Q4 2022 Stella-Jones Inc Earnings Call
Speaker 1: Good morning and thank you for standing by. Welcome to Stella Jones for quarter 2022 earnings call. At this time, all participants are in a lesson only mode.
Speaker 1: Following the presentation, we will hold a question and answer session. Instruction will be provided at that time for you to queue up for questions.
Speaker 1: If anyone has any difficulties hearing the conference, please press the star followed by zero for a perter assistance at any time. I would like to remind everyone that this conference call is being recorded on Wednesday, March 8, 2023. Please note that comments made on today's call may contain forlooking information.
Speaker 1: and this information by its nature is subject to risk and uncertainties.
Speaker 1: Actual results may differ materially from the views expressed today. For future information on these risks and uncertainties, please consult the company's relevant filings on CEDAR.
Speaker 1: These documents are also available in the Investor Relations section of Stella Jones website at www.triplethevolume.com
Speaker 1: We have also prepared our corresponding presentation, which we encourage you to follow along with during this call. I will now pass the call over to Eric Vachon, President and Chief Executive Officer of Stella Jones. Eric.
Speaker 2: Thank you, Julie. Good morning, everyone, and thank you for joining us today.
Speaker 2: I'm here with Silvana Travelini, Senior Vice President and Chief Financial Officer of Telejones, and we thank you for joining us for this discussion of the financial and operating results for Telejones' fourth quarter and its December 31, 2022.
Speaker 2: Earlier this morning we issued our press release reporting 2022 fourth quarter and year-end results.
Speaker 2: Along with our MDNA, it can be found in the Investor Relations sections of our website at www.thelajones.com and will be post posted on Twitter today as well.
Speaker 2: As a reminder, all figures expressed on today's call are in Canadian dollars unless otherwise stated. I will begin today's call by providing a business update before turning the call over to Silvanna for a more detailed financial review.
Speaker 2: I will conclude the call with a progress update on our 2022-2024 goals before opening the floor to your questions.
Speaker 2: I'm proud this morning to begin the call by stating that 2022 was a year of exceptional performance for Stella Jones.
Speaker 2: The company generated robust financial and operating results, and in doing so, demonstrated and reinforced its leading position as a key player in the industrial infrastructure product space.
Speaker 2: We achieved total sales of $3 billion, up 11% from nearly $2.20 billion last year, and our EBITDA increased 12% to a record $448 million.
Speaker 2: In 2022, represents the 22nd consecutive year that the Selajeons has posted an annual sales increase, which speaks to a resilient business model and the strong fundamentals in which it is
Speaker 2: Our sales growth was largely attributed to the strong performance of our infrastructure-related product categories, namely utility poles, railway ties, and industrial products which all meant or surpassed our targets.
Speaker 2: Allow me to briefly review the performance of our product categories in 2022.
Speaker 2: Our utility polls product category delivered exceptional results throughout 2022.
Speaker 2: With sales growing to $1.2 billion compared to sales of $925 million last year.
Speaker 2: Utility poll sales benefits from strong market dynamics and to contribution to our recreative acquisitions.
Speaker 2: On an organic basis, utility pole sales increased by over 20% in 2022. Our pole procurement team rose to the challenge this past year, leveraging relationships to meet growing customer demand and laying down the foundations to access new procurement areas.
Speaker 2: We are currently seeing significant investments being made by utility companies to ensure the infrastructure will support North America's future needs, and we expect this trend to continue.
Speaker 2: network use, support demand generated by electric vehicles, and build newer and stronger lines, all while looking to their supply partners for long-term commitments.
Speaker 2: On the railway tie front, sales reached $750 million in 2022, compared to sales of $700 million last year, an organic growth rate of 4%.
Speaker 2: Railway Thai sales benefited from sales price adjustments to cover higher costs, but class 1 volumes pulled back year over year.
Speaker 2: Procurement in the latter part of 2021 and the first three-quarters of 2022 was challenging.
Speaker 2: The tightness and untreated railway tie availability drew down our dry inventory position.
Speaker 2: This resulted in a rise in untreated tie costs and we progressively pass these costs through to our customers.
Speaker 2: Capacity usage also increased given the long production cycles when treating ties that are not completely dried, a process also referred to as Boltonizing.
Speaker 2: also increased given the long production cycles when treating ties that are not completely dry. A process also referred to as boltenizing. On a positive note,
Speaker 2: More untreated ties became available in Q4 2022 and in the first month of 2023.
Speaker 2: At the current rate of procurement, untreated tie inventories will be replenished by mid-year with optimal dry inventory levels being reached in the second half of 2023.
Speaker 2: This will in turn reduce the number of both nice charges and open opportunities to address more customer demand which is being driven by steady rail road maintenance and ongoing infrastructure spend.
Speaker 2: Industrial product sales grew to $143 million compared to $121 million in 2021.
Speaker 2: The organic increase of 15% was mainly attributable to higher demand for industrial products such as piling, timbers and bridges.
Speaker 2: Our industrial product category perfectly complements our rail and utility offerings and will benefit from infrastructure public spending.
Speaker 2: Sales for residential lumber pulled back this year.
Speaker 2: to $744 million in 2022 from $773 million last year, but did not pull back as much as expected.
Speaker 2: Residential lumber sales continued to benefit from above normalized pricing levels in 2020.
Speaker 2: Our Residential Lumber Product category supports select customers that recognize the value of Stella Jones' Premium Lumber Program and complementary products and services.
Speaker 2: Over the years, we have proven our ability to keep retailers and big box stores well-supplied, which in turn has enabled our customers to grow their market presence.
Speaker 2: On the acquisition front, 2020 was the first full year of contribution from our CAHABA acquisition, which was completed in the fourth quarter of 2021.
Speaker 2: Cahaba, now known as the Stelladon's Briarfield Facility, is a well-established producer of treated wood poles and engages in raw material procurement at its treating operations in Alabama.
Speaker 2: The facilities performance far exceeded our expectations this year contributing to our sales growth in utility poles.
Speaker 2: Accretive acquisitions remain an integral part of Stella Jones' growth. In 2022, we continued on this path with the purchase of the Wood Utility Pole manufacturing business of Texas Electric Cooperatives, or TEC, in Jasper, Texas.
Speaker 2: TEC, joining our fold, added a 43rd wood treating facility to our network and further expanded our capacity to supply the growing needs of North American utilities.
Speaker 2: This mark our second wood treating facility in the state of Texas, the second largest economic region of the United States, and we expect TEC to enable us to leverage the economic scale, the economies of scales, while expanding our customer base.
Speaker 2: North American demand for utility poles is strong and as mentioned earlier, we expect it to continue to grow in the coming years.
Speaker 2: As we prepare for this growth, securing fiber is top of mind.
Speaker 2: With this, I am pleased to announce that Stellar Zones acquired Industries Pollen Piling in February 2023 for a consideration of $12.5 US million.
Speaker 2: Industry is specialized in procuring, peeling and drying SYP poles and is a great addition to our existing networks of pole peeling facilities.
Speaker 2: We continue to consistently
Speaker 2: we consistently seek accretive acquisition opportunities that will support our growth for current businesses as well as expand product offering for infrastructure customers.
Speaker 2: In addition to being underscored by robust operating and financial results, 2022 also demonstrated the resilient nature of our business model, as well as Telzone's capability to deliver outstanding performances amidst challenging macroeconomic conditions.
Speaker 2: The global economy continues to wrestle with inflationary cost pressures, fluctuating commodity prices and supply chain constraints. Regardless of these trying circumstances, I am proud to say that Stella Jones was able to meet demand and continue to serve our loyal customer base.
Speaker 2: The global economy continues to wrestle with inflationary cost pressures, fluctuating commodity prices and supply chain constraints. Regardless of these trying circumstances, I am proud to say that Stellagens was able to meet demand and continue to serve our loyal customer base. This can be attributed to a number of factors.
Speaker 2: First, Stella Jones benefits from long-standing procurement relationships.
Speaker 2: Our skilled and resourceful procurement teams were especially diligent in securing the fiber needs to meet demand, which enabled us to continue to provide essential products to our customers.
Speaker 2: Second, our Contractual Sales Agreement structure continued to provide us with the ability to pass through cost increases.
Speaker 2: which helps us insulate from rising costs particularly important in the current inflationary climate.
Speaker 2: And finally, our expansive North American presence places us in a unique position to serve our customers both efficiently and cost-effectively based throughout Canada and the United States.
Speaker 2: The ability to continue to deliver value and returns to shareholders in 2022 is another indication of a resilient model and solid business fundamentals.
Speaker 2: We ended the year better positioned than ever to continue our growth trajectory and I look forward to what is still ahead to come. Before I turn the call over to Selvanna, I want to provide an update on ESG.
Speaker 2: We are mindful of how our operations impact the planet and the communities in which we operate, and as a result, we continue to prioritize ESG consideration across all facets of our business.
Speaker 2: We were pleased with our efforts in 2022 to better our ESG approach and are dedicated to continuous improvement of our sustainability and health and safety practices through ongoing learning, training and data collection.
Speaker 2: I look forward to the publication of our next ESG report later this year, where we will be sharing our five-year strategy along with the targets for the metrics we tracked.
Speaker 2: One notable ESG event in 2022 was the completion of our very first solar panel installation at a railway tie manufacturing facility in Clanton, Alabama.
Speaker 3: be clear does not include speculation on any M&A so this would be totally off of our current footprint and in capital investment. Okay I appreciate the call and I'll turn the line over. Thank you. Thank you so much. Your next question comes from Amir Patel from CIBC Capital Markets. Please go ahead. Hi, good morning. Good morning Amir. Good morning. I just wanted to clarify one of your questions about the Channel 22 poll performance. Did I hear you right that 75% of the gain there was price? Any visibility you can give us on the fourth quarter how much of the increase there was was price versus volume? Yes, so you're correct Amir in that 75% was pricing relatively the same percentage in the fourth quarter maybe just a the volume piece is really just getting limited by the capacity constraints so we're pretty much selling everything that we're able to produce and treat. Okay great and so then would you happen to have the price volume splits for for TIES and Res Lumber and Q4 as well? So for TIES it's completely it's all pricing so volumes were slightly mitigated we still have this whole customer audience sitting at a rate for range pricing. So if you are the targeted Visa user and you want to start selling to someone else or my company or any Visa provider you should cancel their rates on that
Speaker 3: and for residential lumber for the corridor, it's all volume pricing. It was pretty much in line with last year's Q4, and year to date, I would say mostly volume pricing was down, but not as much as the volume. Okay, great, thanks. That's helpful. And then, Eric, I wanted to ask about, on the res lumber business, I believe you mentioned kind of the sales there trending to 600 to 650 million.
Speaker 3: over time. Is that a range you would expect in 23? And what sort of price deflation would you expect? Because I know one of your major big box customers is kind of pointing to flat volumes in 23. Yeah, correct. So yes, the $600 to $650 would be our ex-
Speaker 2: delivered Montreal if you're going to do the math. Also keep in mind that there's an accessory portion in those cells which is driven mostly by composite products which that is not pulling back and obviously is following current inflationary trends if you want.
Speaker 3: Okay, great. And just the last question I had, Eric, just on polls and ties, what sort of pricing pass-through trends are you seeing in 23, just given, I know there's a lag there on the pass-throughs and just how raw materials fared in recent months.
Speaker 2: maybe a percent or two, as far as we can tell at this point. And at that point, you know.
Speaker 2: hoping that the current procurement trend continues. So I'm hoping we'll be able to see a bit of a stabilization in the entire market.
Speaker 2: For utility polls, we had price increases at different times through 2022. So the first aspect is obviously we'll be benefiting, increases from the second half of last year, we'll be benefiting the first half of this year.
Speaker 2: we're still seeing some price increases generated by our contracts for inflationary adjustments, for example, which we would see materialized in our pricing in 2023. So pricing will definitely be part of that organic growth, but definitely volume as well.
Speaker 3: Thanks, that's all I had. I'll turn it over. Pleasure, thank you.
Speaker 3: Your next question comes from Benoit Poirier from Desjardins Capital Markets. Please go ahead. Hey good morning Eric, good morning Silvana and congrats for the strong finish. Thank you Benoit, good morning.
Speaker 4: Yes, just to look at the railway ties regarding the incident that had taken place at North Folk Southern. What words to describe the incident that took place was the...
Speaker 4: Was Tella Jones affected in any way? And do you believe that this could lead to a potential future uptick in track maintenance from Class 1? Looking forward to 2023 and beyond.
Speaker 2: So first, just to be clear, we're not, Stella Jones is not being tied to the unfortunate incidents that happened on their tracks.
Speaker 2: Secondly, I think our...
Speaker 2: rail work customers are all very much focused on the quality of the maintenance of their network, as well as the safety of the train. So, unfortunate incident.
Speaker 2: you know, could it sort of recenter some interests to ensure that maintenance is sustained, but I don't think we would see enough ticket in sales. So I think our customers do a good job at maintaining their networks.
Speaker 4: Okay, perfect. And Silvana, you mentioned some color about the inventory retire replenishment that will be going through mid-2023. How should we look at working cap going into 2023 on the back of this inventory replenishment?
Speaker 4: for railway ties and if you could share some color about the market dynamics with the sawmills and the pricing for untreated ties that would be great.
Speaker 5: In terms of the capital investment in inventory expected in 2023, I mean it could go as high, total for the company could go as high as 100 million. Part of that is as you mentioned and as Eric mentioned is the replenishment of the
Speaker 5: of the entry to tie inventory. The costs are stabilizing so we wouldn't be expecting any significant increases there, at least not on the tie side. The other big piece of the inventory bill that we would be expecting in 2023 is for the poll, so with the continued increase in demand to support the sales.
Speaker 5: that we're seeing and the sales growth that we would be expecting. We would also be expecting to invest more in the purchases of logs this year. So I would say those are kind of the two main factors. Residential lumber, we're not seeing any significant swings. There might be a little bit less costs.
Speaker 5: but nothing significant.
Speaker 4: Okay, and what about CAPEX range for 2023, Silvana?
Speaker 5: So for 2023, we would expect at least for the growth piece, as we mentioned, we already spent about $30 million of the $100 million we would expect, probably the remaining 60% of the remaining in 2023 and the rest in 2024.
Speaker 5: In addition to the typical $50 to $60 million range that we're still seeing in 2023 for our regular capex.
Speaker 4: Okay, perfect. And just from an EBITDA margin standpoint, if we remove some other losses for the year, your EBITDA margin was just under 15%. And now, given your comments about the modernization, reduced contribution from residential lumber going into 2023, I think
Speaker 4: How should we look at the margin going in 2023? I'll start.
Speaker 2: I'll get the first part of the answer so that I can chime in. So Benoit, we...
Speaker 2: we were still targeting the 16%. I mean the voltenizing piece it is using more cylinder time. I can't say that the cost impact is that much important but we do have a pass-through on that additional cost in our contracts for the voltenizing piece. So on the railway tie side so I don't feel that you know that would impact our margin.
Speaker 1: call top home from TD Securities. Please
Speaker 6: Thanks. Good morning.
Speaker 6: Good morning. Morning.
Speaker 7: I'm going to pick up on a few of the things that have already been discussed, but a couple clarifications and then some additional detail maybe. So just to be totally clear, Eric, for polls in 2023, is the suggestion that you think organic growth can be somewhere in and around that 20% range kind of broadly consistent with what you did in 2020.
Speaker 7: been sort of a you know the entire sort of view shifted upward in terms of what you think you can do in this business organically.
Speaker 2: So Mike, for now I'll stick to our high single digit because that's what we had in our current guidance. And we'll be providing some more color at our investor day on May 25th. We're currently doing a deep dive. It will be a year and a half into our current goals and I think it will be an opportunity for us to...
Speaker 2: discuss a bit more of the long-term views, but as I stated earlier in my comments, we see our utility customers continue to invest looking for long-term partnerships. We have some visibility several years out with certain customers right now and they're looking to tie up Stella Jones's.
Speaker 2: ability to supply, to be able to realize their project. So it will be an interesting chat on May 25th as we explore more. And as well, we'll have our senior team also talk to utility poles instead of, you know.
Speaker 2: me expressing it you'll hear it from our senior team as well.
Speaker 7: Okay, that's helpful. Look forward to that detail. Just in terms of the mix or the composition of this growth you expect in pools in 2023, is that expected to be broadly similar to what you saw in 2022 in terms of 75% driven by price and the balance volume?
Speaker 2: I would think so, yes. The volume aspect is consistently growing with very solid dynamics, but obviously the pricing comes into play when you're in a market dynamics where there's more demand and supply.
Speaker 2: but definitely a good assumption would be to use a 7525 going forward for 23.
Speaker 7: Okay, that's helpful. Thank you. And then when we think about the demand side, I think in your prepared remarks, you called out some of the factors that are driving demand. So there's aging poles need to be replaced as a baseline and perhaps a step up in that level of replacement activity, but you called out broadband network expansion initiatives and growth in EV demands.
Speaker 7: hardening of the grid. So when we think about all of these things, are all of those contributing to demand to the fullest potential already in what we saw in 2022 or things like broadband network?
Speaker 7: expansion and EV demands, like is that going to drive further growth as we look out further or is that all happening right now?
Speaker 2: So they're not all driving it at this similar level, right? So the replacement cycle because of aging infrastructure is, you know,
Speaker 2: at the forefront of the demand. Broadband, you know expansion is something we've been
Speaker 2: hearing about a lot in the last two years and we're seeing those volume demands actually materialized now but I believe you know we'll see more of that going forward. And then you know electric vehicles and hardening of the network you know I do think that demand has still some potential growth going forward.
Speaker 2: Some of these projects will also be supported by infrastructure spent by governments that we haven't necessarily seen the full or actually not much of the impact so far. So there is the US bill obviously for infrastructure. We're also hearing about the Canadian government that's looking to invest in infrastructure and we hear it through.
Speaker 7: tuck in acquisitions you've been able to do and others that maybe could come forward as well as, I suppose, maybe availability improving within in terms of fiber within the poll business. Like are you going to be able to sort of fully capitalize on that demand or do you think that
Speaker 7: You know, there's strong demand drivers, but some of the supply side constraints are going to limit the ability.
Speaker 2: So our plan is to meet every single part of the demand we can.
Speaker 2: We did the acquisition of industries earlier this year to secure some fiber supply on the pole side. We embarked in our capex growth for utility poles last year and to be transparent we sort of were seeing these dynamics and I'll thank the board of directors for supporting management in our views and supporting the capex spend. And as I also mentioned we have two new pole buildings.
Speaker 2: add capacity, add pulp healing and drying yards or procurement as well as in Canada as well we're working on another project in BC to be able to support more fiber procurement and you know we can follow up in future conference calls how we're progressing on that because it will be key to our ability to maintain this
Speaker 2: this leadership position we currently have in the market.
Speaker 7: I know that's helpful and yeah, I know clearly you're doing everything you can to.
Speaker 7: to put yourself in a position to meet that demand. And I guess just shifting over to railway ties, if you look ahead to 2023, can you talk about what you expect to see from a volume perspective there? It was flattish in 2022, and I guess so more specifically, any indications from your class one and non class one customers in terms of capex.
Speaker 2: And I guess our bottleneck is really the procurement piece. As I mentioned, we're seeing more availability in the last, let's say, four months. We're very pleased with that. We're replenishing our inventory levels.
Speaker 2: So that's a question of how soon will we get the dry inventory to service our customers and continue to bulk nice our ties that are not dry to service clients. So we're very closely monitoring our procurement and inventory levels. So our first...
Speaker 2: priorities to service our current contracts with Class 1 and some commercial customers that also have a few multi-year contracts. So we need to honor our engagements there and then we're looking to optimize the opportunity in the commercial business where we do see healthy demand.
Speaker 2: In the back half of the year, if things continue on this trend, we'll be able to capitalize in there. There might be some volume, but I guess I'll confirm it on our next call. So for now, if I summarize it for 23, volumes are flat and we'll see some pricing uptick as we're catching up on our pass throughs.
Speaker 7: Okay, that's all very helpful. I'll get back in the queue. Thank you. Thank you. Thank you, Mike.
Speaker 1: Ladies and gentlemen, as a reminder, should you have a question, please press the star, followed by the one.
Speaker 1: Mr. Vachon, there are no further questions at this time. Please proceed with your closing remarks.
Speaker 2: Thank you Julie, and thank you everyone for joining us today. We look forward to speaking with you on our next call in early May with our first 2023 earnings call.
Speaker 1: Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines.