvana answer the second part so.
That's a great question.
Procurement has been a key.
In the last six months and it's a great relationship with our customers that has enabled us to properly read the market.
We might have paused, maybe a week in early April as far as oil price.
Procurement and questioning like is there a market and how is this going to be driven but we quickly got great market intelligence and we turned around and we never stopped buying lumber, which never got out got us out of the the pecking order at the sawmills. So we've we've maintained our strong relationships throughout that is this sort of pandemic with.
This almost as we've been consistently buying from them and that has helped us actually through the third quarter to be built to procure lumber and to be able to treat and sell to our customers I'll be I'll be honest, if I could have procured more lumber would have sold more in the third quarter, but that being said it.
It was it's been a great quarter and going forward. The relationship we have built and being able to sustain in the last month is carrying forward. So on that front I don't see significant issues to be able to procure sufficient lumber.
Again that goes back to the partnership we have with our customers because as we are trying to build.
Inventory for Twentytwenty one.
There's a mix there of higher higher priced lumber and lower price numbers as we're we're averaging down or customers are working with us as well, which is which is greatly appreciated with regards to capacity.
We've increased our ability to treat more at three of the facilities in Ontario, which which has been greatly helpful and were currently structuring work.
Workforce to be able to add some production shifts to through the whole of 2021 to ensure supply to our customers I'll. Let so then I'll talk about working capital.
Yes for the fourth quarter been lot, we're still expecting on inventory build of about $50 million. This is to support both.
Yes, the growth that we're expecting in residential lumber Amin utility or it might be a little bit more limited depending on how that the the lumber demand that continues to be an oversized fairly strong in October.
So the build might be a little bit more limited.
Or for residential lumber, but overall, we're still forecasting about 50 million. This is where the inventory about just how this keep in mind that our working capital. In Q4 is also highly impacted by the drop in not only on as you know we do collect a lot of the the higher sales of Q3 on that.
While we have much lower Q4 sales.
Okay. Okay, that's great and when you look at the fire retardant national Fortunately it seems that it's.
Slowly over gradually ramping up could you talk maybe about the overall percentage of.
Revenue related to the fire retardant mesh technology, and where do you see that market or a fortunate the evolving in the next five years.
So the new assets.
Well it's.
I was I was going to say, it's hard to quantify but actually want to set I don't want to quantify because we do we don't disclose that level of detail Needless to say there is there is interest it's a it's a it's a proven product now.
Some of the Poles that were installed earlier in 2020 actually were subject to the wildfires I can report that the actually very well perform in.
In the actual situation, which is.
Unfortunate, but we do have the proof and a testament that the product works. So it's I guess, it's not a gadget that we're selling and that it's going to go away into.
In two years I think it's here to stay it's I think thats its proven it works very well so it will grow over time. So this quarter, we're starting to introduce it in our in our discussion because you'll be hearing more about it.
Perhaps you could ask me that question next quarter I might be able to quantify a bit better and now have a sense of what we can do with this product next year, but as I said, we have a budget meetings next week and I'll have you know.
People to button down a number of bits of it more tightly.
Okay. That's great color. Thanks for the time and congrats again, thank you Bill.
Again, if you would like to ask a question press star one on your telephone.
Our next question comes from Michael to form of TD Securities. Your line is open.
Thanks, Good morning.
Good morning, Mike.
Eric I don't know if you've covered this already but.
The breakdown of utility Poles growth in the third quarter between volume and price was that was that already provided and if not can you provide that.
No it wasn't aska and it's about 50, 50, 50% pricing and 50% volume.
Okay, great. Thank you and then.
You had mentioned that.
The maintenance demand piece has been somewhat sluggish I.
Gather this is still sort of due to co that and.
Reluctance to have.
Holding back it gets a little bit in terms of some of the cruise.
That what's dragging it sluggish demand yes.
Yes, exactly and that was as I explained it really was it was offset by demand I was prompted by replacement or should I say now.
Construction demand forward there was generated after the wildfires and the storms in the southeast us.
Okay and so the.
Sluggishness on the maintenance side, if I can use that term again.
Does that create a pent up demand type of dynamic whereby you think there's some catch up to occur or is it simply once it once the crews are able to get back out and they ramp back up it just sort of carries on at a more normal normal pace.
Well.
First I think.
There is a lot of willingness from our customers to start doing some maintenance because it's it's part of their their planning as part of their budget. Indeed, the need to execute it too we're definitely seeing willingness to do to sustain that that activity.
Well you know every year, we forecast them growth in volumes.
Could that be a bit higher because of pent up demand or some of our customers wanting to get the work done within their budget or their fiscal year that could be but nonetheless.
If our customers.
Objective is to reduce the average years average age of the polls, we'll get to it eventually so if its not catching up next year might catch up over 24 months, but doesn't mean, that's what we'll get done so I'm not concerned that volume demand is not going away.
And then similar to my first question, which was about the split between volume and price on the in the third quarter proposals.
When we look at your outlook for 2021 year, you're talking about mid to high single digit type.
Type of growth for pools.
Can you provide some indication as to how that would be broken down between volume versus price.
Yes, we don't I don't have that detail right now as you know I have high level guidance for for for what we believe is going to be results next year.
But it's really in the next two weeks, where we're going to do to deeper dive in and have that mix, but.
I would tend to say that there is going to be volume in there and you know there is going to be pricing as we keep seeing fiber cost increases so that will play into mix as well and then obviously there will be a healthier mix I would say next year for the for the fire resistant redpolls okay.
Okay.
On the comment about higher SGN a to.
To be clear is that being driven exclusively by the ERP.
Cost or is there anything else driving that.
Well year over year, it's largely the RP.
Obviously, we do have a profit share program as we are having a successful year those provisions will obviously be a just get adjusted but you know.
It percentage wise, it's just just just fit into the historical so I would say, it's largely driven by the ERP. Okay. So and then on that those ERP costs.
Is there any way to provide a bit of context around.
The magnitude of those costs on a quarterly basis, how long they last and that we are did we already start to see those.
In the third quarter, such that when we get into next year. We're looking backwards that will already be in there for sort of half of the year and it's just really the other half that were that were comping against a tougher comp or.
Just trying to kind of put all this into perspective no.
No no certain so we did we did start seeing some of that in the third quarter of this year.
I would.
Indicate that you'll be seeing.
Actually something that's a bit stronger as far as expenses in the fourth quarter sales would definitely be higher than what we've seen in Q3.
Q4 levels I would say would hold throughout next.
Next year, and then get curtailed.
At the end of next year or I would say early 2022, so it and it's really comes back to extra head count that we need to support activities as we're freeing up employees that had a project cost that we cannot capitalize on the project because you know for the accounting policy do not allow us to do so so it's driven by those.
<unk> expenses.
Okay, and I haven't had a chance to maybe look through everything in as much detail that like but.
Just quantified in your disclosure documents and if not can you provide.
Some sense for order of magnitude for on a quarterly basis.
No, we don't quantify that necessarily Mike and I guess, we'd be we'd be addressing that when we come out with our quantified guidance for <unk> for 2021, the next quarter.
Okay, even even just how much the ERP is per quarter I mean that the extra cost that you you don't have that you can provide that at this point.
Thinking.
Could be call it call it two to 3 million per quarter.
Okay Thats helpful. Thanks.
And I guess, just lastly in it and it relates to it to all of that.
Higher level, though if you look at the think about the margins for 2021 EUV for 2020, you've suggested you expect to be able to have.
Have comparable comparable margins year over year, but if we look out to 2021 I guess you've got this.
Little bit of this headwind here from these ERP costs.
It sounds like you feel confident in your ability to hold the margins in nonresidential lumber, even if pricing comes off.
Just any I don't know is there any better on your in your budgeting process, but any preliminary thoughts on margin performance next year relative to this year considering these ERP.
Yes, well first Michael our guidance for margin for this year is to be stronger than we started in 2019.
So because year to date, we're sitting at 15.6 and I'm sure you'll be doing the math, but I'm sure you'll end up most likely in the high 40%.
For for this year I would suspect 2020, one two to be similar.
A couple of factors I do think you'll be able to sustain margins on residential lumber as you know.
As as we're dropping I guess potentially dropping our pricing next year, it's a step function and it will be in line with our cost.
Although there will be additional expenses Thats NDS Jenny.
We will not have those does expenses, we incurred this year related to the diesel hedges because we don't we don't adjust for EBITDA. So those will be adjusting so I do believe that we could end up with.
Similar similar margins next year.
Okay, I appreciate that and sorry, Eric I Didnt realize you had changed your guidance to higher I was just okay, not a profit I misspoke there Paul just noted.
That's all from me thanks.
Thank you Michael.
Your next question comes from Matt seemed high chance of National Bank Financial Your line is open.
Hi, Aaron Kessler and good morning, how are you good.
Good morning yourself could.
Good good I just was wondering if it's possible to provide a clarification on I if.
If you can quantify the EBITDA impact.
Due to the gains on sale of inventory in the lumber business. I mean, obviously there is a lot of volatility from a pricing perspective.
Yes, so we don't detail margins and EBITDA, but I don't know when you joined the call but for the quarter. We did we did guide that it was a 25% or margin gain was 25% related to two volume and 75% related to pricing.
Yes, I think that's really helpful. Thank you very much.
And then in terms of.
Circling back to to M&A I was wondering if you could quantify some of the potential targets that you guys are looking at and maybe you know.
Protocols Optimost interest I mean, I just on obviously its a fluid dynamic.
But any color you might provide their small yes.
Yes, well, it's the targets, we're looking at I'll say our range between and its a wide range I would say you know between the 30 and the 90 million dollar.
Kind of a kind of range.
Obviously, the different sizes of customers of potential targets, there, but you know.
As long as we have a negotiated transaction it's difficult to pinpoint.
Right. Okay, no that's helpful and I had any appetite on on.
On the resi side, we're really looking at.
Some of the.
The ties and utility sort of things.
Oh Im sorry residential lumber.
I think you know.
As of today as we're adjusting capacity in Canada. We're I think we're very well served with our network of plants.
In India U.S., it's really a function of you know.
It's really a function of being able to to to get customer contracts if I could.
A better words in order not multi year contracts, but they are there contracts building or building new capacity would just add if I would say a third player I think there are two significant players in the US market. If we want to position ourselves as a third the third player we'd be creating a lot of pricing pressures in that market. So I think.
Yes to your point it is most likely related to M&A.
The next question that comes to that is.
Due to us market is residential lumber business is really a commodity driven business with.
The margin profile that is more similar to a building materials I guess on the EBITDA and multiple side, which is not really what we've been able to achieve right now with our current residential footprint. So it's a big question because theres lots of thought process that needs to go behind that and understand what the impact would be on or.
Multiples going forward for such a transaction.
Okay excellent and just wanted double check and great color. Thank you very much.
Thank you very much.
There are no further questions at this time I'll turn the call back over to the presenters.
Thank you for joining us on this call today, we look forward to speaking with you again at the next quarterly call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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