Q1 2023 Stella-Jones Inc. Earnings Call

Speaker 1: The.

Speaker 1: The pro.

I.

To P.

The.

No.

Oh.

You may listen to the meeting while waiting to ask your question. If you wish to ask a question, dial star 1. A beeping noise will indicate when you're live.

During the quarter, we also used our liquidity to maintain the quality of assets and expand our poll production capacity, including acquiring the poll peeling and drying assets of industry.

as well as return capital to shareholders.

Yesterday, our Board of Directors announced a dividend of 23 cents per share.

And during the quarter, we refer to over 600,000 shares for a total of $30 million.

Since the beginning of the current NCIB program in late 2022, we have repurchased over 1 million shares for $50 million. As a result of our buyback program, we had almost 4.5 million fewer average shares of upstanding the sportors.

compared to last year's Q1. We ended the year with a net debt to EBITDA ratio of 2.8 times, which is within our expectations due to our typical working capital requirements in the first quarter of each year.

We hold a strong financial position and are able to finance our business plans, meet working capital requirements, and maintain our assets through our cash flow generation and available credit facilities. Iugs Unitedron is strongly

In summary, our financial performance to begin the year has positioned us well to remain on track to achieve future growth and value for our shareholders.

With that, I will now pass it on to Eric for his concluding remarks. Eric? knows from Alex's role as Director.

Thank you, Susana. Our established track record of achieving robust results delivering return to shareholders and maintaining a solid financial position has continued into 2023.

We attribute these achievements to our proven and resilient business model as well as our ability to supply the growing demand for our products in the marketplace.

We are well positioned to meet or exceed the targets laid out in our three-year plan.

From a sales perspective, we continue to benefit from strong demand on the utility poolside.

Building under growth.

for 2023.

Utility polls 2024 sales are now projected to grow at a compound annual rate of 20% from 2022.

The company also expects the IPDOM margin to exceed its 15% target by 100 basis points.

We also continue to enjoy steady growth in our railway tie product category driven by stable partnerships and maintenance programs by our customers.

The forecast for utility pole growth capex stood between $90 and $100 million dollars.

Since the beginning of 2022, we have committed to equipment purchases and spent $49 million.

So far we have successfully changed through treating cylinders and increased our Douglas Fur network treating capacity by 15%.

We will also benefit from the production of two new sudden yellow pine, bowl peeling and drying facilities starting mid-year.

Finally, we have returned $273 million of capital to shareholders since 2022.

We are on track to achieve the target we outlined in our three-year plan of between $500 and $600 million.

We have started 2010 and 23 on the right foot.

We will continue to build on our achievements to support future growth of our infrastructure-related product categories and continue to return to capital to shareholders. Before I conclude this call, I would like to acknowledge all of our employees across North America.

They are the reason behind the great brand and reputation we have built.

Our customer can rely on us for quality products, customer care, and meeting deadlines.

All of those traits are because of our dedicated employee base.

Thank you for all of your efforts.

I also want to extend a special thank you to those who attended our annual meeting of shareholders earlier today, both in person and virtually.

We are grateful for your ongoing support and trust in our business and look forward to seeing you again next year.

This concludes our prepared remarks. Thank you for your time today and I will now open up the lines for questions.

Thank you Eric. The 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 1.

Our first question is from Walter Sprocklin from RBC Capital Markets. Please go ahead Mr. Sprocklin.

Good afternoon everyone. Congratulations on a great quarter here. Eric, I guess starting with you on polls, it's a pretty high run rate 20% now out to 2024 on a KAGER basis.

I guess maybe you can give a little color apologize I was only connected in later in the little later in the call but you know the main drivers of that is this kind of a fast and furious situation or higher for longer is you know I don't think it's going to drop off from 20 down to 5 in 20 20

Thank you, Walter. So if you recall last year, we had a great year in organic growth, 20 plus percent. In March, when we disclosed our two four results, we provided more insight for this year, stating that we would see in 2023.

similar growth to the prior year. So obviously, I think a K-year of 20% over, let's say, a whole year of 23 and 24 would suggest something that's a bit front-loaded, obviously, you know, 20-ish this year.

We've seen great growth in the last two years.

pricing side and the volume side. I do see going beyond continued maintenance from our customers and continued maintenance and that is

Our beliefs to that are supported by our growth capex initiatives. As I mentioned a few minutes ago, we've got two pole-pilling yards that are coming online mid-year, which will offer us more more fiber in our network and we do plan on seizing more opportunities in the market. To your point, we have a lot of opportunities to do.

Or to your question, will it be 20% every year for the next five years? I would think so. We will provide more insight on investor day on May 25th. I could confidently say that.

The level that we're seeing now will be sustained through time for a number of years at the very least.

That's fantastic. The 100 basis point improvement in margin, would you say that's a function of pricing or kind of scale with higher volumes or would it be a bit of both? I'm trying to ascertain whether this is something that we can put in our models now longer term as the new 16, the new 15, or is this something that you think may be a little bit more of a What is the

We believe that will be sustained over time. And there is also a product mix if you want in the sense that obviously our fast growing product category is utility pulls so their weight.

in the mix of products is heavier, therefore enabling us to...

reach better in the DOM margins. OK. Last question for me is now that the CP deal is done, KCS is now part of the new CPKC and given CP's historical decision to kind of outsource tight treatment versus KCS's focus on doing it in the system.

rough basis to get a sense of upside if you were to get that contract.

Well, so Walter, we know the team at that treating facility in Louisiana well as I stated before. We do have interactions with them for bridge timbers and some very small volume of railway ties. So, thank you all for being here and I'll see you all tomorrow.

It would be a low percentage of our total business. If I have to size those annual sales from outside not having to be privileged to any information, I would say it's 30 to 35 million in annual sales if we were to be supplying them and obviously I'm sort of

Not an educated guess, but it's our appreciation of what that could be. That's great. Okay, that's all my questions. Really appreciate the time. And again, congratulations on another great quarter.

Thank you, Walter. Thank you. Our following question is from Gabriel Nicholson from CIBC Capital Markets. Please go ahead, Mr. Nicholson.

Hey, hi. Hope you all are doing well and yeah, once again congrats on the quarter. You mentioned that you were capacity constrained in polls and this is kind of building off of Walter's first question. How much additional volume growth do you think you could have realized if you had the capacity?

And do you think that the two new poll additions would cover that unmet demand? Great question, thank you. Our constraint right now is not on the treating capacity, it's on the procurement capability. And even then when I say procurement, it's really more on a drawing.

capability on the Southern Yellow Pine. It's a wood species that you need to kiln dry and right now we're putting in new 4 billion yards and each of those yards has kiln capacity.

So we're definitely going to leverage that up and everything we'll be able to produce out of those facilities will be sold Will be sold going forward. We have no doubt of that We have discussions with customers on their needs and we're adjusting our offerings to them And they're adjusting their maintenance schedules based on our long-term commitments

So, I feel very optimistic about our ability to be able to start seeing volume growth in the coming quarters. Okay, yeah, great. Thanks. And then also on polls.

The high teens growth your poll guidance is is embedding for 2024. How much is price versus volume?

I would say it's heavily weighted toward the price, but call it 30, 70, let's say, on 70 being depressing.

Okay, great. Thank you. I'll leave it there.

Thank you very much.

Thank you. Our following question is from Michael Caprios from Desjardins Securities. Please go ahead Mr. Caprios.

Thank you. Thanks. Congratulations on the great quarter, maybe just on the Canadian federal budget that was released since you last reported for Q results that included a 15% investment tax credit for crown corporations like Hydro Quebec and some leather.

Is there anything that specifically caught your eye and could be a driver for utility pools moving forward? Well, obviously we're always happy when we hear different governments or Canada and the US put in place programs to help.

utilities or companies investing in their infrastructure. So obviously, yes, our utilities are well in tune, our customers are well in tune with those programs. Our forecast doesn't, when we talk about potential growth, does not scope in those infrastructure. Without borders of hot time, we cannot affordlbs.

It sometimes takes a while to start seeing them. If I think about the US infrastructure bill, I can't say we've seen much of that to date, maybe a bit on the rail tie side. These programs take a while to get to market, so they're not scoped into our views.

future sales and future demand for us. So obviously all of this would be just over and above and

Obviously great news for us. Thanks, that's very helpful. Maybe just on residential number. I know Seasonality played a factor in the first quarter, but looking forward you still have confidence in 600 to 650 million in sales for the year and maybe are there any changes or tone in commentary that you could share from your discussions with your retail partners.

I think it's something that as a company we can.

recreate year over year confidently. If there's favorable R&R trends, if there's

different dynamics, lumber prices impacting this business, you know I think it would be just upside for us on that point on but we remain confident with that.

this exhibition. Thank you. My pleasure.

Thank you. Our following question is from Michael Tappolm from TD Securities. Please go ahead, Mr. Tappolm.

Thank you. Good afternoon.

Thank you. Good afternoon.

Hey, Eric. Just a question on the 16% margin. So I understand that that's the number we should be focused on for 2024 and beyond. Is that also what we should be thinking about for this year? I realize you had a strong start to the year, but is that the 2023 number as well?

16 would be our guidance going forward. If I could maybe clarify, our Q1 result, the 16.9 is a very strong number, but obviously we don't have a full year mix of products. All your products such as residential lumber have a stronger presence in our product mix.

Q2 and Q3, so I do expect to average down during the course of the year, but using 16

be my recommendation or our guidance presently for coming years.

my recommendation or our guidance presently for coming years. Okay, that's helpful. Thank you.

Yeah, and sorry, just to, I think this maybe overlaps a little bit with one of the last questions, but just in terms of the demand, the market demand you're seeing in the utility pools area now, I realize in Q1 it was primarily price or almost all price that drove the organic growth, but it does sound like from your comments there is strong market demand and it's just a function of being able to meet that demand.

and hence the investments you're making in capacity and drying and whatnot. But is this really just heightened replacement activity and I guess the benefits of the fire wrap and there's really nothing contributing at this point at all in terms of any sort of

EV-related infrastructure initiatives or broadband initiatives and things of that nature.

Well, so.

There is some of that in the mix of the demand we're seeing. A good example is the Ontario broadband program. There's a $4 billion program over...

It was over four years now, we're a bit into it right now, but obviously that spend will increase demand for products. That's a public example I can point to. There are other similar examples across different provinces and states in North America. EV is a growing point of discussion with our customers. I think utilities realize that there's going to be...

increase demand from the network. So obviously as maintenance is being planned out, all of these factors are now taken into account.

replacing a pole, it has more hardware and more line loads than it had 50 years ago, and you'll probably increase demand going forward.

AC with electric vehicles. So our customers are discussing about it and are planning accordingly. So obviously all of that, it's hard to say how much dollars would go to one of these. It's now part of the new mix and demand our customers are designing line and designing their maintenance programs.

This general approach is driving the volume for a greater number of products from our partners. Okay. I know that's helpful and makes sense. And not to belabor the point, but it just sounded like earlier on you were suggesting you haven't really built that into the 20 percent CAGR.

number you would put out there for the polls business. Is that, is that correctly notwithstanding the fact that there's things happening in that area, that that's not really a driver to your 20% number?

So all of that is in, what's not in is.

Government infrastructure bills, for example. The previous question was about the federal budget that came out a few weeks ago and had special

knowledge biz reserves for particular info program. I don't know what's going to come out of this, so we can't speculate. So that's not in there. But definitely everything that our utilities are talking about to increase their network, that is definitely sculpted in our 20 percent case.

Got it. Okay. Just shifting over to the ties business 5% organic growth in the quarter. How do you see that trending over the balance of the year? Because if I'm not mistaken, originally you were thinking maybe a little lower than that. Just curious about how to think about the rest of the year here.

I would see the pricing fees decline slightly throughout the quarters. We've been increasing sales prices to our customers every quarter of last year. So obviously we're coming into the year Q1 with less for on life, meanwhile in mid- individuality

four quarters of price increases. So as we're lapping ourselves, you would see that pricing effect reduce over time. With my comment on increasing dry inventory, I think we would have the opportunity to sell a bit more volume in the back half of the year. So I still think that, you know,

low single digit, maybe a bit lower than the 5% somewhere in there is where we'll end up the year. Okay, and raw tie availability, is that improved now?

It has. I mean the last two quarters, sorry, the last two months of Q4, so November to December was great. The four, can actually talk to April now, the first four quarters of this year supply has been coming in at a very healthy rate. We will be at optimum inventory levels by mid-year and obviously the...

inventory will procure in December , January , February will be dry by, call it September , so somewhere in age two we will have more dry inventory, therefore we'll be both sizing less and have an opportunity to treat more ties and take advantage of some bidding opportunities in the market. Okay, perfect. Thank you. And just lastly, and I also had some issues.

revenues, it's enhanced production, and optimize the cost profile of our product and optimize production.

Okay, and that's one of the things that you were pointing to in terms of seeing enhanced ability to meet market demand sort of overcoming quarters here.

And that's one of the things that you were pointing to in terms of seeing enhanced ability to meet market demand sort of overcoming quarters here. All right.

Yeah, okay, okay, thank you. Thank you, Mike. We have no further question in line, thank you. Well, thank you, operator, and thank you everyone for joining us today. We hope you can listen in to our Investor Day on May 25th in Toronto.

Details for virtual attendance will be posted on our website as we get closer to date. Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may disconnect your lines.

for virtual attendance will be posted on our website as we get closer to date. Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may disconnect your lines.

Please stand by and enjoy this music.

Thanks for watching!