Q1 2022 Stella-Jones Inc Earnings Call

Good afternoon, Ladies and gentlemen. Thank you for standing by. Welcome to Stella Jones. Q1 2022 earnings conference call.

At this time. All participants are now listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to K up for questions.

If anyone has any difficulties hearing the conference, please press Star, followed by zero for operator systems at any time. Before turning the meeting over to management, Please be advised that 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'd like to remind everyone that this conference is being recorded on Wednesday, may eleventh, twent y and twenty-two.

I'll now turn the conference over to EP commercial President and CEO . Please go ahead.

Good afternoon everyone on here with slana traveling Senior Vice brother and Chief Financial officers, dllleg Jones.

Thank you for joining us for today's discussion of the financial and operating results for teloones's first quarter and in March thirty-first 2020 -two.

I will provide an overview over quarter. Then I'll turn the call to salvana to review our results in greater detail. I'll then return with concluding remarks before we open the call to questions.

Before that, let me start with a brief recap of our annual memeaning of shareholders, which we held earlier this morning.

All resolutions brought forward to shareholders were approved, including the election of all nominees to a Board of Directors, including miss ara O'Brien as a new Director, the appointment of auditors and support for our approach to Executive compensation or say, on pay.

Turning to our results, our press release reporting first quarter results was published earlier this morning and can be found on the steaones's website at W Stella Jones com in the Investor Relations section.

It's being posted on Cedar today as well.

As a reminder, all figures expressed in today's call are in canaining, in dollars, unless otherwise stated.

First quarter sales exceed last year's Q1 sales and met expectations.

This was primarily attributable to increase in sales in our infrastructure-related product categories, which were up 14% in Q1 versus the same quarter last year.

Within our infrastructure-related businesses. Utility polls benefited from increasing pricing, strong demand from maintenance work and broadband expansionsteady demand for transmission pollles and contributions of the khaa acquisitions.

As you recall, we closed the acquisition of khaa pressure treated forest products and khaa timber in November 2021, So this was our first full quarter being able to leverage the acquisitions.

Additionally, our kirkken leke pole plant, which we recommissioned last year, played a valuable and timely role in supporting strong customer demand during the quarter.

For railway ties, the trend was also positive, although the tightness of untreated ties in the market has continued for a longer period than initially anticipated.

Q1 rail reti sales were up, mostly driven by pricing, while volume remained unchanged.

As expected, sales were residential lumber decreased from last year.

Demand for pressure treated lumber in the first quarter last year was exceptionally high and we were expecting lower sales this quarter.

Sales were nevertheless higher than anticipated in this seasonally slower pion.

The second and third quarter will be better performance gauges for this product category.

In terms of margins there remained under pressure due to increasing input costs. We continue to anticipate a certain degree of lag as contractual price adjustments are being implemented.

With that, let me turn the call to sillvano for a detailed look at our financial performance.

Thank you Eric, and good afternoon.

Earlier today we reported net income for the first quarter of $46 million, or 73 cents per share, compared to $56 million, or 85 cents per share, last year.

During the first quarter of the year, we generated sales of $651 million, up from $623 million for the same period in 2021.

Excluding the contribution from the acquisitions of khaa pressures and haa timber of $15 million, pressure treated withod sales rose $21 million or 4%.

This increase was essentially driven by strong organic growth in our infrastructure-related product categories, namely utility pollles, railway ties and industrial products, partially offset by lower residential lumber sales, as we lapped a very strong first quarter last year.

Looking at results by product category, sales of utility polls amounted to $254 million in the first quarter of 2020.

Up from $206 million last year.

Excluding acquisitions, sales rose 16%, led by continued improvement in making demand selling price adjustments to reflect cost increases.

And a more favourable sales mix, mainly due to higher fire resistant RAP pole sales.

Railway tiai sales reached a hundred and $75 million this year, up 11% from $158 million last year.

The variation essentially sent stems from selling price adjustments with cost one customers to reflect higher fiber costs and higher pricing for noncost one customers.

Volume remained relatively stable compared to last year.

Residential lumber sales told $132 million, down from $166 million last year.

As lower volume following exceptionally strong Q1 in 2021 was partially offset by the higher market price of lumber.

As Eric mentioned, a sales decline was expected this quarter.

More importantly, stellar Jones's momentum remains solid in this product category as this year's Q1 sales are more than double are prependan first quarter sales of $58 million.

Industrial product sales were $33 million, up from $28 million last year, largely due to greater demand for pilings and timber.

Finally loss in lumber sales amounted to $57 million versus $65 million a year ago. The decreased stems from lower lumber trading activity campaignt compared to the same period last year.

Turning to profitability, gse profit was $1 million in the first quarter of 2022, versus $112 million in the same quarter last year.

As a percentage of sale. Gross profit margin was 15% this year compared to 18% last year.

The decrease in absolute dollars mostly reflects the lower sales volume for residential number when compared to lastyear's exceptionally strong demand.

Meanwhile, the reduction in gross profit margin is mainly attributable to the time, like in contractual price adjustments, as rising cost outpaced selling price increases during the quarter.

As a reminder, a large part of celioses's infrastructure-related sales are contractual. Include price adjustment mechanisms to cover cost increases.

In a rising cost environment such as the one that we are presently into the normal time line before selling price adjustments reflect the new input costs. Temporarily impact margins.

Turning to cash flows, this year's first quarter cash flows from operating activities, before changes in noncash working capital components and interest and income taxes paid, was $88 million compared to $1 million last year, mostly reflecting lower profitability.

Given the normal seasonal increase in working capital, changes in noncash working capital components, reduced liquidity by $207 million this year versus a reduction of $23 million last year.

As a result, cash flow used in operations was $136 million in the first quarter of 2022, compared to $141 million last year.

We repurchased approximately one million shares during the first quarter for a cash consideration of $39 million.

Since initiating the current normal course issuer grid program last November , stelly Jones has repurchased more than one point seven million shares out of an authorized maximum number of five million shares.

Our financial position remains sound, with a net debt to EBITDA ratio of two point 75 times and $86 million available under our credit facilities.

The variation in both metrics during the quarter stemmed from higher seasonal working capital requirements.

Finally the Board of Directors declared a quarterly dividend of twenty-centth per common share, payable on June twenty-second 2022 to shareholders of record at the close of business on June first.

I will turn the call back to Eric for concluding remarks.

Thank you, slovanna. Let me take a moment to add some color as to how we see our business progressing.

We are optimistic about utility bollles, thanks for a combination of price increases and strong cold demand, which I expressed earlier.

This aligns with our decision to grow capital investment in the category between $9.1 billion over the next three years.

To date, purchase orders have been finalized for poor pillars, dry kilns and treating cylinders, with deliveries expected by the end of 2022, all of which will help us continue to meet demand.

We also continue to work closely with our customers to face out pentacorpheno. We now have two of our plants offering D coi and by the end of 2020 two we expect to convert between two and four more of our training facility to the coi.

Our investments in future, growth notwithstanding, will face some short-term challenges.

Raw material sourcing will continue to be hurdle this year and likely beyond. Right now, access to untreated ties is presenting a challenge and has led to fiber cost increases.

We had similar issues in 2021, and it was a strength of our procurement network that set us apart when it came to successfully meeting customer needs. The flexibility of our customer agreements allows us to recoup most, if not all, of any cost increases, albeit on a delayed timeline.

That can result in short-term headwinds for our margins, but it does not impact the solid fundamentals of this business.

Turning to residential lumber, we continue to see volatility in the price of a lumber, which started at the beginning of pent of the pandemic, and has continued until today.

While this year's price swings are not as extreme as 2021, we have still seen prices moved by more than $500 a thousand board foot from the low to the high during the quarter.

That being said, the residential lumber division is operating where we expect it would be over the long term.

In summary, this quarter provides a good start in laying the foundation to our three -year years stratedgic plan. Our business remains very strong. dem from our infrastructure-related product categories continues to grow. We have a strong balance sheet as season and sophisticated team with a well-developed relationship network with customers and strong procurement and distribution capabilities. We intend to pursue acquisition targets as we return capital to shareholders. In short, we are building upon a well-established and strong fundamentals.

That concludes our prepared remarks, and we will now turn the call over to your questions. Can I please ask the operator to begin?

Thank you. If you'd like to ask a question, please press Star followed by the number one on your telephone key pad to D your question. Please press that one again. Our first question comes from Walter frackland. You C capital markets. Please go ahead, your line is up. Thanks very much, morning ning are. areyou doing your' Walter good? Good, I guess my. My question is to start is really to to see how your guidance both for this year and into the three year guide you provided, how the quarter is played out to that and it would seem that on the surface at least, and I know you give some color about waiting to see how the summer months go in residential ummmer And so on, but it looks like you're off to a very strong start. So my question, I guess, starting with ties and polls, where you are and a guiding, low single digit ties, high single digit polls, your experience in Q1 has come up out of the gate a lot stronger than that. And just curious if your' you see upside. Now to your twenty three I think you were talking about flat your of a year- if your twenty three target would be, or your twenty three guancefor the full year is is moving higher, and whether it's enough yet to start to move higher. Some of your, your guidance for the full for up to 2020 three in those in those two segments.

Thank you, Walter. That's your your question. Talking about the three main product categories I get the first general comment would be: it is a bit early to think about readjusting the total guidance for the full three -year guidance. However, as you mentioned, strong start with utility polls driven in part by volume, as very healthy maintenance that is supporting that number, but also price increases, which are driven by increase in fiber cost and increase in oil cost. I would suspect, as we look at how this year unfolds, as we were thinking about that high single digit, could it be the low teens for this year? Seeing how our pricing has started off this year, I would probably say yes, that that would be a fair statement for this year. But what was still? Maintain the high single digit for the three -year period.

With regards to railway ties, again strong started the quarter this year, proprompted essentially all by pricing in the cost passed through of price increases we saw in Q4 last year and again more increases to come with what we're seeing in Q1. We still remain cautious with railway ties because of the tightness of availability in product, if I need to describe this year. But the dynamics would be flat. Probably pricing would be up but I think it would be probably offset by some volumes and I guess the caveat there is: if availability of railway ties sort of opens up better than we're seeing right now for the second half of the year we could potentially get back to that low single digit growth for railway ties.

Last but not at least the residential lumber product category we're very happy of how we started off the year we've got we've been very tactical on on the procurement side to make sure that we maintain very reasonable cost profile. Even though the market has at one point to the quarter isn't to high lumber prices but our team was very smart about huding. They went about that so.

We have a good start to the year. Yes, still early to understand fully, to demand, how that is going to unfold at the retail level, although R and our indicators do demonstrate some, still some strong interest for renovation. That being said, our guidance was that in our three -year guidance we would be at 35% of the 2, our 2, 29.019 thousand benchmark, and I think that's still hold.

That that's. That's great. And just my follow up: is it actually exactly on that that? That point Eric, and that is the 35% diidance of prepandemic for residential lum right, I guess when you, when you came up with that number the first time, get given the volatility in the uncertaintykey, in predicting that you know three years out as to what what what, what your revenue stream will be in that segment, must have been very difficult. I get a sense that you, you know you probably made an educated guess with a little bit of a conservatism built into it, if I know you well what. My question is: what point and what markers are you looking for that would change that 35%? What can we follow or look for? That might have been part of how it, the input into how you derived your 35% that we could, we could follow in track to see if it's doing better or worse when we look out here 2020 or your three year guide right well, you know, the basis is really the it would cause the raw materials with the dimensional lumber. Obviously, random life is something that you know we look at and we will get the future pricing there. So you know obviously, date prices are probably sitting in the 11. you know, 11 hundred, you know.

Ballpark number futures you are sitting at, you know 65.7 thousand or actually hard that sorry. Futures are saying more around the 850. So you know that that would give you a sense of you how we look at it. That being said, twentthousand 19, you know prress numberumber was around the 500 and when we sort of did our educated guess where we we use about 650. So that gives a bit of an idea how to look at it. That's, that's very helpful. Appreciate the time. Thank you very much. My fghter, Walter.

Our next question comes from benois palylier, from dejpe. Please go ahead, your line is open.

Yes good afternoon and Congratulations for the quarter. When they look at the pressh yes, when we look at the residential number, you mentioned some pressure on the margins driven by obviously lower sales and increasing input costs. Could you quantify maybe the impact in Q1 and the timing of the lag before you get back to two more normalized level?

I won't. First the answer to the question that like is essentially behind us. We we, we completed the shipment of certain orders earlier in Q1 that were booked in Q4 where we're pring still to move some inventory in the market to lower our inventory levels. So' a bit of the result of that. So that had the impact, but that was really called it the first half of q,1. But' that's all behind us at this point. If, if I look forward, we've reset our prices for the kenadian market for the second quarter, pretty well established in taking in consideration occurring cost profile, even consering the volatility we saw in the first quarter. So I think we're well positioned going forward.

Okay and when we look at your overall EBITDA margin, 13 and a half for Q1, which tends to be typical given the seasonality, But given the improvement that we've seen and the completion of the shipment, what about the magnitude of the improvement we could expect in Q2? Would it be more similar to two thousand and nineteen, 2020 or 2021 ?

Well the. So you ably right, the first quarter is 13 and a half is probably tyficult for a first quarteras we usually see volumes as a whole for all product categories increase or being higher for Q2 and Q3. Pricing will have a play in the in the margin and the pricing. So if I think about utility polls, the first quarter we did not see the full impact over price increaseases and we will see those fulfill 100% in the second quarter and going forward. Same for railway ties. Know we had price increases in the first quarter driven by increase costs of rail ties and I suspect that on July will have other increases. So, as you can understand, with railway ties we're still chasing that, that margin profile, and you So it will. I mean we will keep increasing our pricing and our margins will will recuperate faster as soon as the cost, the cost increases, stabilized.

Okay that's great in for utto people. What was the breakdown between volume and pricing and how important was the contribution of the fire retard? The sales bolow in the quarter.

Right So we'll excluding kha because we carvered out it in the mdn. If I exclude khaa, the increase was about 50% volume and 50% pricing. The fire wrap: when I talk about it, we include that. We included it in the pricing piece and, as we've talked about in previous calls, the fire wrap is about now 10% of the product category and we think that's where there's a good, good estimate to use for now as we're talking to different customers about adoption of the product. But it's still under analysis and review, but the current customer and not have adopted it and it's fully, it's fully in place.

Okay perfect And just lastly on the capital deployment given your overall working the consumption of about two million Q1. syvanna do you still feel confident to finish the year with an overall consumption of about five million and would you still feel confordable with the one Hundred million of CapEx is it a good proxy for 2020 -two.

Yeah So the the assumption I guess with the five million, I guess therejust two factors that take into account one is you know.

It's a reasonable number but obviously always taken into account the market price of number if there's any significant variation. There that could impact that number as well as Eric mentioned the availability of ties. We do expect a gradual increase in availability over the nine 12 months but ifever there is a difference in the market where there is more availability in the second half that would also impact that number that we.

We put forward.

Okay and CapEx for the last part, one million is. Is it still a good proxy for 2022? It is, it has not changed it still a good estimate.

ok Thank you very much.

Thank giana.

Our next question comes from hmier Patel from CIBC capital markets. Please go ahead. Your line is open.

Good afternoon.

Eric, could you give us maybe the breakdown in res lumber how, how volumes feared in in Q1? And also, are you seeing any signs from your major retailer partner about maybe end used demand differing in terms of sort of contractors versus DIY?

So for for residential, So for the resance level: product caries in Q1. Obviously So then explain.

Year-over-year sselveses are down and the the volume piece of is call it the 80% compared to, compared to the previous year and the pricing actually being a bit better than last year, but slightly, So call it. You pretty much all in the volume part of it. If you remember Q1 2021, there was a lot of expectations for a strong R in our year season in a lot of retailers and and dealers stocked up on inventory you just wanting to make sure they had the product to sell in store. So So that's a bit of the comparison, if you want, as far as what we're hearing today from our customers were a big box level.

They're not. They're not, they're not shying away from their expectations for the year so that you relatively stable. You know, between between us, as we're discussing today and approaching behind us spring in Eastern Canada and how comebebackcaon ontararea was was low to start to remain cold for a long time. You know we have some Snow So I would say that the volume to a slow start in in April . But as I look at daily shipments so far in amazing things are picking up and looking good. So right now not really no signs of a downturn on demand. And more precisely, you asked about contractors that do it yourself is. So you know we do have inststore reps. we do have conacts with the contractors. We understand that they're pretty much off, fully busy you for the balance of the season. They do it yourself is I mean you know.

I can again point to the R and our statistics. But the proof will be when do it yourself as will walk through in the store and actually pick up the product. The prices still relatively high if you compared to last year, which could have been a bit of this incentive, But right now we remain really optimistic and we've done a good job also managing our inventory levels internally. So I'm not- I'm not concerned of, let's say, repeat of last year.

Fair fair enough and Eric. What impact do you expect the construction strike in Ontario to to have on the res lumber business and can you remind us how much off that business is from Ontario?

Yeah I would say good.

For our Canadian business it's a good 50% of our sales are in the Ontario market. The strike referring to I believe it is mostly framers. I don't think it's impacting that the independent contractors and that was my understanding. So obviously these framing is slowing down. Housing is slow down maybe some of those. So those decks that are buil on new homes won't get built but.

The team right now doesn't seem too concern. A concern about that part.

Great that's all I had. I'll turn it over thanks's. Thank you very.

Our next question comes from Michael tepm from TV Securities. Please go ahead. Your line is open.

Thank you, good afternoon.

D like: how are you good, Thank you. So just picking up with a question on the residential lumber side. Eric, you mentioned that you're not seeing any signs of a slowdown in demand. As you sort of look at how things have been trending so far through the second quarter. I guess.

I'm taking that to be more of a comment sort of in terms of the progression of Q2 versus Q1. I'm guessing on a year-over-year basis the comp is still pretty tough from the prior year and would you expect to associate some volume decline on a -over-year basis, or if you can clarify that, that D be helpful.

So the comp is difficult you're right because of sales price. Last year. We're high hired than what we're foreseeing for the four to quarter. This year. However is we think about last year sales dynamic for initial leverty in Canada. Anyhow we did see a decline in demand which was offset by the growth in the sales price. So that being said for the second quarter yes a difficult comp I think the.

The lower sales price will to some extent ll get compensated by better volumes, but it is still a difficult comp when I think about the year where we could most likely match up to last year's numbers would be in Q3, where things really slowed down in see be for now that slows that similar what that would not happen in the third quarter.

Okay So, So in Q2 it's it's it's a bit different than Q1 then, and just in terms of the composition or residential number, you you'd actually expect volumes to to be similar or possibly up even, and it's on on the pricing side where you'd give it back.

Yeah.

Okay perfect. And then on the on the margin side, you sort of ran through a couple of the the various product categories. Is it fair to say that the the only area where you're sort of lagging now is is really on the on the ties side. When you look at the product categories from a.

In terms of catching up with the cost increases through the price increases you've put through So yes for ties definitely but also also does some extent also for polls. So.

The contracts we have, utilities are annual and the adjustments on pricing are typically annual. A large part of our contracts have the anniversary in the first five months of the year, let's say, but they do actually have anniaries throughout the year, but that's the majority is concentrated in the first first few months of the year. So as we're sort of adjusting for fiber and oil cost increases that we saw this year and we're starting to see this year as well those, those pric are coming coming into a sexual. Back to my comment about not seeing the full effect of price increases for Q1, but there's still some more price increases to come through in Q2 4, a customer that would have their contract anniversaries in April and may, for example.

Okay obviously, you don't break down the margins by product categories, So if we're looking at the entire company's margins, is it fair to then conclude though, notwithstanding some ongoing?

Lag impact and catch up the. The margin pressure you'd expect to feel in Q2 should be less pronounced than it was in Q1, and I'm not talking seasonally or understand Q2's seasonally strong on a year-over-year days. Is it's less PR exactly? Would we would? Our sentiment is that we would see less, less of the margin pressures in Q2.

Cape perfect, and then.

And then, just in terms of the acquisition pipeline, can you provide an update on what you're seeing, what's happening there? And also don't know if anything's happened here yet, but last quarter, when you unveiled your three -year plan, you had talked about the possibility of evaluating.

Growth opportunities and adjacent businesses. If there's any progress or developments or sort of preliminary comments on that, that'd be helpful as well.

No certain So we So the top line, commented I there. There's no big news to share with with anyone today we continue to have discussions with the different targets, the treated withod sector and, as far as analyzing adjacent adjacent businesses, our internal reviews progressing well. We have a gop or task force internally that's looking into this and the Board is being the brief on our progress and we're discussing and sharing strategies at that level to make sure that we we're sounding superboard, sounding all the ideas we're we're bring forward, But so far not nothing you to do able to disclose today.

ok and.

Sort I took what your response to be more focused on, sort of a latter part of my question. Just as far as the.

The more normal course- acquisitions, if you will- that you'd be targeting and in your existing product categories. Really, there's nothing to report on as of yet, but just the pipeline and sort of the opportunity set it is. Are there some things that are?

That you're looking at at the moment. That could come to fruition at some point, or is it? Is it?

Is it to hard to took all at this point?

So we did guide like two to three million in potential pool of acquisitition and in there yes, we're talking to targets.

There's some discussions and some interest, but but, but don't want to commit to anything. Anything in the next couple of months. Let's say, but're, we're still very reactive, then discussing with with different parties.

Understood ok, Thank you.

Thank you.

As a reminder, if you'd like to ask the question, please press Star, follow by number one on your telephone key pad. Our next question comes from maxims. That just from National Bank. Please go ahead, your line is open.

Hi good afternoon.

conestional mixing.

And as I just wanted to start with your capital investments and was wondering if you can please discuss some potential benefits of these projects, maybe how you are thinking internally from either ricc perspective, or how it could be helpful for for labor, productivity margins, So forth- because we're still talking about growad- to the invest.

Yes a good point. So when I think we're referring to the capital investment that we're targeting, especially for utility polls, exactly So we know, we get also know the range of $95 million with our forecast projections on sales growth and obvious volume and pricing and margin growth. We were looking at a payback somewhere between three to four years.

So some of these investments are in existing facilities. So as we're enhancing our for productivity and production capabilities, we're leveraging the current workforce. So that's one of the benefits of our plan and not wanting to, let's think, build a whole brand you planted in new area, having to recruit an entire team and train them. However we are looking into some some new procurement yards in different geographical reasons in the country and now that you will need to recruit some employees, but those teams are usually smaller crews- pole paling yard- we might, we might need.

10 around 10 employees. Let's say if you want- and we definitely feel that in the regions that we're looking to expand we have that opportun to be able to hire the labors. We have the luury of selecting the communities where were going with. That is oneever our selection criteria, you want.

Okay So we'll helpful. Thank you. And then last question, just if you can please comment in relation to the progress. So go have the integration. How? How is going in any color there?

Yes So Q1 was the first full quarter. So as of the end of the year last year systems were fully integrated. Q1 was still a bit of a training ground to sub extent educating employees on our year. Pie system per inventory systems requires a bit more diligent providing more data. So there was still some training ongoing I feel that at the end of the first quarter we had things pretty ready pretty smoothly. The kaba facilities combined because they're they're both of the agcracquwith es jac. If you look at that footprint in our case. It's probably the equvalent of.

three or four of our plants. So it is a, you know it's ait.

two great production production units, a lot of potential and power to produce a lot of volume, which we think we've pretty much got under control. But you know it takes a bit of time when you have such a big footprint to manage, but things are gone well. Very impressed with the time that in our team has invested in the first quarter, spending time there with employees and training and monitoring performance month over month. But I think we're about there, starting in Q2.

Okay excellent. That's it for me think so much.

And take ullisten.

We have no further questions in queyou. I'd like to turn the call back over to Eddie fciional for any closing remarks.

wellthank you julianne, and thanks everyone for joining us today.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

The host has ended this call. Goodbye, lannning matterharakiovervover.