Q4 2023 Stella-Jones Inc Earnings Call
Press Star one again to remove yourself from the queue yearend 2023 earnings call. At this time all participants are in listen only mode. Following the presentation. We will hold a question and answer session to queue up for questions by phone. Please press star one and our moderator will contact you.
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I would like to remind everyone that this conference call is being recorded on Thursday February 29 2024.
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 differ materially from the views expressed today.
For further information on these risks and uncertainties. Please consult the company's relevant filings on SEDAR plus. These documents are also available in the Investor Relations section of Stella Jones its website at Www Dot Stella Jones dotcom.
We have also prepared a corresponding presentation, which we encourage you to follow along with during this call.
I'll now pass the call over to Eric rational President and Chief Executive Officer of Stella Jones, Eric.
Thank you Matthew.
Good morning, everyone and thank you for joining us.
With me on today's call Silvana, Travaglini, Senior Vice President and Chief Financial Officer of Stella Jones.
Earlier. This morning, we issued a press release reporting our results for the first quarter and year end 2003.
Along with her.
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 SEDAR plus.
As a reminder, all figures expressed on today's call are in Canadian dollars unless otherwise stated.
Our strong operating and financial performance May 2023, a resounding success for Stella Jones.
We recorded a 23rd year of continuous sales growth and we generated a record increase in profitability.
Our solid results not only reflect the continued growth and momentum of our infrastructure product categories. There are also indicative of our team's forward looking preparedness and ability to leverage the expertise and industry intelligence to take action and seize opportunities for the business.
Much of last year was focused on building additional capacity and inventory levels to meet growing demand for our infrastructure products.
Depending on the heels of 2023, a number of factors support a solid demand environment over the long term.
For utility Poles, we have several of our customers shift to long term sales commitment to secure supply for their ongoing maintenance program and expansion projects.
Utilities and governments, both in Canada, and the U S have also publicly announced broadband expansion and electrical grid hardening projects.
The railway tie product category remains underpinned by steady demand driven by railroad maintenance and our railway tie and industrial products are expected to benefit from important government infrastructure investments and mandates.
In addition to the strong long term fundamentals of our infrastructure businesses the value driven dynamics of our residential lumber customer base provide a relative steadiness and positive prospects for this business.
Our loyal and dedicated customers recognize Stella Jones is value added proposition of premium lumber products accessories and composite products distribution.
In the face of these trends, we've taken a proactive approach to both procurement and capacity.
With our robust growth Capex program for utility Poles, we actively expanded our appealing drawing and treating capabilities, making significant investments in six peeling and treating facilities in the U S and Canada.
Additionally, we bolstered these investments with targeted and accretive acquisitions in 2023, we completed three acquisitions, which added to treating facilities and two pulp killing operations to our network in the south Eastern United States.
These capital expenditure projects and acquisitions reinforced our procurement.
Production capabilities and enabled us to secure new customers and expand our customer base.
Our strategic approach to augmenting capacity was upheld by our procurement capabilities and financial strength to secure ample wood supply.
In 2023, we cease procurement opportunities benefiting from fiber availability and <unk>.
Prioritizing mutually beneficial relationships with sawmills and loggers across North America to build a robust inventory position.
As always ESG is a significant companywide focus.
Our formalized ESG strategy title connecting our sustainable future.
Identified long term and measurable near term targets across six strategic topics, including climate change greenhouse emissions as well as health and safety.
In 2024, and we look forward to reporting on our progress.
And to move forward on key initiatives that will drive sustainable improvements across our value chain.
All of these initiatives coupled with the strong performance from each of our key product categories enabled us to finish 2023 satisfied with our performance and with the progress we are making on our business objectives.
Allow me now to elaborate on the performance of our key product categories.
Our infrastructure products sales benefited from strong organic growth and the contribution of strategic investments.
Utility pole sales grew organically by 18% in 2023 profiting from favorable pricing dynamics and the emergence of growth investments during the year.
While the long term market fundamentals and growth prospects for this product category remain unchanged, we experienced lower volumes year over year and noted a softer pace of purchase mostly attributable to certain customers' capital budget constraints.
During the year, we have shifted our focus to preserve existing and capturing new business for the long term.
Electrical and telecommunications utilities across North America remain dedicated degrees maintenance and upgrades their request for sales contracts with a long term horizon instills confidence in the upcoming demand for our products and in our investments to meet this demand.
Turning to railway ties.
Following 2022, when the industry was faced with fiber availability challenges our focus in 2023 moved to replenishing and maintaining adequate inventory levels to meet demand.
We were successful in that regard and are now well positioned to cater to the commercial side of the market.
Railway tie sales grew above our expectations in 2023, driven largely by the pass through of untreated tie cost increases from the previous year.
Looking ahead into 2024, we expect the cost of untreated ties to remain relatively stable.
While maintenance programs for class one railroad customers should remain comparable to those in 2023, we anticipate additional sales volumes from our commercial business supported by a healthier inventory position.
As we see railway tie customer agreements gaining maturity in the coming years, a key area of focus in contractual discussions will it be to reset pricing and established improved cost recovery by reviewing agreements to ensure costs are better incorporated inter pass through clauses.
Lastly, we remain pleased with the performance of our residential lumber product category in 2023.
We continued to prove our ability to provide consistent supply to big box retailers, which comprise approximately 70% of our customer mix.
So the consumer base is contending with macro economic headwinds brought on namely by interest rates. Our customers are noting good demand driven by persistent consumer trends such as homeowners expanding their living spaces outdoors.
This bodes well for our business and it will certainly support our premium treated products as well as our composite products we distribute.
On the procurement front of residential lumber Canadian saw mills have curtailed production in the last year, which has brought on challenges, making it difficult to source specific components in Canada.
In response, our resourceful procurement team has started turning to alternate geographical regions to secure required materials and help maintain a healthy mix of inventory and I commend them for their creativity.
With that I will turn the call over to sylvana.
Thank you, Eric and good morning, everyone.
As Eric stated at the top of the call Stella Jones delivered another solid financial performance Mike.
The increased sales and a record improvement and profitability.
Sales for the year were $3 3 billion.
$254 million from last year.
This increase was driven by the 13% organic sales growth of our infrastructure products.
All of our infrastructure products benefited from favorable pricing dynamics, while residential lumber and logs and lumber sales pulled back due to the decrease in the market price of lumber.
The acquisition of Texas Electric cooperative late in 2022, and more recently Baldwin as well as the favorable currency conversion effect also contributed to the higher sales in 202003.
For the fourth quarter sales and market to $688 million compared to seven $665 million for the same period in 2022.
The increase continued to be driven by the sales growth and utility Poles and railway ties offset in part by lower residential lumber sales.
For utility Poles, we generated $383 million.
In the fourth quarter up 17% over the same period last year.
<unk> and contribution from acquisitions were partly offset by lower volumes, mainly due to the slower pace of purchases of certain utilities.
Volumes were down 5% versus Q4 of last year.
For the fourth quarter sales of railway ties were $165 million up 2% compared to $161 million in the fourth quarter of last year.
Pricing was up 8%, but was largely offset by lower non class one volumes compared to Q4 last year.
Similarly to previous quarters sales of residential lumber decreased compared to last year.
Also were $82 million in the fourth quarter of 2023 down from $100 million in the fourth quarter of 2022.
While pricing in 2023 pulled back residential lumber sales benefited from higher sales volume due to solid consumer demand.
We ended the year with sales of $645 million within our $600 million to $650 million target range.
Turning now to profitability.
EBITDA for the year increased to $608 million.
By a record 36% compared to last year.
The higher EBITDA was largely driven by the margin expansion of the Companys infrastructure businesses.
Utility pole acquisition in late 2022, and in 2023 and the positive impact of currency conversion further contributed to the increase in EBITDA.
We ended the year with <unk> margin of 18, 3% up from 14, 6% last year.
As a percentage of sales EBITDA also benefited from better product mix led by the strong growth of utility pole sales and a lower relative proportion of residential lumber sales now representing 19% of the company's total sales.
For the quarter EBITDA increased $120 million.
An increase of 38% compared to the EBITDA generated in Q4 last year and the margin grew from 13, 1% in the fourth quarter last year to 17, 4%.
Third to the third quarter, all product categories generated similar margins as a percentage of sales.
The sequential decrease in EBITDA margin was a result of the lower volumes in operating leverage that is typical in Q4 versus Q3, when the margin percentage benefited from strong seasonal volumes.
Consistent with the EBITDA growth in 2020 net income for the year increased 35% to $326 million.
Earnings per share also continued to benefit from our share buybacks and grew by 43% to $5.62 per share.
During the quarter, we initiated we initiated another normal course issuer bid as part of our strategy to return capital to shareholders.
During the year, we deployed the cash generated from operations of $107 million in available credit to maintain our network assets mid cap capacity enhancing investments, which included the acquisition of three businesses as well as return capital to shareholders.
In line with our capital allocation policy in 2023, we increased dividend by 15% to 90% per share and yesterday given the record increase in profitability. The board of directors announced that 22% increase in its quarterly dividend to <unk> 28 cents per common share.
This marks the 20 <unk> consecutive year, we have increased our dividend, which speaks to our overall confidence in the long term fundamentals of our business.
We ended the year with a net debt to EBITDA ratio of two six times deviating slightly from our leverage target as we invested in strategic growth Capex and acquisitions.
These growth opportunities totaled over $150 million and are expected to contribute future profitable growth.
At yearend inventories stood at approximately $1 $6 billion, an increase from $1 $2 billion at the close of last year.
In addition to the increase in inventories in the fourth quarter due to the slower pace of purchases of 50 utilities. We also built inventory to support the anticipated infrastructure demand growth and to secure longer term utility coal sales commitments.
Further following the limited availability of untreated ties in 2022 received procurement opportunities in 2023 to replenish our railway tie inventories.
This higher investment in inventory places the company in a good position to service the anticipated increase in customer demand.
Subsequent to year end, we amended our syndicated credit agreement in order to increase the amount available under the revolver to $600 million U S and extend the maturity.
Demonstrating our lenders confidence in our ability to execute our plan and grow the business.
In summary, with our healthy financial and inventory position as well as solid market fundamentals, we have confidence in the financial strength of our business and believe stellar John is well positioned for success in 2024.
I will now turn the call back to Eric for his closing remarks.
Thank you sylvana.
By all measures, we had a strong year and a strong start to our three year strategic plan.
After the first year sales reached $3 $3 billion, but were $3 2 billion.
Organic basis.
Based on our progress in 2023, we remain confident in the sustained growth of the company and our ability to obtain or exceed the $3 6 billion organic sales objective set out in our financial guidance.
In 2023, our infrastructure product categories represented 77, 7% of sales mix and residential lumber sales represented 20% in line with our expectations.
Looking ahead, we expect continued profitability for the business.
External factors like to continue higher cost of capital and increased supply from the utility pole industry, they're undetermined effects, which could impact our EBITDA margin in light of this we remain confident in attaining our 16% objectives.
2025.
We are also optimistic that the proactive planning and execution of our business strategy will enable us to continue returning capital to shareholders, having already returned almost 40% of the minimum of $500 million objective outlined in our guidance.
We are focused on maintaining our leadership position in North America.
And that requires us to evolve with the needs of our customers.
With our growth Capex program, largely complete our attention in 2024 will remain on growing our business.
Acquisition on the wood treating side of the business as well as investing organically in our network remain key elements of our strategy.
But we will also pursue growth through acquisitions and other infrastructure products and services, where we can leverage our continental network industry, leading customer relationships and solid reputation.
In closing I want to mention that we have high standards for our business and if im confident in our capabilities is because of our nearly 3000 employees.
Our products enable power to flow through the electrical grid helped move merchandize on the covenants rail network or help retailers in North America supply lumber products and accessories. Our employees are the one who make it all happen.
I want to thank everyone for their contributions in 2023 and beyond and for their ongoing dedication to customer service and maintaining our leading reputation in the industry. Stella Jones is ready for the future and this is in great part thanks to you.
And with that I will open the line for the questions.
Thank you Eric Your line is now open for questions I would like to remind you that if you were on the phone and wish to ask a question. Please press star one.
Our first question is from James Mcgarrigle from RBC capital markets. Please go ahead.
Got it thanks for taking my question.
Yes, good morning, Amit.
On the utility Pole segment, you mentioned some constraints.
And we've heard a slow pace of federal funding has some utilities cautious about their pace of purchases but.
To what extent do you see this as a temporary headwind I mean, you are making significant investments in inventory.
So what gives you that confidence that this situation will resolve during the remainder of the year.
Okay. Thanks.
Thank you for the question.
Several factors right. So let me address further slowdown piece.
In our view.
It's not necessarily related to federal funding is the timing of.
The availability of capital budget of our customers.
Many leaders in the.
North American utilities have pointed out to me that the cost of capital right now is.
A bit of a headwind obviously.
Increased.
The increase cost of capital is making certain projects.
A bit harder to do.
To get off the ground that'd be said im not an economist, but I think we all feel generally are seeing the new is that interest rates will be dropping in the next year, let's say.
All of this will resolve itself on the second part of your question.
We.
Have secure.
Long term contracts with several customers in the United States.
We have secured new customers in 2020 forward as total has not serviced in the past. So we are definitely build some inventory to be able to address those customer demands more.
Or are customers, although at a slower base are still increasing demand for their maintenance projects going forward.
Barry.
Optimistic and looking forward to see those projects to execute.
We're quite confident as we look at the remainder of our Miss our guidance here that we will continue to see growth to our 2025 objective then who would be driven by by some by some volumes and lastly, I just wanted to point out some public information that you are probably aware of and then maybe for everybody listening, obviously theres been some public announcements.
From a Canadian utilities U S utilities as well as the governments.
Which indicate that.
And all of these announcements talked about decades worth of work. So when we say we're future ready.
Definitely positioning ourselves in the last 18 months.
Building that capacity building their procurement.
Getting the long term contracts, we hold all the right cars to be very successful for the long term.
I appreciate that and just my other question is going to be on our margins in the longer term outlook.
You put up a really strong margin in a seasonally weak quarter in Q4.
I know theres, some uncertainty due to potential cost inflation pricing can move around with some of the new pool supply coming online but.
The call out specifically in the quarter.
Looking ahead, it looks like mix should continue to shift towards Paul you mentioned some of those.
We've made long term investments on the utility side just.
Just trying to better understand the puts and takes.
In the quarter and to what extent.
These levels of margin will be sustainable in 'twenty, four and potentially longer term.
Well with regards to the quarter. We are we're actually very pleased with the percentage margin is.
Haven't checked in deposits, but it's probably one of the highest.
On the record for us.
You know that we have a cycle throughout the year to fourth quarter is usually a lower volume quarter, which makes us such that the margin percentage from compressors to some extent because we have certain network that has its base cost that we need to support.
So very happy with your year over year performance of at least four points plus compared to last year.
Maybe if I understand your question going into the future. We finished the year very strong you're sitting in a hold over 18%. We were had a very good product base definitely.
Weighted towards utility Poles. So we're very pleased with the performance and we are talking in my last remarks.
Dynamics in the spot markets. Another long term contract piece of it but the more the spot market or the contractor market, where we feel that additional capacity in the industry right now.
We will probably put some pricing pressures later in the year on that part of the business.
And just a quick follow up on that the spot market. I think you mentioned last quarter is about 30% of your overall pool mix.
If we're going to see.
As an example, you know 100 basis point decrease in your consolidated margin.
It would imply extremely significant drops on the spot market any color you can.
Sure with regard to what Youre seeing in the spot market and after that I can turn the line over thank you.
No certainly so.
We haven't seen it as of today, so, we're calling and calling it out because we are observing the dynamics in the market and we're paying close attention to it.
By default Stella Jones.
Getting into long term agreements and welcoming new customers suppliers.
Every action, we take as a reaction in the market and we would expect.
Dynamics in the spot market to become a bit more active so.
That could be compensated by a very healthy demand throughout the rest of the year and we may never talk about it but I do think it's something we will observe this year end.
It looks like it will be short lived I think it's a bit of a.
It will follow a bit on the trends in the general market as interest rates subside a bit and we see some some pickup with the bigger utilities with their business.
To predict this if I can't give you much color on just sort of explain to you a bit of a biologic and how we're seeing things, we're being cautious cautious I guess not necessarily wanting you as an analyst to take this 18% and sort of projected street laying out I think we need to live through a few cycles here a few quarters. If you were just going to leave.
Thank you very much.
Thank you very much.
Thank you. Our following question is from <unk> <unk> from CIBC capital markets. Please go ahead.
Good morning.
Eric I mean sticking with the cold category.
So what type of volume growth would you expect there in 2024 and just given some of your comments around your near term.
And being in perhaps less robust do you do you think you'll be capacity constrained or is that your growth and that the plant is going to likely track ahead of demand in 'twenty one.
Obviously with the investments and the acquisitions. We've done we were obviously planning ahead to capacity constraint.
Not one of my concerns at all at this point.
To answer your.
So the first part of your question I guess I will.
Answer is refer you to our guidance in 2025, if you look at our first year of a performance caused a $3 2 billion or again is organic.
Sorry, you're talking about in the utility pole business in there too to be able to reach that objective.
We're probably looking at Carlin.
14% to 16 like midpoint of 15% CAGR.
For the next two years for utility Poles and that would mostly be volume.
Most of the volume okay.
That's helpful. Eric in terms of the.
Sure polls that is.
Spot.
Just given the capacity you're bringing on would you expect that share to change or is.
Is that already kind of contracted out.
I don't think so.
It's part of the a bit of the.
In general approach on where you're planning production, we have a steady base, which is great and we're growing it obviously as I've mentioned, because we have new customers, but part of it is to I guess to plug the hole.
Sort of fit in.
It makes sense that this is a spot market business as we've grown the network. Obviously, we got new treating facilities with our Baldwin acquisition, and we've increased cylinder sizes at certain facilities last year.
So we've run the capacity you were growing the long term and then we will.
Complementing with.
The spot market.
And with certain strategic partners also should I say.
Okay. Thanks, that's helpful and just the last question I had was on on res lumber.
Could you give us a breakdown of how the volume and price.
Mix wise for for 2023 and are you expecting any volume growth in red lumber in 2004.
Yes, so for 2024.
We keep guiding toward six to $6 50, and I think.
Could there be marginal growth there perhaps.
We do feel that there is good consumer dynamics of last year.
We had some volume growth in the business around call it 7% and that was obviously all overshadowed with.
The reduction in price of lumber coming.
Coming out of a Goodyear other volume side I would say.
I would say relatively comparable if I listen to our customers. They feel that there is.
There is some potential increase call it mid single digits.
Sure.
Discussions I mean looking outside today, it looks like spring here in Montreal, and obviously it gives those projects started earlier so that could also be very helpful for us but.
If you look at our guidance I still think we're going to be in that range of the $6 to $6 50.
And we.
We've got a great customer basis to support that thesis and maybe a bit of growth there, but we will see how the season rolls out.
Great. Thanks, Eric go ahead, I'll turn it over.
My pleasure. Thank you.
Thank you. Our following question is from Jonathan Goldman from Scotia Capital. Please go ahead.
Hi, good morning, and thanks for taking my questions, maybe just a housekeeping one to start off with.
On weather.
<unk> noticed any impacts on your business from the flooding in California.
Or even the colder weather in the northeast do you anticipate that impacting any sales levels anything in that regard.
Paul.
Obviously, we had cold snaps in January in some ice storms in the south end.
Obviously that doesn't help but there are winter conditions.
Last year, we had these.
Rivers storms in California, and mudslides and.
Actually a record snowfall.
It seems like every year, we have some of these weather events. So.
Yes, it does.
It does slow down a bid business, but it's one month out of the year.
I think our customers have plenty of time ahead of us to readjust.
I am not really concerned about that.
Unless we keep seeing either.
Continuous storms in specific geographical areas, which would add to a long term trend, but right now it's.
That one slightly but it's one month.
Okay. Thank you for that and then maybe switching to capital allocation priorities for 2024.
Maybe you can just remind us what the priorities are and then whether or not you've earmarked any capex this year.
For additional capacity that would be required in 2025 to support.
Additional potential spend and infrastructure related investments.
And certainly I'll, let silvana take that one.
So Jonathan for 2024, and we our priority is first to complete.
The capital expenditures related to Iraq of growth Capex apolitical Capex that we had told the market that in total we had a five year project.
Capital expenditures to grow R&D activity pulls up a $150 million, so theres about $25 million to $30 million left to complete that in 2024.
Have may.
Maintenance and other efficiency projects being.
I looked at and targeted and we always mentioned somewhere between 65 and $75 million up let's call. It more regular capex. So that is always.
A top priority for us and we continue as I noted in.
In our conference call at that time, we have initiated a new and CIB program, so still committed to it.
Returning capital to shareholders, both through dividend and.
Through repurchase of shares at least keeping in mind that we have a three year commitment to return $500 million to shareholders and we do not have specifically earmarked any additional growth capex in 2020 point that will be.
Looked at as we prepare for our budget for 2025.
Okay, and then maybe just a quick follow up Eric how long would it take to bring on additional capacity I guess.
You Didnt quantified how everyone similar magnitude to the capacity youre, bringing on this year, what would be sort of ran safe.
So we do have is an interesting question. So we do have a bit of a cheat sheet of what we could do in the next 12 months and what we could do it in 18 months.
Execute quickly on capacity.
And when you know.
That question I think I have a few things.
When I think of southern yellow pine is a drawing capacity and.
We do have quick access to kill them, if we need to.
Execute on that is I would say within six months I could get kilns installed or additional kettles installed at facilities.
The quickest way to increased treating capacity right now would be to add trading cylinders or increase the size of cylinders at certain facilities and we have earmarked.
And lead.
Lead time currently right now is about six months to get it in call. It two months to put in place or maybe eight months to install the cylinders. So I would say pretty much anything we'd want to do within 12 months, we put mostly most likely execute on that.
Excluding a greenfield plant because thats a bigger endeavor because.
Permitting and finding the fighting a facility and working with the community. So that's a longer piece. So greenfield plan is something that.
If you ever hear us talk about that there'll be announce ahead of time, they will do well thought out plan.
Right now I think we've got enough capacity to.
Execute on what we want to do for at least 18 months that I feel comfortable that.
Our five year planning exercise that we will be doing in the next few next few months.
<unk> already started talking about what could happen what do we need to do to capacity. So trying to give you a flavor, but I think within a year, we could easily execute if something would happen quickly as far as demand, but you know we.
We are what we've done in the last 18 months was really trying to plan for increased demand.
<unk> new customers that we have now and.
I am hoping for some other new customers in 25 at this point that.
Where we keep talking to so I think we're well positioned.
Address Amy.
Unexpected demand coming our way.
No. That's really helpful. I appreciate the color I'll turn the line over thank you.
Thank you.
Thank you. Our following question is from Ben <unk> from <unk> Securities. Please go ahead.
Hey, good morning Silvana.
Just to come back on the Youtube you pulled volume I think you mentioned earlier on the call that you felt comfortable with the 14, 16% growth in the company.
Two years I'm, just wondering about pricing expectation, what we could expect.
In 2024, whether pricing could play it could be incremental to our volume.
Good morning, but also with a question for Amir first of all then.
One of you.
Thank you.
So it is mostly volume I think so if you if you recall we've had two years of.
<unk> growth.
Good pricing increases or pricing growth.
I am very confident that we will hold the door, though those prices could we see a bit of an uptick maybe offset by what I was talking about pricing headwind headwinds in the spot market.
Potentially but when we think about the future growth it will be on volume and if there is some pricing uplift it will be a bonus.
Okay, and just coming back on the railway ties you made great color about the slap expectation from class one although you have additional ties to serve the commercial customers. So what could be reasonable in terms of overall organic growth expectation and I would be curious to.
Get your talks about the pricing environment is it.
Looks like there was improved pricing in Q4, and I don't know how significant it was all on the organic growth.
The pricing on the <unk>.
Organic growth.
No.
Hi, David.
Figure it out because obviously we had.
Lower volume, so we had lower volumes, because obviously, we refocused our inventory to service our R.
Our class one numbers, so so that overshadowed business sales growth call. It.
Five ish percent pricing increase over the year, just as a pass through of untreated untreated tie cost passing through.
No as I said going forward, we think the untreated.
Price of ties would be relatively stable so going forward I.
I know, we're making it all on volumes or you can call it in that low single digit.
Range.
I'll leave it up to you to define the low single digits in my mind, it's not one or two.
I'll, let you model it out.
Okay perfect.
Pricing on top of that.
For depending on the price of ties well Theres always a bit as you know is to propose also every year, there's a bit of a you know.
Our causes has.
Inflation indicators and different things that can give us a couple of percent here or there.
That would be part of it.
Yes.
I'd agree with that.
And given the favorable mix a unicorn silvano in 2024 talking about bigger contribution from utility Poles.
Stabilized residential lumber better mix from commercial on the railway ties could it be enough to offset the potential risks around additional pull supply toward the back half of 2024, just wondering if you could sustain kind of the 18% margin profile.
<unk> could offset the other.
Positive implication from a mixed standpoint.
I guess it would be difficult for us to say because obviously, we quant.
Quantify quite easily with the improved mix with due to our margin, but harder to for us to sort of determine what potential impact the <unk>.
The spot market type pricing.
Yes, there's a negative impact.
Mentioned.
In a previous answer is.
We haven't seen it or felt it.
It's something we're monitoring so it's kind of hard to one quantify.
So I do think we'll see some of that to what extent there'll be it will be.
Significant or not we'll have to see EBITDAR.
Okay, and just one on in terms of working cap any thoughts about working cap requirement for 2024.
And youre still growing but there might be some reversal at one point given the build up in the 2023. So if you could provide some color on that and maybe given the leverage situation a little bit higher than the targeted range should we expect you to be maybe a less focus on the buyback activity in 2012.
Four.
So to answer the first part of the question in terms of the working capital going into 2024, we would not be expecting any any significant increase generally think could be fairly.
Flattish.
When we compare this year end of 2020 to end of 2020, keeping in mind, there will be some seasonal variations as you know in the first quarter there will be a pickup but then there will be a relief expected in second half.
<unk>.
In terms of the.
The leverage.
No I do not expect that the higher leverage to impact that.
<unk>, we are still left focused on.
On returning that $500 million of over three years. So the buybacks will be in line with that target.
Comfortable again, that's D at the uptick in leverage was really.
Based on our opportunity to us to invest in that in the three acquisitions that will get us a lot of that growth capex. So expect the leverage as it usually does tend to go a little bit higher in the first quarter of the downturn to leverage back down subsequently in the second half.
Okay perfect. Thank you very much for the time.
Thank you Bruno.
Thank you. Our following question is from Michael <unk> from TD Securities. Please go ahead.
Okay.
Thank you good morning, Eric.
Eric maybe just to start on the utility Poles product category for Q4, 2023 can you talk more specifically about the pricing versus volume changes.
<unk> seen in the quarters in terms of pricing being a tailwind in volume being a headwind what the kind of what the actual.
<unk> were for those two.
Yes.
This pressure was about.
Sorry, the volume was about 5%. So obviously organic growth you see is net of that in the deck.
Sure.
The.
Sorry, the volume was a bit of a 5% downtime.
Okay, and then we come back into the pricing.
Exactly by different that will give you 22, right and Thats simple math.
And then just to be clear I guess just to go back I think.
It's been asked a few times now, but as far as the outlook for organic growth and pulls I think if I'm, if I'm understanding correctly youre talking about something in and around the 15% range.
Organic growth for <unk> over the next two years is sort of a keg.
I guess first question is just to begin.
Reconfirm that.
For me and then just a follow on how.
How do we think about that over the next two years for modeling is there much variance from one year to the next as we look at 24 versus 25 or is that a fairly steady state.
Expectations in each of the next couple of years.
So you you listed properties of call it 15% CAGR over two years and it would be sort of even between the two years evenly spread out.
Got it okay and this is just to be clear. This is organic organic growth for pools or is this is this 15% inclusive of the benefit of the acquisitions you announced.
Later, certainly earlier purely organic carving out whatever gains you would have in the first six months for the Baltimore acquisition.
Okay perfect. Thank you.
Yeah.
And then I guess just.
Talking about the you mentioned some of these announcements from from North American utilities about longer term capex plans as far as.
Meeting increased power demands and how theyre going to do that.
In your conversations with utilities and I think this is an area you've been excited about for some time now.
But the conversations you've been having more recently I mean are you feeling more encouraged by the the medium to longer term outlook than previously or is it.
Is this just sort of unfolding as you would have expected as far as your views on that.
For the slowdown that we sort of called out today I guess it does not hit our three year guidance is not something that we saw coming.
But to your point in talking with leaders of utilities.
Sure.
They have a lot of they have a lot of projects a lot of work to do theres lots of maintenance in grid hardening and upgrades to be done across North America.
And I will say is even before considering the impact of electric vehicles.
Because that is apparently something that is still very difficult to model everybody knows that there will be an expansion that is going to be some some hardening in some some adjustments because you'll need more transformers.
More cables in the network.
But right now it's not clear.
For our customers and I understand it's actually it's not care for them to how to model.
Where do we upgrade how much until they see where the.
The different projects that are going to get established.
Necessarily been modeling that so I am very optimistic about what our customers have to do it is unfolding as it goes but.
As I pointed out.
It's not by coincidence that all of these announcements usually cover at 10 or 15 year period, and we're now signing supply agreements that cover those periods.
So it's.
As.
Utilities.
Capex budgets increase overtime.
We do observe a correlation with our utility pole division sales increase on the volume side. So as all of this sort of unfolds.
We will benefit.
<unk> continued growth.
I don't want to stretch buy sell but I would say beyond our current guidance.
And.
So to answer your question in my discussions with leaders of utilities in the U S. I am quite optimistic of what the.
The next two years, where our guidance hold but also probably the next decade as I sort of look at those announcements.
Okay. That's very helpful. Thank you.
And then just back on the margin question, you've also had a few times about.
Strong margins in 2023, and you've highlighted a couple of potential headwinds doesn't sound like you have necessarily seen.
Much impact as it relates to any kind of spot market pricing for Paul So far so.
Understandably that could come in your rightful arena correct to be <unk>.
Cautious about that I gather but.
Should we be thinking about margins sort of holding in.
At least through the early part of the year given that you have yet to see.
See those kinds of pressures materializing materialize yet.
I think that's a fair assumption for now Mike.
If I follow.
My statement I didn't say, we haven't seen it yet and before we get those.
<unk> done it and delivered Youll, probably a few months out so.
We could see you are right that we could see.
First part of the year with softening if it happens.
The summer in the back half of the year.
Got it.
And then just.
Maybe just lastly, the.
I know you've been asked about this but just on the acquisition front is that still.
Focus area for you.
And if so what what are you seeing and what are you looking at right. Now if you can if you can comment.
So certainly there are always interested in.
Increasing our network and doing some acquisitions.
We have a very large and strong network in North America. So there are.
Geographical regions, where I don't necessarily need more capacity in the other parts of the.
Continent, where.
I would definitely consider some acquisitions.
So definitely a utility poles. It is top of mind, if that business comes with.
No good.
Good assets at a good book of business.
We'd be really interested in that there are still some opportunities potentially on the railway ties side and we keep our eyes open and we are very patient, but I.
I think theres, some oddities that can come there and last but not least I have I've expressed.
Infrastructure products that support our customer base.
<unk> remains very appealing to us it's something that we keep.
Investigating and studying and had discussions you know in the last year with.
Different parties to see what the future look like.
But I guess my top of mind is how do we better service our current customers.
And I do have positive signals from our customers.
Ah.
<unk>.
Encouraging us to consider other products and even services.
Actually.
So we're very.
Structured and disciplined in how we're approaching this but it's definitely something something of interest, especially when we got the green light from from from important customers I think.
It's a it really makes things easier to consider we just wanted to make sure that whatever our whenever we do it we will be very successful at what we in her new endeavors.
Okay, perfect and sorry, and just one follow on to that.
This latter part that you were just discussing there that we use to better.
Serve existing customers could these be impactful opportunities or are these sort of more.
Likely to be <unk>.
Moller tuck in type situations.
These vary in size as Mike from very impactful to small.
And my view is if we are going to enter something that is.
Different intriguing would it would be it would be of a certain size, where theres. Good structure. Good leadership, good knowledge, a strong base to ensure what I just mentioned about being very successful at what we do.
Sure.
I don't think we buy a small shop thinking we were going to grow into.
So a $1 billion I think we'd probably buy.
You know our medium size, if I can make at the analogy of medium size that has a great engineering team and you know a good footprint and good customer access.
Already thriving with that us potentially adding on with our customer relationship and distribution network as potential synergies.
Okay. That's all very helpful. Thank you.
My pleasure.
Thank you. Our following question is from Maxim <unk>.
From National Bank financial Please go ahead.
Hi, Erika good morning.
Good morning, Tim.
So just in terms of to think about the polls dynamics. So you don't think it's a reaction to the price increases that we've seen over the last two years and it's really in relation to kind of the capex piece on the part of the clients.
How you guys have taken internally.
Yes, the 100%.
No doubt in my mind this has nothing to do with impressive.
Okay, and then in terms of like obviously, you said minus 5% in terms of volume in Q4, but what are you guys seeing in Q1 like the rates of.
Volume headwinds on a similar different what can you tell us.
Yeah.
For now I would say similar obviously with.
We got we got one month really under our belt in the last few weeks have been focused on.
On a quarterly so I have.
To say I haven't spent much on our February but.
The same for now but as someone asked earlier about the weather in January that sort of a bit of a headwind. So I can't draw a conclusion on that part.
And maybe a thought Maxim as you know.
Our customers feel for where we're at.
Talking about decades, a few minutes ago, we're working on the on the long term aspects for the quarter to quarter impact.
Impact.
We report quarterly we want to deliver great results and we typically do.
But you also have to keep in mind, what does that trend look like for the year for 'twenty four and 'twenty five.
Part of our team is now actually planning on 2025 business and looking at contracted renewals and extension and new customers. So.
It's a bit of that long term play when we talk to utilities.
Yeah makes sense and then just in terms of.
Thinking about the margin profile for Paul So like we're not in a situation where kind of like a higher cost.
Inventory cycling through the <unk>.
P&L right. So I mean, that's kind of the comment around margins staying relatively stable and policies is that how we should we thinking about this.
Yes, so the <unk>.
Increase in the inventory.
It's mostly volume right and not at any cost.
You know Atlanta, no impact on profit margins.
Margin impact.
On that volume.
Okay. That's great. Thanks, Thanks, so much and then just.
So coming back to kind of like obviously youre looking at M&A and I think also the market appreciates that but in terms of <unk>.
Commitment to sort of all the verticals.
Current platform.
No incremental thoughts in relation to you.
<unk> exposure, if that's something that you.
You quote unquote need in the long term maybe.
Any thoughts there thanks.
Volume mix and the way we look at it.
That business.
Out of the three product categories as a visitor inventory four five times a year healthy margin and definitely is a good contributor to the business. So.
I don't know what the future holds as far as dynamics and what comes our way.
Obviously, you've been vocal that we're investing in our infrastructure business and that business is proportionately shrinking although stable revenue.
<unk> very steady on the margin piece.
It is shrinking so as long as it's accretive contributing to the business as wood treating which is part of our core knowledge it.
<unk> fits very well with what we do.
Okay Perfect and then just one last question clarification. When you talk about sort of additional services potentially for your time post clients. So you would not be averse to potentially looking at something which is sort of lost manufacturing and maybe a little bit more kind of final head count driven in terms of.
M&A assumed that it meets certain Ross your targets is not the way we should be thinking about this.
Yes.
We find the right partner that is.
If I could say the Stella Jones equivalent in their own in their own segment.
I wouldn't I wouldn't hesitate, especially as we got customers, saying.
Hundred percent intelligence can bring value in a combined service process slash product offering.
Okay. Okay excellent. Thanks, so much.
Thank you.
Yes.
We have no further questions in the queue. Thank you.
Well, thank you Matthew and thank you everyone for joining US today, we look forward to updating you on our first quarter results in May have a great day.
Ladies and gentlemen. This concludes today's call. Thank you for participating you may now disconnect your lines.
Please standby and enjoyed this music.
Okay.
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Yes.
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Meeting has ended goodbye.