Q2 2022 Stella-Jones Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by.
Welcome to Stella Jones Q.
To 2022 earnings conference call.
At this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up.
If anyone has any difficulties hearing the conference. Please press star zero for operator assistance 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 would like to remind everyone that this conference call is being recorded today Wednesday August 10 2022.
I'll now turn the conference over to Eric <unk>, President and CEO . Please go ahead Sir.
Good morning, everyone I'm here with Silvana, Travaglini, Chief Financial Officer of Stella Jones.
Thank you for joining us for the discussion of the financial and operating results for Stella double Jones's second quarter ended June 30th 2022.
Our press release reporting Q2 results was published earlier this morning.
Along with our MD&A it can be found in the Investor Relations section of our website at Www Dot Stella Jones' dot com and it will be posted on SEDAR today as well.
As a reminder, all figures expressed on today's call are in Canadian dollars unless otherwise stated.
I will begin by providing a business update and overview of our quarter and will then turn the call over to savanna to review our results in greater detail.
I will then return with concluding remarks before opening the call to questions.
I'm pleased to report that Stella Jones delivered a robust above market second quarter performance.
10% organic sales growth in our infrastructure related product categories better than anticipated results for residential lumber as well as sequential EBITDA margin growth evidenced by strong cash flow generated this quarters.
Are all of a testament to the strength of not only our business, but our expert team.
These results are attributable to our expansive network and our capabilities in terms of procurement and logistics.
Our utility Poles category continues to see overall growth powered by both pricing and volume gains.
We are expanding our capital investment program to increase capacity and support rising demand driven by ongoing maintenance demand and broadband network development.
In addition, we are leveraging the acquisitions of Cahaba, which are fully integrated into our fold and play a pivotal role in our continued growth, particularly considering current demand.
Turning to railway ties, though volumes were affected by the lower maintenance programs of certain class one operators product demand remains steady.
With price adjustments implemented in the first half of the year and more to come.
By the end of 2022, we are confident in our continued ability to push through higher input costs.
Tightness, we've observed and access to untreated ties is showing signs of stabilization and even recovery at certain regions have started to generate more volumes.
Sustained demand for utility Poles and railway ties combined with contractual price adjustments allow us to better navigate cost increases brought on by an inflationary climate, while maintaining healthy margins.
We work closely with our clients, who appreciate our ability to deliver on their needs, while consistently providing quality and timely service.
The performances of our infrastructure related product categories, largely offset the anticipated pullback in residential lumber sales, which was eased by the higher than expected lumber market pricing and set the stage for a strong first half of the year than initially forecasted.
No Q2 started on slower note our team did an outstanding work in navigating the volatile market.
Market.
And delivered healthy results.
We ultimately concluded the period with solid demand and on target inventory position.
Subsequent to quarter end on July 20, <unk>, we acquired the specialty carrier transportation business of Theres more trucking.
This is more it was a long standing and trusted logistic partners Astellas joneses with a strong operational presence in Ontario, and Alberta and extend the reach across Canada and certain regions of the United States.
As some logistics are fundamental to our business securing these trucking hauling and delivery assets will help us better serve our network and clients through increased control and flexibility in our transportation operations and costs.
I would like to think that Theres more team for their partnership and welcome our new employees to the Stella Jones family.
With a healthy balance sheet resilient margins and cash flows this quarter builds upon the momentum generated since the start of the year, while continuing to deliver on our three year strategic plan.
With that I will now turn the call over to Sylvana for a more detailed view of our financial results.
Thank you Eric.
Good morning, everyone. This morning, we reported net income of $94 million or $1 51 per share for the second quarter of 2022 compared to $115 million or $1.76 per share last year.
During the quarter, Stella Jones generated sales of $907 million compared to $903 million for the same period in 2021.
Excluding the contribution from the acquisition of Cahaba Pasha, and Cahaba Kimber of $15 million and the favorable effect from currency conversion pressure treated wood sales held steady compared to last year.
However, factoring out the pull back in residential lumber sales compared to the exceptional growth last year. We observed that are infrastructure related sales were up a robust 10% as Eric pointed out.
Looking at the results by product category sales of utility Poles amounted to $360 million in the second quarter. This year up from $236 million last year.
Really high sales reached $215 million this year versus $216 million last year.
Sales decreased by 4% organically, mostly due to the reduced maintenance demand a certain class one customers compared to last year.
This decrease was partially offset by the continued selling price adjustments realized agenda quarter to cover higher costs.
Residential lumber sales totaled $286 million down from $330 million.
Yeah.
The currency conversion effect sales decreased 14% due to lower volumes largely stemming from a weather related full stack to the season and lower pricing compared to last year's record high market prices.
Industrial product sales were $38 million.
That's up $36 million last year, largely due to higher pricing for projects related to rambling bridging and processes.
Finally locked in London sale amounted to $52 million versus $85 million a year ago. The decrease stemmed from lower lumber trading activity compared to the same period last year.
Turning to profitability gross profit was $173 million in the second quarter of 2022 versus $197 million.
In the second quarter of last year.
As a percentage of sales gross profit margin was 19, 1% this year compared to 21, 8% last year.
The decrease in profitability, mostly reflected the normalization of residential lenders gross profit, which more than offset the pricing gains that yielded higher gross profit margin for utility Poles and railway tie.
Nonetheless, we did generate sequentially higher margin.
At 19, 1% Q2 gross profit margin marked a significant improvement from 15, 4% in the first quarter. Similarly, our EBITDA margin rose from 13, 5% in the first quarter to 17%, 17% this quarter.
While inflationary pressures impacted cost of all our product categories. A large part of Stella Jones is infrastructure related sales are contractual and include price adjustment mechanisms to cover cost increases a core attribute of our business model.
Turning to cash flow during the quarter the company generated $228 million of cash from operations driven by the strong result, and favorable movements in noncash working capital components.
Changes in noncash working capital increased liquidity in the second quarter, primarily as a result of the seasonal decrease in inventory an increase in accounts payable and accrued liabilities.
As of June 30, our financial position remains solid with $228 million of liquidity available under our credit facility.
Long term debt stood at 820.
$20 million with a net debt to EBITDA ratio of two seven times, primarily driven by the lower trailing 12 month EBITDA.
During the quarter, we repurchased close to one 3 million shares under our normal course issuer bid program for a consideration of $45 million.
Since initiating the program last November Stella Jones has repurchased more than 3 million shares out of an authorized maximum number of 5 million shares for a total consideration of $115 million.
Finally, the board of directors declared a quarterly dividend of <unk> 20 per common share payable on September 23, 2022 to shareholders of record at the close of business on September six.
I will turn the call back to Eric for concluding remarks.
Thank you sylvana.
We are proud of the performance we've seen in the first half of 2022.
We are equally pleased with the initiatives put forward to further enhance our network.
Stella Jones is more than ever in a solid position to build on its strong fundamentals.
The acquisition of Cahaba late last year gave us added manufacturing capabilities to meet strong demand. While the addition of the does more trucking business is further enhancing our logistical capabilities.
Internally, we are on track to invest approximately $100 million of capital expenditures in 2022 to support growing demand from our infrastructure related customer base and to continue to upgrade our facilities.
This includes the addition of new treating cylinders.
Drying capacity and pulp healing yards.
We're also proceeding with the conversion of certain facilities to ease the plan to phase out of Pentachlorophenol and introduction of D. C O Y for utility Poles treatment.
As we are at the mid point of the year I can report that these initiatives are proceeding on schedule and within budget.
Stella Jones is a leading manufacturer of pressure treated wood products in North America, our coast to coast footprint second to none production procurement and logistics capabilities as well as solid customer and supplier relationships are key attributes that will contribute to our sustained growth.
We welcomed a steady demand flow from our business, mostly based on replacement and maintenance driven requirements of critical infrastructure related products.
This in turn ensures we maintain a sound financial position.
Which we can further invest in our operations and pursue strategic acquisitions to complete our product offering and returned capital to shareholders via dividends and share repurchases.
In summary, our strong progress this quarter reaffirms our confidence in our ability to meet the addictive set for 2022 and part of our three year strategic plan.
This concludes our prepared remarks, and we will now turn the call over for questions.
Operator. Please proceed.
Thank you Sir.
Ladies and gentlemen, we will now begin the question answer session.
We'd like to ask a question. Please press star followed by the number one on your telephone keypad.
If you would like to withdraw your question. Please press star followed by the number too.
Please standby for your first question.
Our first question will come from <unk> Patel of CIBC World markets. Please go ahead.
Hi, good morning.
Every morning.
Some of the major composite decking producer's 0.2 large channel destocking over the next two quarters do you see any risks of that playing out as well.
Your restaurant business.
So with regard to composite decking as far as we're concerned.
Stella Jones for our customers. The most part we're holding that inventory so we're managing.
Our supply chain with regards to how demand is evolving so so destocking from the network I don't see that as a potential issue if anything for the first six months of the year composite sales volume wise have been very strong higher year over year, a very strong demand for that product, so I'm not too concerned about.
That for the balance of the year.
Great. Thanks, that's helpful and Eric in terms of the cost pass throughs have you now caught up with all the inflation that you've seen and as you know.
If not what sort of maybe sequential uplift.
On prices remaining in closer ties.
So for for railway ties, we've seen prices of untreated ties stabilizing the market somewhat in the last quarter. So I would you know if this holds I would suspect that we'd be done with certain with the fiber pass through let's say by the end of the year than Theres. Some annual adjustments that are still to come which are <unk>.
Times inflationary adjustments to cover labor costs.
Being careers old cost increases, which are you know, we're all Israeli and discussions to passing through to customers. So far.
For railway ties I think will be you know in February we'll be done with the fiber adjustments probably by the end of the year and then maybe a bit more to come early into next year, where are other cost considerations that need to be discussed with our customers for utility poles.
We keep them just.
Having discussions with customers and increasing pricing.
So we've seen pricing gains Q2 over Q1 and I suspect. This will will we'll have some more opportunities for price adjustments in the next.
In the next few months in the second half of the year.
But then when you sort of reset the clock will start again discussing in 2020 through with customers about sort of cost increases we've seen in 'twenty. Two so I would suspect that we could see more price adjustments in 'twenty three as well in the first half.
Inflationary cost keeps putting pressure on labor on freight and fiber costs.
Okay, great. Thanks, that's helpful I'll get back in queue.
Thanks.
Yeah.
Your next question comes from Michael <unk>.
Of TD Securities. Please go ahead.
Thank you good morning.
Good morning, Mike.
Maybe just start Eric just hoping you could clarify a comment that was included in the press release and then also reiterated at the end of your prepared remarks. So specifically you noted that based on the strong progress made in the first half of the year you were confident that the company's efforts will contribute to the achievement of the objective you set for 2022.
I'm just wondering if you can clarify what 2022 objective you're referring to there.
Well, if you recall, Michael we had disclosed last year in Q3 that we would see sales and EBITDA will be comparable.
In 2022 compared to 2021, we obviously have internal goals, which oh, sorry, not disclose but we're well on our way with the strong start to the year in achieving those.
Okay. So that that that annual guidance, you had provided but sort of a no longer updating regularly you're you're suggesting that.
Those numbers are the targets you had originally set are well in hand at this point.
Correct.
Perfect. Thanks.
Hum maybe secondly, just if you can provide a breakdown of the.
The utility Poles organic growth in the quarter in terms of volume versus price certainly it sounds like price was it was a major driver, but just looking for a bit of a breakdown there. Please.
Certainly so.
Volumes were approximately 40% of our look first and foremost if you exclude FX and the cob acquisition and debt are our MD&A provides us some color. There then I would say our volumes would represent 40% of that growth and pricing would be 60.
Okay, and as we look out a little further maybe.
Beyond the second half and into next year.
How do you feel about your ability to do to achieve the high single digit growth that you target sort of over a multiyear period and utility poles considering the very.
The very strong organic growth you've seen this year, and which will make for a bit of a tough comp next year.
Right well.
To your point single single digit high single digit is still what we would see for next year. This year.
Particular, with all the price adjustments or inflationary pressures, but.
But still remain confident on that high single digit.
When your customers are talking about further project and expansion.
Very recently, the government of Ontario announced a $4 billion broadband project, which utility Poles will be a key component and we are a key supplier in that market.
Similar examples that are not publicly disclosed we were having discussions are like with other customers. So feel good quite comfortable about you know our projection and our three year <unk>.
Our three year outlook with the with that high single digit.
Okay perfect. Thanks, Eric and then just lastly, our residential lumber.
You talked about the slower start to the quarter, but it sounds like it ended with solid demand. So I guess I'm just wondering of the 10% decline in inorganic growth year over year in the quarter.
Are you able to sort of compare what what you were seeing early on in the quarter. When you when you add those weather issues versus what you were saying later on in the quarter and then I guess.
Any outlook on on sort of the second half just as far as demand trends.
Right.
Well so to your point.
April was a bit more difficult when you say weather related it's really April there was a bit more.
Slower start to spring.
But we didnt saw.
Healthy demand.
From our customers and we're able to also maintain adequate pricing although markets have.
Have the collateral.
General lumber markets have.
A decline over that period, we were able to hold our pricing as we had built part of a better part of our program for the year.
So the decline for the quarter is probably similar year over year Similarly for pricing and volume if you want because obviously last year's prices were.
But much higher than this years, but.
We're very happy with the quarter's volume we concluded the quarter with optimal I would say inventory position. So we are definitely well positioned to be able to continue to buy and followed the market trend to be able to adjust our costs to be able to support our customers and to.
To your second part of your question with regards to how we're seeing the second half of the year.
I would say so far volumes have been holding.
Relatively well definitely better than what we've seen last year. If you remember last year was a bit of a.
Of a depressed.
The first quarter as far as demand. So we're definitely not seeing this this this trend this year.
Okay. That's great. Thanks, so much Eric I'll get back in the queue.
Your next question comes from Ben <unk>.
Of those shutdowns Securities. Please go ahead. Please go ahead.
Yeah good morning.
So congratulations for the quarter yeah.
Just to come back on the residential lumber seems to be doing a better than expected how should we be looking at the second half given the drop in the lumber price and maybe if you could provide more color about the opportunities to replenish the inventory.
Given the drop in lumber prices I know, it's a built in typically all cures in Q3 Q4. So I'm just wondering what are you see some unfortunately due to <unk> to increase the inventory at lower levels.
Yeah, Yeah, so definitely been on my in my previous comment on optimal inventory singles that we concluded Q2 with inventory levels that are definitely manageable in terms of days of sales and we are definitely taking opportunities now that are seizing the opportunity to.
Procure lumber at the current market costs, obviously as you know the trend drops you could expect as we could expect to see the retail.
Market wanting to reduce their prices so.
We obviously need to participate in that because we need to follow the trends so at our own rhythm, we will see and participate in the lower retail prices, but we're in a position now where.
Margins should should should hold up relatively well compared if you remember last year, where we ended the quarter with high inventories and we need to do is do we need to do that extra effort to a cycle of inventory. This is definitely not the case this year.
Perfect talking at overall revenue for our residential lumber would it be fair to expect kind of flat or slightly up in the back half, but as opposed to the second half of 2021.
Compared to last year.
Definitely we would expect to be higher in the residential lumber.
Pricing is definitely would be will be more favorable as it stands today, obviously as I just explained our margin profile should should whole historical levels. If you want simply because we're not.
Adding to deal with a I guess, an overstock of inventory.
That's great color and on on the pricing side overall, you've seen discipline have you made any changes to your pricing strategy and maybe try to shorten the lag impact that typically are cures with the movement in lumber price have you made any changes to your strategy.
Well you know I'll I'll take my hat off to our procurement team did an exceptional job in the first six months of.
<unk> 22 in procuring and managing the inventory level. So obviously, we never want to run out of inventory and the product mix, where your customer, which we have not our service levels are extremely high but we did very well in managing inventory levels, and particularly not procuring at the very high prices. So it gives us a bit of that opportunity.
To better manage our inventories so yeah.
Lessons learned a bit from last year, but very disciplined approach the team work together procurement operations and in sales too.
Sure that we as I said with supply customers, all while not overextending ourselves with the with the volatility of the lumber market.
And talking about lumber two centers in the U S. They have recently stated that they are interested in.
A new softwood lumber deal with Canada. So could this be a possible positive for Stella Jones of any thoughts about the potential agreement on the softwood lumber.
So while it's a great question, but you know we don't we don't move a lumber cross border. So we know our Canadian residential lumber category is essentially source and manage with Canadian resource in our Canadian facilities and the same in the U S. So that you know with all these terrorists and Oh for <unk>.
S border movements don't impact us.
Okay. Okay. Thanks, Thanks, very much for the time.
My pleasure.
Ladies and gentlemen, once again, if you would like to ask a question. Please press star one at this time.
Your next question will come from Walter Spracklen of RBC capital markets. Please go ahead.
Hey, Thanks for taking my question. This is James Mcgarrigle I'm on for Walter This morning, Congrats on the great quarter, and I hope everyone's keeping well.
I guess, we are thank you.
On the utility pole business.
Overall in the supply chain capacity.
Listening to your competitors call last week and they were highlighting.
Some rail labor and trucking issues and you just completed the trucking acquisition to help alleviate some.
Some of those issues I assume.
I'm just wondering how much capacity you have in your pulp business to me.
Strong demand that's out there and do you foresee any constraint side, either internally related to production capacity or externally related to a labor or transportation going forward that would impact your ability to meet the demand that's out there.
Yes, certainly.
So with regard to procurement.
The industry in general.
Are you seeing higher year over year demand.
And.
Obviously, it puts more pressure on on all of the suppliers. So it is it is a constant.
The search for the fiber, but the relationships that we've established with our with different suppliers, our own network, our procurement and pull billing yards has given us that opportunity to be able to just to see the higher demand and does the volume increase that we've seen.
You know that we've seen in our results.
With regards to treating capacity not an issue we have sufficient treating capacity.
Currently and are.
Announced Capex program, if you want of $100 million dedicated before our utility Pole Division will cover over the next few years.
I said no extra treating extra drawing.
Capacity and also pulp healing capacity, so right now where I think we sort of foreseen and obviously we've been in.
Been a bit bullish on our expectations and the volume growth, which is materializing. So our initiation of this capex plan is probably right on point.
Two enabled us to keep seizing that opportunity going forward, so under production and capacity side No no no no no current constraint and as you know as I say, we are on budget and on time with our schedule, we should be able to have the capacity to meet.
Our requirements going forward.
From our customers.
The last part of your question is with regards to logistics.
Again, the first and foremost strong logistics team, we haven't Stella Jones and great relationships with a lot of carriers.
Logistics is a very big part of our business.
As you mentioned we.
Completed that there's more acquisition.
The month of July .
Which will essentially service, Canada, and a bit into into the U S. But we also have a similar fleet and trucking business in the U S.
Essentially focus in the South East U S. So railway ties in that region and southern yellow pine Poles.
Great flexibility for us.
To your point finding trucking.
Services is up.
A daily challenge, we're lucky we have strong relationships with different partners that services.
But the fact that we run.
I'll say, a smaller fee because it maybe services, maybe total 5% of our needs like Theres more would be 5% in Canada and the one that we have in the U S would probably service 5% of our of our hauling needs in the U S. It gives us great flexibility to get deliveries on time when customers call us with emergency requirements.
It gives us that chance to to be that supplier. That's always there for them seven days a week. So it's been a lot of work, but you know where our where we're able to march through and deliver deliver as our of course, our customers need a needed materials for their maintenance projects.
I appreciate that that's good color.
I have another question on the railway tie business and kind of your outlook into 2023.
So on one hand.
Are you seeing the rails delaying any capex given how congested rail networks have been and if so do you expect that to drive potentially.
Science growth into 2023, and then the other part of my question is Theres been some issues with.
Assessing untreated ties and usage.
Your businesses scale.
Being advantageous versus smaller competitors and potentially driving.
Some outsized growth versus what potentially the industry might be expecting into next year.
Right.
So you know we are.
With our industry always wait with anticipation the railway tie association meeting that occurs in the fall where class ones would formally communicate their maintenance programs for next year. So obviously I have no no secrets said, we're like everyone else, we're waiting to see.
What we are seeing is in general class one customers are maintaining their networks at I would say well they have at historical levels and their adjusted they're trending upwards a bit.
Yes.
And I think that's what we're seeing right now and we talk about.
Certain class one meeting maintaining a bit a bit lessened in previous years that being said to your point networks have been bogged down for the year Theres been lots of traffic on the rail networks in general, which is creating usage of the network and will eventually lead to some to some required maintenance now will that come in 2000.
Three or 24, I think it's it's it's somewhere in that 12 to 24 months.
<unk> that we know we will see that that increase I don't expect it to be like a big jump I think it'll be just a gradual pick up.
I fully I have great confidence in the engineering departments.
At the railroad companies.
In the matter of being able to monitor the network usage and being able to you know to run their networks in a safe manner and I'm quite confident that for those reasons, we will see the maintenance requirement increase in that window.
Okay perfect.
A quick follow up and then I'll turn the line over you had on the utility Poles, you had mentioned high single.
Growth was going to happen in 2023, and again that was on top of potentially 2022 growth that's going to come in.
Above the high single digit range that you've guided to.
That is correct.
Thank you very much and congrats again on a good quarter.
My pleasure. Thank you.
Your next question comes from Michael.
Of TD Securities. Please go ahead.
Thanks, Yeah, I just wanted to clarify or ask you a question about the margins. So it certainly it sounds like in the quarter.
The margins you generated maybe you could just clarify it sounds like this is a fairly sort of normalized level of margins. There was nothing unusual going on.
And I guess I'm just wondering if we look forward is this sort of level of margins I know, there's some seasonality, but are you performing in front of a normalized rate and from a margin perspective and is that sort of expectation you're able to carry on going forward here.
Well.
Obviously.
The second quarter is typically our highest EBITDA margin quarter, and I think thats.
Probably an indication of what we've seen.
So far this year to your point normalized compared to historical.
Excluding last year results, which were a bit exceptional.
So going forward I would suspect that Q3, and Q4 would be more or less in line with what we've seen in previous years, you know, maybe it's slightly better as a percentage simply because of <unk>.
Our pass throughs and pricing.
Find new railway ties and utility Poles.
Okay. That's helpful. Thanks, Sir.
Yeah.
There are no other questions from the phone lines I would like to turn the conference back to Mr. <unk> for closing remarks. Please go ahead Sir.
Well, thank you Michelle and thank you to everyone for joining us this morning and have a great day.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank everyone for their participation and ask you to please disconnect your lines.
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