Q2 2023 Stella-Jones Inc Earnings Call

August 9, 2023

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This conference call is being recorded on Wednesday August nine 2023. Please.

Please note that comments made on today's call may contain forward looking information and this information by its nature is subject to risks and uncertainties.

Please note that comments made on today's call may contain forward looking information and this information by its nature is subject to risks and uncertainties actual results may different differ materially from views expressed today for further information on these risks and uncertainties. Please consult the company's reliv.

Actual results may different differ materially from views expressed today for further information on these risks and uncertainties. Please consult the company's relevant filings on SEDAR.

And filings on SEDAR.

These documents are also available in the Investor Relations section of Stella Jones' website at Triple W. Dot still a dash Jones dot com.

We have also prepared a corresponding presentations, which we encourage you to follow along during this call I'll now pass the call over to Eric vessel, President and Chief Executive Officer of Stella Jones, Eric.

Thank you Shirley.

Good morning, everyone and thank you for joining us today.

With me on today's call and so then the traveling senior Vice President and Chief Financial Officer of Stella Jones earlier.

With me on today's call is Silvana, Travaglini Senior Vice President and Chief Financial Officer of Stella Jones earlier.

Earlier. This morning, we issued a press release reporting our results for the second quarter of 2023.

Along with our MD&A it can be found in the Investor Relations section of our website at Www Dot Stella Jones' dot com as well as on SEDAR.

As a reminder, all figures expressed on today's call are you kidding in dollars unless otherwise.

Otherwise stated.

I am pleased with our financial and operating results in the second quarter, which reflected the upward momentum brought on by the rising demand of our infrastructure related products.

It provides a good start to our 2023 to 2025 outlook, which was updated at our inaugural Investor day in May.

We delivered strong second quarter results fueled by ongoing organic growth all while setting the stage for the accelerating demand across North America, particularly for utility Poles.

We did this not only through continuous investment in our network, but also by pursuing acquisitions that support our growth and help us ensure we deliver predictable consistency and quality in serving our customers.

Yeah.

Yes.

The company has recently made notable additions to its network in the quarter, we acquired the southern yellow pine pulp peeling and drawing assets Balfour pull company for a consideration of $15 million U S.

Located in Georgia Gulf Wars operations are situated in an area, where we have established an established presence and this acquisition will help drive costs and operational efficiencies for our utility pole business.

In July we acquired the wood utility pole manufacturing business of Baldwin pulled in piling for $48 million U S.

Baldwin is a storage business with a record of producing quality S Y people products for its local utility customers.

Alabama, and Mississippi facilities expand our capacity to supply growing demand, while optimizing the overall efficiency of our network, which now counts 45 treating facilities in North America.

Alabama, and Mississippi facilities expand our capacity to supply growing demand, while optimizing the overall efficiency of our network, which now accounts for 45 treating facilities in North America.

I would like to welcome the 80, new employees from about four in Baldwin, who joined the Stella Jones team in the last few weeks.

Accretive acquisitions, such as Bell for Baldwin and industries completed earlier this year remain a key area of growth potential for our business as we continue to seek opportunities that complement our network.

Accretive acquisitions, such as Balfour Baldwin and industries completed earlier this year remain a key area of growth potential for our business as we continue to seek opportunities that complement our network.

We are also pleased to highlight the commissioning of our pulp peeling facility indirect Mississippi, which opened on June 1st and this is now fully operational.

You can see the significant footprint of the facility on the current slide of the accompanying presentation.

As we scale up bidder as we scale up to better cater to expected demand acceleration. This facility strategically located in the south Eastern United States will help maximize our treating capacity in this area.

In the second half of the year, our second full appealing facility in the southeast region will be commission and we will begin and we will begin work on the planned capacity expansion to increase our Douglas fir network all in line with our growth Capex plan.

In the second half of the year, our second full fueling facility in the southeast region will be permission and we will and we will begin work on the planned capacity expansion to increase our Douglas fir network all in line with our growth Capex plan.

Through a combination of strategic capital investments acquisitions and ongoing organic growth, we have built a strong infrastructure product business.

Our customers recognize the quality of our work ability to adjust to their needs and the strong distribution capabilities we offer.

Customers recognize the quality of our work our ability to adjust to their needs and the strong distribution capabilities we offer.

We work in collaboration with our customers to best understand their requirements and overtime, we had expanded and innovated our product offerings accordingly.

We work in collaboration with our customers to best understand their requirements and over time, we have expanded and innovated our product offerings accordingly.

As our customers' needs evolve these seek strategic partners that can support their projects and assure product readiness, when and where they need it which we proudly deliver.

As our customers' needs evolve these seek strategic partners that can support their projects and assure product readiness, when and where they need it which we currently deliver.

Now, let's turn to the business dynamics of each of our key product categories.

Our utility pole product category continued its of course, a strong performance.

Our utility pole product category continued its course of strong performance.

Market demand remained robust.

Market demand remains robust.

All the while sales volumes were lower in the quarter, we continued to project and work to serve as the accelerated demand growth for utilities.

As we turn our focus to customers long term projects and two agreements structured to support growth. We are adapting to best meet the rising demand into the future.

With our expansive network vast resources and enhancing production capacity, we have the mechanisms in place to support the expected volume growth ahead of us.

Railway ties sales were also up in the second quarter benefiting from continued price increases passed onto customers.

Inventory constraint.

Shifted our focus to fulfilling long term commitments and we were pleased to see a continued trend of dry tie inventory growing stronger month over month.

Shifted our focus to fulfilling long term commitments and we were pleased to see that continued trend of dry tie inventory growing stronger month over month.

We are confident that the current level of untreated tie will allow us to not only continue to honor our long term commitments, but also service strong non class one market demand in the upcoming quarters.

We are confident that the current level of untreated tie will allow us to not only continue to honor our long term commitments, but also service the strong non class one market demand in the upcoming quarters.

Lastly for residential lumber, we saw healthy demand in Q2, which reflected our ability to supply product consistently to big box retailers and maintained a loyal customer base.

Lastly for residential lumber, we saw healthy demand in Q2, which reflected our ability to supply product consistently to big box retailers and maintain a loyal customer base halfway through 2023, our residential lumber product category is performing and alignment with our guidance for annual results.

Through 2023, our residential lumber product category is performing and alignment with our guidance for annual results.

With that I will now turn it over to so that ought to provide a more detailed overview of our second quarter financial results.

Thank you, Eric and good morning, everyone.

As Eric stated in his remarks, we've had a great start to 2023 with continued strong financial results in the second quarter sales.

Alec stated in his remarks, we've had a great start to 2023 with continued strong financial results in the second quarter.

Sales in Q2 increased to $972 million.

<unk> $907 million last year.

<unk> was driven by a 10% organic sales growth of our infrastructure related businesses.

<unk> was driven by a 10% organic sales growth of our infrastructure related businesses lie.

Likely explained by pricing gains for utility pole railway tie and industrial product is.

Actually explained by pricing gains for utility pole railway tie and industrial product is.

Increase was mitigated in part by lower residential lumber sales and lower volume for utility Poles and rambling Pi.

Increase was mitigated in part by lower residential lumber sales and lower volume for utility Poles Unraveling pie.

Sales in the quarter also benefited from the contribution of the pole treating assets.

Sales in the quarter also benefited from the contribution of the pole treating assets acquired from Texas Electric Cooperative in November last year, and the positive effect of currency conversion.

From Texas Electric cooperative in November last year, and the positive effect of currency conversion.

Utility pole sales increased to $388 million in the second quarter compared to $316 million for the same period last year largely explained by the organic sales growth of 13% and the contribution from <unk>.

EC acquisition.

D C acquisition.

The organic growth was driven by higher pricing as sales volumes were down quarter over quarter due to the impact of extreme weather events on our California customers maintenance activity as well as delayed timing of shipments.

Organic growth was driven by higher pricing as sales volumes were down quarter over quarter due to the impact of extreme weather events on our California customers maintenance activity as well as delayed timing of shipments.

The deferred volumes in Q2 to contribute to more sales in the second half of the year.

Sales of rally tight relative to $238 million.

Sales of railway ties relative to $238 million.

Compared to $215 million last year organically sales were up $13 million or 6% all attributable to favorable pricing.

While <unk> volumes were up this quarter overall volumes were down as we did not have enough treated inventory to service the strong non class one day, Matt and this then eliminate fiber supply in 2022.

While classified volumes were up this quarter overall volumes were down as we did not have enough treated inventory to service the strong non class one day, Matt and this Dan kind of limited fiber supply in 2022.

Residential lumber sales of $271 million.

Residential lumber sales of $271 million decreased by $15 million compared to the same period last year.

Decreased by $15 million compared to the same period last year.

Q2 sales were impacted by the lower market price of lumber and the resulting decrease in sales versus the second quarter of 2022.

Large part of this decrease but however, mitigated by the solid sales volume in the quarter. So.

Large part of this decrease however, mitigated by the solid sales volume in the quarter. So.

So far this year sales are in line with our expectations.

Moving now to profitability.

Our EBITDA increased to $175 million in the second quarter up 14% compared to $154 million in the second quarter of 2022, outpacing the 7% sales growth.

This increase was attributable to the expanded margins of our infrastructure related product categories, largely unaccounted price increases realized for utilities Paul.

This increase was attributable to the expanded margins of our infrastructure related product categories, largely unaccounted price increases realized for utility pole.

Led by the strong utility poles sales growth and resulting improvement in product mix, our EBITDA margin increased to 18% from 17% in Q2 last year.

Following a strong start across our product categories. We now expect the EBITDA margin for 2023 to exceed 16% objective.

Net income in the second quarter with $100 million.

Up 6% compared to last year, while earnings per share also benefited from the company's ongoing share repurchase program and was up 14% versus the same period in 2022 to $1.72 per share.

During the quarter, we used the cash generated from operations of $127 million.

To invest in our network and expand our utility pole production capacity, which included the acquisition of boundless pulp peeling and drying process.

Also continued to return capital to shareholders in line with our commitment.

So far this year. The company has returned $87 million to shareholders through dividends of $27 million and share repurchases of $60 million.

Since the beginning of the current buyback program in late 2022, we have repurchased one 5 million shares for $80 million.

During the quarter, we continued can bill the utility poles inventory to support the strong demand, but it was more than offset by the seasonal decrease in residential lumber inventory.

During the quarter, we continued can bill that utility poles inventory to support the strong demand, but it was more than offset by the seasonal decrease in residential lumber inventory.

As for the untreated railway tie inventory it was largely replenished by the end of the first quarter.

As we head into the second half of 2023, we have a healthy inventory position that will allow us to service our customers and meet their evolving needs for our products.

At quarter end, we had $292 million available under our credit facilities and maintained a solid financial position with a net debt to EBITDA ratio of two six times.

Through our consistent cash flow generation and available credit facilities, we can maintain our assets meet working capital requirements and finance our business plan.

Consistent cash flow generation and available credit facilities, we can maintain our assets meet working capital requirements and finance our business plan.

Yesterday, our board of directors announced the dividend of 23 cents per common share payable on September 25, 2023 to shareholders of record at the close of business on September 5th.

In conclusion, our robust financial performance allows us to stay on course to achieve our growth plans, all while returning value to our shareholders.

With that I will now turn it back to Eric for his closing remarks.

Thank you sylvana.

As we looked at the second half of 2023, you believe we are well positioned for future success to capitalize on additional opportunities.

The three acquisitions, we concluded to date in 2023 have allowed us to secure fiber supply ahead of expected demand and continued to enhance production and operational efficiency.

These acquisitions not only help us remain in line with our goals to augment capacity to keep pace with the demand growth for our utility pole product category.

But they also enabled us to leverage existing assets within our network.

During our Investor day, we noted several growth catalysts that will allow us to achieve our financial targets and create long term shareholder value.

For utility Poles ongoing maintenance broadband expansion and new power generation sources continue to be significant growth catalysts.

On the railway ties side increased volumes favorable pricing dynamics and product innovations are key growth drivers.

Product expansion sourcing and procurement as well as favorable macro trends will help drive the residential lumber product category going forward.

We are off to a great start and look forward to the second half of the year as we set ourselves up nicely to execute on our updated three year growth plan.

Through this revised guidance, we endeavor to increase sales to over $3 $6 billion by 2025 maintain EBITDA margins of 16% and returned more than $500 million to shareholders, while maintaining a leverage ratio of between two and two five times.

Through this revised guidance, we endeavor to increase sales to over $3 $6 billion by 2025 maintained EBITDA margins of 16% and returned more than $500 million to shareholders, while maintaining a leverage ratio of between two and two five times.

In closing our established record of success to date can be attributed to our team of outstanding employees across North America.

Our customers can rely on us for quality products.

Certainty of supply and timely service and that is because of our employees, who possess the agility resourcefulness and dedication to deliver the very best every day.

Thank you for your time today, and I will now open up the lines for questions.

Eric Your line is now open for questions I would like to remind you that if you are on the phone and wish to ask a question. Please press star one.

First question is from James Mcgarrigle, RBC capital markets.

Eric Savannah, Congrats on a great quarter and thanks for taking my question.

Thank you James good morning.

Yes. So my question is on the U S infrastructure Bill.

Yes. So my question is on the U S infrastructure, Bill I know coffers last weekend.

<unk> last weekend.

Some of the U S steel producers during earnings they've made some commentary and theyre starting to see the funds.

Planned and they are expecting some of that money to be spent kind of early 2024 and I know your guidance is it doesn't include any of that U S infrastructure spending so it's kind of hard to.

Land and they are expecting some of that money to be spent kind of early 2024 and I know your guidance is it doesn't include any of that U S infrastructure spending so it's kind of hard to.

To quantify and to.

To be certain on the timing, but it seems like on what's changed since your Investor day. So can you talk to any of the conversations.

To be certain on the timing, but it seems like a lot's changed since your Investor day. So can you talk to any of the conversations.

You are having with regards to U S infrastructure spending and any additional color that you guys can give us.

That's happened since the Investor day wouldn't be I appreciate it.

That's happened since the Investor day would be appreciated.

Yes, certainly thank you Jamie.

The fund allocation is certainly getting organized it is very early for us to be able to even speak to.

The fund allocation is certainly getting organized it's very early for us to be able to even speak to.

Presently.

No.

I do think will eventually we will benefit from from the allocation of those funds, but right now nothing significant on the horizon as far as I can tell.

I do think will eventually we will benefit from from the allocation of those funds, but right now nothing significant on the horizon as far as I can tell although dynamics in infrastructure remains strong and our customers are very active in planning projects.

Although dynamics in infrastructure remains strong and our customers are very active in planning projects.

Obviously all of this is sort of intertwined, but I can't say I have a very important update on that front.

And then going back to the infrastructure spending I think.

A lot of focus has been on what's going to happen on the utility pole side, but there's a lot of money being allocated for rail infrastructure as well.

I don't know a lot of your company as investments have been on the pole side, but what's your capacity.

If a lot of that infrastructure spending work to flow through on the rail side to kind of step up type production just given some of the <unk>.

The strength that you were highlighting.

Constraints that you were highlighting.

That's a great question.

The key the key.

In.

In answering this question it starts with the inventories and obviously, having dry inventory enabled us to have more throughput at our facilities. Silvana explained we are in a healthy inventory situation overall, we now need to the proportion of that inventory.

The increase in <unk>.

The proportion of inventory to drive to increase over time and I think we will be there in the next few months, so that positions us very well for any upcoming demand.

The proportion of inventory to drive the increase over time and I think we will be there in the next few months, so that positions us very well for any upcoming demand them.

Not concerned about the capacity aspect of things its really having access to the resource of the fiber and having to do proper dry inventory to be able to respond properly to these.

Not concerned about the capacity aspect of things its really having access to the resources of fiber and having the proper dry inventory to be able to respond promptly to these.

To the inquiries and I think we've done a lot of work in the last eight months in the railway tie division two to prepare for a good demand in 2024 and our conversation today at least I think it will be a great.

A good year next year, and we're well positioned for that.

And then my last question here before I turn it over.

And then my last question here before I turn.

Turn it over.

I know there's been some.

There's been some.

Some headwinds in your negotiations with the rails to pass on some of those.

Some of the recent raw material costs.

Railway tie side.

All right Hi, Syed.

How are those conversations has been evolving I know youre. Your peer was in a similar boat I think they actually said.

This conversation has been evolving I know youre. Your peer was in a similar boat I think they actually said.

That they would exit the industry if they don't we're unable to pass those price.

They would exit the industry if they don't we're unable to pass those price increases.

Increases on them I'm not sure how serious they are aware about that but that was something I think that as I said on the call. So.

This is Adam I'm not sure how serious they are aware about that but that was something I think that as I said on the call. So.

Do you have you noticed any change in the dynamic.

With renegotiated.

Grocery items with the rails and over what period of time do you think you'll be able to pass on some of those raw material price increases on the tie side.

Patients with the rails and over what period of time do you think youll be able to pass on some of those raw material price increases on the tie side.

So kind of work on the margins on that side of the business.

We kind of work on the margins on that side of the business.

Alright, well with so as you know 60.

Alright, well with so as you know.

60% of.

More or less over 70% actually the business is.

Related to class ones would have long term contracts and we work within the mechanisms of the contracts we have for price increases we have been.

Adding pricing, we're increasing pricing quarter over quarter now for several quarters more than <unk> more than a year's worth of almost say like eight at least a quarter's worth of increases so we keep pushing forward.

Adding pricing, we're increasing pricing quarter over quarter now for several quarters more than more than a year ago with almost say like at least a quarter's worth of increases so we keep pushing forward.

We as a company we stand our ground obviously, we were in business to generate margin and returns on our investment on our working capital investments and we keep pushing for pricing, but actually in all product categories that that's what we're in business for.

We're in business for.

But.

We're we're moving ahead and then pushing forward on that front.

We're moving ahead and then pushing forward on that front.

Alright, Thank you very much and congrats guys my pleasure. Thanks.

Thank you. Our following question is from Ben Noir Colby <unk> Securities. Please go ahead.

Thank you. Our following question is from Ben Noir Coffee <unk> Securities. Please go ahead.

Yes, yes.

Okay.

Sorry.

I can't hear you Robyn.

I can hear you Robyn.

No okay.

Now is it better Ken.

Now is it better.

Yes. It is.

Yes, sorry, okay. Congrats.

Hey, Ric and Silvana for the strong start of the year.

I can still went up or the strong start of the year.

First question when we look at the utility pole, you achieved 13% organic growth.

You pointed out the delayed timing of shipments and the deferred maintenance.

Utilities in California, but.

Do you still feel comfortable with the 20% target for the year.

Yes with you.

Okay, Okay, and one of your poll infrastructure peers in the industry came out and spoke about near term softness in the telco market.

Okay, Okay, and one of your poll infrastructure peers in the industry came out and spoke about near term softness in the telco market, we are seeing capex spending.

Seeing capex spending.

More aligned to historical trends is it more specific to other type of pole or do you still.

More aligned to historical trends is it more specific to other type of pole or do you still feel maybe some different picture by some telco.

Maybe some.

Different picture by some telco.

<unk>.

Guys.

So not really seeing that was the same pulls because did you usually these shared networks is the same type of fall that utilities would be using.

So not really seeing that was the same pulls because it usually these shared networks is the same type of fall that utilities would be using.

We have telcos in the mix of our customers, we haven't necessarily heard much on that front actually heard a few telcos come to us and talk about potential broadband projects into future actually.

We have telcos in the mix of our customers and we haven't necessarily heard much on that front actually heard a few telcos come to us to talk about potential broadband projects into future actually.

Almost it's a bit of the opposite of what you are.

Youre youre, stating, but we haven't seen any softness.

And honestly, if there were a bit of softness in the mix of all the demand we have on the utility side I don't think.

Honestly, if there were a bit of softness in the mix of all the demand we have on the utility side I don't think.

We've been talking about it today.

We'd be talking about it today.

Okay with respect to the K begin wildfires could you maybe provide some color about how it impact your operation in the quarters and any changes in the procurement inventory management and it.

Okay with respect to the K begin wildfires could you maybe provide some color about how it impacts your operation in the quarters and any changes in the procurement inventory management and it.

Do you see unfortunately too.

Do you see unfortunately due to.

For to sell the fire retardant mesh product in Canada. Following the the worst wildfires in the country that we'd see.

For to sell the fire retardant mesh product in Canada. Following the the worst wildfires in the country that we've seen.

Two good questions. So I guess with two parser two to.

So good question, so I guess with two parts to.

To your question. The first one is we've been fortunate.

The areas in which the fires.

Or that the fires have impacted.

Or is that the fires that are impacted.

Did not touch our key procurement areas. So I cant say that for utility Poles were impacted.

And our suppliers for residential lumber either they seem to be moving along and be able to supply us.

And our suppliers for residential lumber either they do seem to be moving along and be able to supply us.

The required products.

As far as the fire retardant order.

What's more to.

What's more.

Fire retardant product.

Alright, retarded product, but.

I would expect to see some interest from Canadian utilities.

I would.

Specs to see some interest from Canadian utilities.

And over time, because you're right. It does raise some concerns now also bear in mind that areas, where the fires impacted are in the wilderness and theres not always.

And over time, because you're right. It does raise some concerns now also bear in mind that areas, where the fires impacted.

In the wilderness and Theres not always.

Road and utility Poles in those areas, but it does bring back to mine or to the thought process about the importance to have a very strong and resilient network.

Road and utility Poles.

Areas, but it does bring back to mine or to the thought process about the importance to have a very strong and resilient network.

Okay and.

Okay.

With respect to the EBITDA margin, obviously strong start 18% in Q1 higher than expected then sort of I know you mentioned that you feel comfortable to achieve over 60%.

For the year. So I was wondering if you could provide some granularity about what could be achieved beyond 16% and whether you could achieve the 17, 18% level.

For the year. So I was wondering if you could provide some granularity about what could be achieved beyond 16%.

And whether you could achieve the 17, 18% level.

As part of your strategy landlords, just a one year a strong performance.

As part of your strategy landlords just.

One year a strong performance.

So.

We are definitely confident like we said that this year will be about 16% given the strong start and really came from all three product categories. Obviously.

We're definitely confident like we said that this year will be about 16% given the strong start and really came from all three product categories. Obviously.

Utility coal as being the most notable line, but that contribution above what we expected from both the railway ties and residential lumber that being said beyond this year.

Utility pole as being the most notable one but.

<unk> contribution above what we expected from both the railway ties and residential lumber that being said beyond this year at <unk>.

Yeah.

The objective is to maintain a 16% difficult for us at this point in time too.

The objective is to maintain a 16% difficult for us at this point in time to add to that.

Project anything beyond that comfortable that we'll be able to maintain and we produced at 16% in the next two years, our guidance, but would not venture to say at this point to go beyond that for us for 2021 2025.

Jack anything beyond that comfortable that we'll be able to maintain and we produced at 16% in the next two years.

Guidance, but kept without venture to say at this point.

But beyond that test for us for 2021 2025.

Okay, great. Thank you very much and congrats.

Thanks Peter.

Thanks Pat.

Thank you. Our following question is from Michael two phone TD Securities. Please go ahead.

Thank you good morning.

Good morning, Mike.

On the utility pole side can you provide a little bit more detail on on the delayed timing of shipments and the deferral of maintenance by utilities in California, just to help us understand what sort of an impact that had on on that.

Utility Poles category organic growth in the quarter.

So just sort of frame how impactful this was.

While the first off.

Let's start with our California customers.

There were a series of.

Of heavy rainfalls in the California region.

Of heavy rainfalls in the California region, which led to significant flooding and then.

Let the significant flooding and then.

Landslides and mudslides, which all saw that on the news so that has sort of pushed.

Landslides and mudslides, which all saw that on the news so that has sort of.

Pushed out in time the maintenance.

The utilities in California have been focusing on restoring some powers and taking care of the infrastructure, but the the upgrades that.

We're planning this year has sort of been pushed out.

That were planned this year has sort of been pushed out.

It's delayed to the second half and into next year at this point so.

Daily to the second half and into next year at this point, so that as that dynamic with regards to.

Is that dynamic with regards to.

With regards to their shipments.

With regards to delay of shipments.

It's just a question.

Is the timing of.

Is the timing of when.

When the customer wants to take the orders. So we have the orders we have a healthy order book. It's a question of when the customer is actually going to one that wanted to take those orders and the good news there is that our procurement and production.

When the customer wants to take the orders. So we have the orders we have a healthy order book. It's a question of when the customer is actually going to.

One I wanted to take those orders and the good news there is that our procurement and production.

Functions have been.

Performing extremely well and holding to plan and being able to support the demand so.

I guess it led to a small buildup of inventory.

Quarter, but.

It's all going to sort of.

Flush itself out I guess into next into next two quarters.

Flushed itself out I guess into next into next two quarters.

Okay, I mean, I guess, a different way to try to ask the question. If possible is just you did 13% organic growth in utility pools in the quarter had you not had those those issues you just spoke about and it had things shipped has plan can you tell us what organic growth would have looked like.

Okay, and then I guess a different way to try to ask the question. If possible is just added 13% organic growth in utility pools in the quarter had you not had those those issues you just spoke about and it had things shipped as planned can you tell us what organic growth would have looked like.

I think we would have been closer to the 20% we've been guiding Mike Okay.

I think we would have been closer to the 20% we've been guiding mic okay and.

And as you overcome these these issues.

Is this a situation where were you.

Is this a situation where.

You recover those volumes plus do what you would have otherwise done in the second half were to do some of this stuff just kind of gets shifted to the right.

You recover those volumes plus do what you would have otherwise done in the second half were to do some of this stuff just kind of get shifted to the right.

I think it's a combination some of it will get shifted or rate.

I think it's a combination some of it will get shifted right and some of them might be a pickup we're expecting a good quarter in Q3 as upside as I mentioned, we have some inventory to ship all we need is the green light in some some some railcars and trucks to move them.

Some of them might be pick up we're expecting a good quarter in Q3 as upside as I mentioned, we have some inventory to ship.

We needed the green light in some some some railcars and trucks to move them.

But then some of them will shifted right like for example, the California maintenance I don't think those utilities will catch up.

But then some of them will shifted right like for example, the California, a maintenance I don't think those utilities will catch up.

Did the H, one volume that <unk> fell short of I mean, I don't want to I mean, we.

Did the H one funeral volume that <unk> fell short of I mean, I don't want to I mean.

We don't manage quarter to quarter as it's a continuum of our customers having projects that are moving along and we're supporting them and we feel pretty pretty good about what's coming ahead of us for future quarters. Okay.

Okay.

Helpful. Thank you.

Helpful. Thank you so as far as the two acquisitions you announced.

Or is the two acquisitions you announced.

Can you talk about how much annual revenue capacity those two acquisitions.

Can you talk about how much annual revenue capacity those two acquisitions will provide you with an and what what.

I'll provide you with an.

And what what.

As we think about that I mean, what does that theoretically you mean organic growth could be if with the benefit of that.

Additional capacity because I think I was wondering guys I mean, just looking out a little further but in 2025, one of the constraints to.

Additional capacity because I think I was wondering guys. I mean this is looking at a little further but in 2025, one of the constraints too.

Delivering higher revenue growth had been.

Comment on the sort of capacity.

Comment on sort of capacity does this in part addresses.

<unk> addresses.

Addresses that issue not necessarily in 2025, but just trying to get a sense for how much this adds.

Right.

Right so the.

So the the.

The Balfour and Baldwin acquisition are.

Are different in the sense that <unk> is a.

Are different in the sense that <unk> is a pull peeling and drying facility. So.

Peeling and drying facility so.

They are actually providing the fiber for our network. So they don't have a treatment capacity. So it's more for securing fiber increasing actually the security of fiber for us and also efficiencies within our network. So that will show up more at the margin level. If you want the Baldwin acquisition is I guess <unk>.

Throw up more at the margin level. If you want the Baldwin acquisition is truly a wood treating facility that has peeling dry and treating capacity of the head of customer list.

Julie a wood.

Wood treating facility that has peeling dry and treating capacity that had a customer list.

If you want.

So we didn't disclose the sales, but if you look at our.

So we didn't disclose the sales, but if you look at our if.

If you look at our history, our sales price usually lined up more or less about one time sales. So I think you're going to use that as a as a as a guidance.

The Baldwin acquisition does have some upside potential on volume. So I think it is a very key acquisition for us because it comes with a customer list of book of business.

Very accretive, but we think we'd be able to move more volume in the next 12 months through that facility helping us.

Service, better our customers and potentially new customers.

Okay. That's helpful. Thank you and then on the margin. So so suggesting that this year you could do better than the 16% you'd previously guided too for for EBITDA margins.

Is this simply a function of the strong margins through the first half and second half Youre still thinking about it the same way you previously were or could.

Some of the outperformance on the margin that you saw in the first half are you expecting that to continue on in the second half relative to prior expectations.

Alright.

Okay.

So.

So to.

To start with one I guess I'll go back to <unk> comment earlier, so we saw.

To start with one I guess I'll go back to <unk> comment earlier, we saw.

Very good margin performance in all three product categories in the first half of the year better than I guess or our initial guidance. If you want and I think this will flow through in better part for the year.

Obviously.

Our utility pole product category is leading the group there with healthy pricing and obviously.

Good performance on the margin.

Let's also keep in mind, a few things one is our second quarter is usually our highest EBITDA margin quarter simply because all three product categories.

Our our peak season, so credit to sort of tail down or slow down a bit in the next quarters, yes, but I think right now with the performance we've seen in the first six months of the year.

It's quite clear that we will be exceeding that 16%. The guidance. We provided is to maintain and 16% in each of the three years of our guidance and I think I'm very pleased with the performance. So far I think it's clear to US now that we will be achieving this and maintaining it or at least this now for the year, which is great and in which we reset again next year I know we will obviously.

To start off maybe maintaining the 16% and if our team can bring us more I'll be happy to celebrate that with the team.

Alright, Thank you I will get back in the queue.

Thank you.

Thank you. Our following question is from Roman <unk> National Bank Financial. Please go ahead.

Good morning, Erika Good morning, Hansen, Silvana and congratulations on the quarter.

Thank you <unk> good morning.

Good morning.

I know you touched a bit on the railway ties earlier.

I was wondering if you could comment a little bit more on the level of volumes you would expect to see over the next year or so.

Over the last number of years, the overall volumes in North America have come down from the 20 plus million dollars remark.

Just wanted to get a sense of how you see that developing over the next couple of years. Thank you.

Well thank you for the question.

I guess I always refer to the the industry itself. The railway tie Association data shows that the last 25 years.

The average volume sold by the industries are up 19 million ties.

And the last couple of years, we've been slightly under that average however.

However, I do believe that we'll be working towards that average, let's say as early as next year, if not slightly slightly.

Slightly higher than that so and obviously being one of the leading suppliers in North America, we would benefit from that increase in particular.

Related to our long term contracts with class one customers, but that being said we are so we're also seeing healthy demand in the non class one or the commercial market.

And again as we build our dry inventory will be addressing more of that market in coming quarters. So that maybe the back half towards the end of this year, but certainly into nations when you express future quarters limiting it to 2023.

Thank you so much that's very helpful.

I just had a second question around the <unk>.

So your guidance for the next couple of years.

And I was wondering whether that guidance already imputes acquisitions exclusively or if it's purely organic.

It was purely organic so acquisitions, we're not.

And in that guidance, nor was the effect of infrastructure.

Programs by governments in Canada, or the U S simply because it's always hard to predict and predict the timing of acquisition and predict the allocation of funds from government. So all of that is not within our guidance.

Perfect. Thank you so much and congratulations again.

It's our pleasure.

Thank you. Our following question is from <unk> Securities. Please go ahead.

Yes, yes.

So just to come back on the railway ties you were able to achieve 6% organic growth in Q2, just wondering what are you.

Sustainable going through the second half and maybe if you could provide the split between Pri.

Pricing and volume that would be great.

It's actually a good question, but I guess.

Our customers have a maintenance program and it is not necessarily spread out evenly throughout the year. So.

Sorry, if I if I take a look at the first six months of the year.

The increase we've been seeing is driven by pricing.

Offset by some lower volume as we didn't do not did not have enough dry inventory to sell into the commercial market.

Forward as I look into the back half of the year.

I do said to my understanding is that some class one that will be.

Slowing down their maintenance programs.

You've done the maintenance, where do you want it for the summer. So I do see some maybe a bit more of a volume adjustment downwards from for a couple of class, one which would probably bring us back to our low single digits right. So obviously under to six.

Pinpoint that number right now, but definitely call it a low single digit.

Thats, great and when you look at your comments made on non class one railroad that youll be able to better serve those clients towards the back half of the year 2024.

Is it fair to expect the margin profile to go upward for railway ties as you're able to increase your mix toward those.

<unk> customers.

Yes.

It should definitely obviously.

The spot market is.

What do we quote corporate pricing.

Obviously, competing either I guess other suppliers, but typically.

It's easier to.

States are our cost profile and Youll recoup I guess, our cost cuts. There is no contracts as we're bidding are actually bidding for what we think we should be getting prototypes. So that is definitely a bit.

<unk> margin business for now.

Okay and for residential lumber you mentioned still healthy demand as the big box store recently, we saw an increase in lumber prices, but would it be fair to think that it could be a tailwind going forward that this was not taken into account in your outlook.

Okay and for residential lumber you mentioned still healthy demand as the big box store recently, we saw an increase in lumber prices, but would it be fair to think that it could be a tailwind going forward at these was not taken into account in your outlook.

If prices if price increase with demand we maintain yes, eventually it would be it would be a tailwind.

Internally, we track that to buy fix and it did increase at let's say the end of June early July sort of tempered often actually drops ever so slightly at the back half of July , but but to your answer. Your question, yes, if prices would decrease because of the pressures of wildfires.

Dynamics of the light, yes, we would probably see a bit of a tailwind on our sales price.

Okay and last one for me just for the phase out deadline in October 2023 in Canada, and any update on the <unk> approval by the government.

So we're not the applicants for the label on the COI router supplier. So we don't were not privilege to all the conversations.

So there is no firm timelines that have been communicated I do believe that the federal agency is working diligently at reviewing the files.

And from our side, where we have adjusted and are ready to go going forward. After October 4th ready to supply our customers with alternate preserve those an alternate solutions as best we can.

And from our side, where we're we have adjusted and are ready to go going forward. After October 4th ready to supply our customers with alternate preserve those an alternate solutions as best we can.

Until the government agencies are probably Dci.

The government agencies approved Dci.

Thank you very much okay.

Thank you very much okay. Thank.

Thank you Barbara.

Thank you. Our following question is from Michael to foam TD Securities. Please go ahead.

Thank you. Our following question is from Michael <unk> TD Securities. Please go ahead.

Thanks.

Just on the pricing front. This has been a key driver to the sales growth you've seen.

On the pricing front. This has been a key driver to the sales growth you've seen.

For some time now in both pools and ties.

Can you talk about the extent to which you are still seeing new pricing increases put through at present or is all of the benefit youre getting now.

Reflective of past pricing increases and an easier year over year comp.

I would say, we're pretty much there Mike.

For utility pole, they don't expect as we look at our pricing here spending in mid year I don't think wed see much more price increases for the balance of the year. Obviously you guys hit next year contract renewals, we will be adjusting again, but I don't believe we will see much pricing impact additional to what we've seen so far and on a railway ties.

For utility pole, they don't expect as we look at our pricing here spending in mid year I don't think we would see much more price increases for the balance of the year. Obviously you guys hit next year contract renewals will be adjusting again, but I don't believe we will see.

Much pricing impact additional to what we've seen so far and on railway ties it might inch up here or there.

It might inch up here or there.

Percentage points, but.

The railways are treated tie costs are more or less stabilized in the market. So I think we're we're pretty much caught up there okay.

The railways are treated tie costs are more or less stabilized in the market. So I think we're we're pretty much caught up there okay and so when when should we see you actually lapping.

When should we see you actually lapping.

The easier comps such that the pricing tailwind.

It won't be showing up as a benefit assuming no further increases of any have any material degree from from here.

Be showing up as a benefit assuming no further increases of any have any material degree from from here.

For railway ties it would be next year, probably Q2 next year, we'd be lapping it would be comparable in the dynamics stay the same for utility Poles.

For railway ties it would be next year, probably Q2 next year, we'd be lapping it would be comparable or the dynamics stays the same for utility poles.

Right.

The second half of next year, but.

Yes, I would say the second half of next year, but I would expect as you know.

Yes, I would say the second half of next year, but I would expect that.

Marlin from inflationary cost creep into on labor costs and overhead and so on those are part of the renegotiation we have on an annual basis with our customers. When we adjusted it might keep increasing not at not at the rate of 20% that we've seen last year and this year, obviously we were.

Marlin from inflationary cost creep into on labor costs and overhead and so on those are part of the renegotiation we have on an annual basis with our customers when we adjust it might keep increasing not at not at the rate of 20% that we've seen last year and this year, obviously we were.

There are different dynamics, but I could see small adjustments going into into the future, but I guess, if you wanted to look at a good point, where we would elaborate with the H. Two next year. Okay. Okay. And then maybe just a follow up to <unk> question about.

There are different dynamics, but I could see small adjustments going into the into the future, but I guess, if you wanted to look at the good point, where we would elaborate with the H. Two next year. Okay. Okay. And then maybe just a follow up to <unk> question about.

About railway ties that will look in the second half. So you said with the possibility of some.

Certain with certain class one is pulling back on maintenance, a little bit and if they've completed their maintenance, we could see organic growth drop down a little bit from where its been the last couple of quarters.

Certain with certain class ones pulling back on maintenance, a little bit and they've completed their maintenance, we could see organic growth drop down a little bit from where its been the last couple of quarters.

I guess I'm, just trying to understand how the possibility of a step up in non class one volumes.

I guess I'm, just trying to understand how the the possibility of a step up in non class one volumes.

Does that not act as somewhat of an offset or is it just not material enough in the context of whatever kind of a pullback in the class one volumes you see.

So there could be a bit of an offset.

Impact. This proposed is a few things I guess I hope it was still listening.

Impact this how does a few things I guess that I hope it was still listening.

One thing we don't know is some class one is although they are my maintenance is done for example at the end of September .

One thing we don't know at some class one is although they said our maintenance is done for example at the end of September .

It's not clear if theyre going to buy.

It's not clear if they are going to.

Somewhere call it pre buy both by some inventory in October November to distribute in the network to start maintenance in Q1. So right now we have no clear signs of that so if so either either we go we go down that route to service those customers or we will start.

Somewhere call it pre buy buy buy some inventory in October November to distribute into network to start maintenance in Q1. So right now we have no clear signs of that so if so either either we go we go down that route to service those customers or we will start.

Servicing the non class one market.

But it would not be enough in Q4, two to offset that volume, but it would be like a positive momentum.

But it would not be enough in Q4, two to offset that volume, but it would be like the positive momentum.

Dry inventory will sell Q4 over Q1 Q2 of next year and build momentum to two I guess to catch up some volume downturns that we had in the last year.

Dry inventory will sell Q4 over into Q1 Q2 of next year and build momentum to two I guess to catch up some volume downturn as we head into the last year.

Okay. So still when you put that altogether, you're still thinking in the second half of this year, we could see a little bit of a moderation of organic growth versus that kind of mid single digit frequency.

Okay. So still when you put that all together youre still thinking in the second half of this year, we could see a little bit of a moderation of organic growth versus that kind of mid single digits, we've been seeing.

Yes, yes, yes exactly.

Okay.

Okay. That's great. Thank you.

Thank you.

Yeah.

We have no further questions in the queue. Thank you.

Well, thank you Shirley and thank you everyone for joining US today, we look forward to speaking with you again at our third quarter update in November .

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

Please standby and enjoyed this music.

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Q2 2023 Stella-Jones Inc Earnings Call

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