Q3 2024 Stella-Jones Inc Earnings Call
The End
Speaker Change: You're in listen only mode. If you wish to ask a question, thou start one.
The End
Speaker Change: Good morning and thank you for standing by. Welcome to the Stella Jones 3rd Quarter of 2024 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 a moderator will contact you.
If anyone experiences difficultly hearing the conference call, please press star one for operator assistance at any time.
I would like to remind everyone that this conference call is being recorded on Wednesday, November 26, 2024.
Speaker Change: 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.
Speaker Change: Actual results meet different materialies from the views expressed today.
For further information on these risks and uncertainties, please consult the company's relevant filings on C-DR+.
Speaker Change: These documents are also available in the Investor Relations section of Stella Jones website at www.stella-chones.com
Speaker Change: Additionally, during this conference call, the company may refer to non-gap measures, which have no standardized meaning undergap, and are not likely to be comparable to similarly measures presented by other issuers.
Speaker Change: For more information, please refer to the company's latest MDNA available on Stella Jones website and on C-DAR+.
Speaker Change: Lastly, we have prepared a corresponding presentation which we encourage you to follow along with during this call.
Speaker Change: All now in, the call over to Eric Vachon, President and Chief Executive Officer of Stellageau. Eric?
Eric Vachon: Thank you James.
Eric Vachon: Good morning everyone and thank you for joining us today. I'm here with Silvana Travaglini, our Senior Vice President and Chief Financial Officer of Stella Jones.
Eric Vachon: Earlier this morning, we issued our press release reporting the results for the third quarter of 2024.
Eric Vachon: Along with our MDNA, you can be found in the Industrial Relations section of our website at www.stellahifengjohn.com as well as on Cedar Plus.
Speaker Change: As a reminder, all figures expressed on today's call are in getting $1 on the set of wise days.
Speaker Change: Telugu is a strategy, as always, it is rooted in the long-term growth of our resilience infrastructure businesses.
Speaker Change: and we are confident in the strong long-term demand drivers of the industry's research.
Eric Vachon: The growth in Q3 sales, however, was lower than anticipated, and this was driven by lower sales volume for utility poles.
Eric Vachon: As we keep our focus on our goal to deliver profitable growth, we are pleased with the continued solid margins and strong operating cash flows generated this quarter.
Eric Vachon: The demand for utility poles remains very compelling. But over the last year, we have witnessed a slower pace of purchases and deferral in the execution of certain projects by utilities.
Eric Vachon: While our customers continue to acknowledge the need to increase their investments to replace aging infrastructure and increase risk resiliency.
Speaker Change: Do you feel you are working through what we understand, our various challenges, impacting the timing of some capital expenditures?
Speaker Change: This includes inflation and utilities supply chain constraints as well as timing of funding based on rate case violence.
Speaker Change: As such, our utility customers are currently investing in poll maintenance at a slower rate than their initial projections, and we have seen less project-based activity than we typically would in the third quarter.
Speaker Change: Based on our visibility on user-current purchasing trends, we are updating our three-year sales target to approximately $3.6 billion by 2025.
Speaker Change: This compares to the above $3.6 billion organic sales objective set in May, 2023.
Speaker Change: From an event on large and perspective, our performance today has exceeded our profitability objective.
Speaker Change: Test 2022, we have expanded our Epidol Marges by over 300 basis points and we are confident that we can sustain and expand the Epidol Marges of over 17% compared to our original 16% target.
Speaker Change: This represents an impact of 11% for the 2023-25 period compared to our initial period of 9%.
Speaker Change: As we remain focused on value creation for shareholders, our aim is to continuously grow sales and profitability as evidence by our established track record of performance.
Speaker Change: Turning now to each other product categories.
Speaker Change: For utility polls, as I noted, we are experienced what we believe is a period of the first spending on certain maintenance and projects across the utility industry.
Speaker Change: That said, aging infrastructure, our customers forecasted capital expenditures and the long-term sales contract that we continue to secure. All underscores are continued confident in the long-term demand growth.
Speaker Change: To this end, it is not where these are highlight that sales are usually pulled product category. Even prior to this significant increases in 2022 and 2023, have grown on average in the mid to high single digit range.
Speaker Change: When compared to the industry's increase in transmission and distribution capital expenditures
Speaker Change: Our organic sales growth has outpaced this increase.
Speaker Change: According to Industry Reports, the transmission and distribution spent on utility is expected to sustain an average historic row rate of 60 to 7%. Supporting our views on the revised forecast for utility polls sales growth.
Speaker Change: Now let's turn to the performance of railway talks.
Speaker Change: As we talked about in the last calls, we expected lower sales volumes for railway ties in the second half of the year.
Speaker Change: As anticipated third quarter sales were lower and this was driven by the reduction in the maintenance program of certain classroom customers and the timing of shipments.
Speaker Change: On their year-to-date basis, sales of railway ties were up largely due to the ongoing strong non-pass one demand, which we have service to well in 2024, given our replenished levels of inventory.
Speaker Change: We remain confident in the stable source of revenue from real-weight ties and in this product category, the ability to consistently deliver a low single digit sales growth.
Speaker Change: For residential lumber, sales continued to be lower versus last year, but we are encouraged to see lumber prices trending upward, as well as preliminary signs of increased in demand.
Speaker Change: According to various industry reports, the remodeling downturn is expected to reverse by the middle of 2025. And renovation and remodeling spending is expected to benefit from improvement in new home construction and existing home sales.
Speaker Change: We continue to forecast sales for residential lumber in the 616 million target range.
Speaker Change: With that, I will now ask Silvana to provide a more detailed overview of our 3rd quarter financial results.
Silvana Travaglini: Thank you, Eric, and good morning everyone. Fail in the third quarter of $950 million, decreased 4% year over year, driven by lower volumes for all product categories.
Silvana Travaglini: The decrease in sales largely explained the lower operating income to $130 million and the decrease in EBDA to $162 million.
Silvana Travaglini: The sales and Evaga were lower compared to two, three last year, we continued to deliver a solid Evaga margin of 17.7%.
Silvana Travaglini: Year to date, sales were up 4% to $2.7 billion, we increased EBITDA to $518 million and expanded the EBITDA margin to 18.9%.
Silvana Travaglini: Now turning to the product category.
Silvana Travaglini: You tillly post failed for up 10 million discolors to 448 million dollars, driven by favorable pricing in response to cost increases.
Silvana Travaglini: of setting in part this higher pricing with a decrease in volume. Volumes were down 6% compared to 2.3 last year and was mainly attributable to spot business as we witnessed a flow down in project-based activity.
Silvana Travaglini: Riddleweight Highstead decreased by $25 million, largely driven by lower volume.
Silvana Travaglini: In addition to the expected reduction in the maintenance program of Sturton Class 1 customers, the lower sales this quarter were also explained by timing as the annual maintenance program of some customers were completed earlier this year.
Speaker Change: Residential Lumber Sale decreased 5% to $109,000,000 due to lower volume. Despite the weaker market price of lumber, year over year, Residential Lumber pricing has remained relatively stable.
Speaker Change: During the quarter, we generated strong operating cash flows of $186 million, bringing our year-to-date operating cash flows to $301 million.
Speaker Change: During the quarter, we had a favorable non-cash working capital movement, including a drawdown in inventory.
Speaker Change: Considering the typical build of inventory for the other product categories in the fourth quarter of the year, we are forecasting our year-end inventory to be higher than the balance at the beginning of the year.
Speaker Change: In terms of working capital movement in the fourth quarter, the investment in inventory is expected to be largely offset by the seasonal decrease in accounts receivable.
Speaker Change: A key focus for the organization is to maintain a capital allocation approach with an investment-grade profile. We are committed to a balanced capital allocation strategy, investing towards growth of our business and returning capital to shareholders while maintaining a prudent leverage ratio.
Speaker Change: During the first nine months of the year, we returned $112 million to shareholders through dividends and share repurchases.
Speaker Change: Since the beginning of the normal course issuance bid last November, we repurchased over 1 million shares in consideration of $85 million.
Speaker Change: Our business is highly cash-generative, which is why our Board of Directors has the confidence to authorize a new NCIB for the upcoming year, which we announced in a dedicated press release earlier today.
Speaker Change: Bella Jones is authorized to repurchase up to 2.5 million shares, representing approximately 4.5% of the common shares outstanding.
Speaker Change: As of the end of September, we were on track on our commitment to shareholders, having returned almost $310 million out of the $500 million committed for the 2023-2025 period.
Speaker Change: And yesterday, our Board of Directors approved a quarterly dividend of $0.28 per share.
Speaker Change: At September 30th, we had $342 million available under our existing credit facilities and a net debt-to-EBITDA ratio of 2.5 times.
Speaker Change: As we head into 2025, we are pleased with our strong financial position and flexibility, which we were able to bolster on October 1st with an inaugural bond offering of $400 million for seven years at a rate of 4.3%.
Speaker Change: We used the proceeds from this offering to repay the amounts outstanding on our revolving credit facilities. As of October 1st, we had almost $750 million of available capital.
Speaker Change: The successful completion of this notes offering at attractive terms speaks to the confidence our lenders have in our underlying business and future prospects.
Silvana Travaglini: With that, I will now pass it back to Eric for his concluding remarks.
Eric Vachon: Thank you.
Eric Vachon: As Sylvana mentioned, the note offerings provide us with additional financial flexibility heading into 2025, and this is especially important as we actively pursue acquisitions.
Eric Vachon: Growing our business through acquisitions continues to be a cornerstone of our growth strategy.
Speaker Change: We have dedicated significant resources towards identifying opportunities that we deem to be a good fit for our business, and we are confident that in 2025 we can realize a creative acquisition that will drive higher sales and profitability.
Speaker Change: We are enthusiastic about the long-term growth prospects and strong market trends across all product categories.
Speaker Change: If I can leave you with the following takeaways before we conclude today's call. First, it is our expectation, as has been the case historically, that sales continue to grow based on strong demand drivers of the infrastructure markets that we serve.
Speaker Change: On the profitability front, our updated margin targets of over 17% represents a significant expansion over our 15% historical average. We expect to maintain this and continue to work improving it over time.
Speaker Change: For 2024, as mentioned in our Q2 conference call, we continue to forecast a margin closer to 18 percent.
Speaker Change: In addition, we continue to leverage acquisitions as a conduit to expand our business.
Speaker Change: Strategically selected, accretive acquisitions will enable us to further meet our infrastructure customers' needs and pursue growth.
Speaker Change: And lastly, by remaining committed to an investment-grain-leverage ratio and disciplined capital allocation strategy, we are able to maintain a healthy balance sheet which provides the flexibility to seize growth opportunities.
Speaker Change: In closing, and in the wake of recent devastating storm events in the southeastern United States, I would like to say a word to recognize ours and our customers' emergency response operations.
Speaker Change: Teledome is always fully committed to supporting its utility customers and is ready to help bring power back to our communities.
Speaker Change: I want to thank our teams for their tireless efforts and dedication. Your commitment serves as a testament to the strength and solidarity of our organization. I will now open the line to questions.
Speaker Change: 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.
Speaker Change: Thank you very much. Bye.
Eric Vachon: Our first question is from James McGarrigle.
Speaker Change: from RBC Capital Markets. Please go ahead.
James Mcgarrigle: Hey, good morning, Eric and Savannah. Thanks for having me on.
James Mcgarrigle: On the updated consolidated guidance, I know you put up the new targets for 2025, but can you just provide some additional color there on the pull and tie segment a little more specifically?
Speaker Change: Certainly. So, as I mentioned,
Speaker Change: We readjusted our goals, targets for the end of 2025 for sales to be over or actually to be at.
Speaker Change: $3.6 billion
Speaker Change: Our view is there is and I'll get into some detail in a second, but our view there is that
Speaker Change: As I mentioned, our whole sales growth would be closer to industry growth, you know, for this year and next year, that being the six to seven percent.
Speaker Change: Our railway type business, we maintain the low single digit and obviously the residential number, we maintain our views on that sales range of $600 to $650 million.
Speaker Change: The big change comes from our thoughts on utility pull sales volumes.
Speaker Change: If I think about the first half of 2024, we saw an improving trend in volumes going from Q1 to Q2, but not as strong as our expectations.
Speaker Change: going into the second half of the year, we validated our customers' expectations and we set up a production schedule. And here we are today in Q3 with lesser volumes.
Speaker Change: A couple of drivers there, I mentioned that we've seen less project demand and less spot demand in the quarter than we usually see historically. And we're also seeing customers, long-term customers, being a bit more cautious in confirming orders.
Speaker Change: So although our customers in general are still
Speaker Change: indicating strong demand for their needs and you know we see the headlines in the media maybe for generating assets or transmission projects there's the same interest and excitement around distribution maintenance projects. Those POs are not flowing through.
Speaker Change: Our customers in the interface with
Speaker Change: I would say, you know, a few challenges, you know, cost of materials have been increasing, the labor costs have been increasing, and they have a given pool of, you know, funds to allocate to different projects, to different buckets that we continually hear about.
Speaker Change: And, you know, in the end, they need to make some decisions and select some priorities. And I do think that as we see rate-based cases, you know, get more scrutiny but eventually get approval, they'll be able to catch up and change their allocation of funds.
Speaker Change: So those are our views, you know, essentially there. It's what we sort of determine as we're listening to what our customers say, what our experts are telling us, what the channel checking is doing, and we felt that, you know, today it was an appropriate time to
Speaker Change: We set the expectation, it's a responsible approach.
Speaker Change: Still very happy in the growth that we're showing, it's a, as I said, it's a long-term perspective on our business. I do think we will see growth in the long term, but you know, this might be just a period in time where there's a bit of a slower pace, but still forecasting growth for this year and next year.
Speaker Change: I appreciate the caller and then
Speaker Change: One follow-up on the poll pricing, I know in Q2 you flagged, you know, the pricing is holding up pretty well. It seems to be that that still looks like the case, but...
Speaker Change: With, you know, some of this, you know, near-term headwinds to demand and some of the capacity that's coming on
Speaker Change: across the industry. Do you still expect pricing on the spot side of the business to hold up or any color you can provide there? And after that, I can turn the line over. Thank you.
Speaker Change: There's some softness in certain areas, but you know nothing significant that we've observed and keep observing
Speaker Change: Going into next year, you're completely right that the spot market might see some slight softness. Not significant, but you're right, there's more capacity and we have proofs of that capacity being online today. But, you know, do think that it will be offset with just our regular contract increases. Obviously, as.
Speaker Change: Certain of our own costs may be labor or material cost increase and our contracts allow us to pass it through We should see some increases there that would offset it. So for next year, I would say it's called slightly sladdish. We're pressing next year
Speaker Change: Thank you. Our
Speaker Change: Our next question is from Michael Tupholm from TD Securities. Please go ahead.
Michael Tupholm: Thank you. Good morning. Maybe I can just start by clarifying the last comment there, Eric. When you talk about slightly flattish pricing next year, are you talking about just in the spot pulls market, or are you talking about within this six to seven percent?
Michael Tupholm: Organic growth, it's flat pricing, it's just not clear there.
Eric Vachon: Yeah, it's in the total growth. Michael, you know, as we get closer to the end of the year, we know we will assess our cost increases, we will look at what the difference...
Speaker Change: You know, inflation indexes that are referenced in our contracts look like, and we'll have a better understanding of what that cost or pricing adjustment will be as we pass on those cost increases to our customers.
Speaker Change: You know, we have an idea, hard to predict, but I do think, you know, that it'll be part offset with the spot market. So, you could call it slattice for the entire growth for the whole product category.
Speaker Change: Okay, and so sorry, just to be totally clear here, the expectation now for organic growth within the Utility Polls product category for both full year 2024 and full year 2025 is six to seven percent?
Speaker Change: Correct.
Speaker Change: Okay, and in 2025, it sounds like essentially all of that would be volume and...
Speaker Change: We're very close to all of that is volume-driven and pricing is not really playing a role in next year's growth.
Speaker Change: Yep, I would say for now that that's the visibility we have.
Speaker Change: Okay.
Speaker Change: Just sort of the deferrals and the factors that led to your commentary about utilities pulling back or deferring some of the projects and not seeing the order flow come through as you would have expected.
Speaker Change: Have you seen any improvement in any of these areas yet, or is that all still yet to come?
Speaker Change: And you had also previously talked about, you know, seeing the possibility of lower interest rates.
Speaker Change: Getting some activity, spurring some activity among utilities. We have seen obviously
Speaker Change: Rates come down. We'll see what happens later this week in the U.S., but just kind of trying to understand if the factors that pressured results in the third quarter, are they all still at play or are you seeing any indications that things are actually kind of starting to move a little bit?
Speaker Change: So they're still all at play, and I guess that, you know,
Speaker Change: justifies a bit why we felt we had to adjust our guidance. So we will actually see some of that early next year.
Speaker Change: to your question on interest rates, you know, by the time the rates drop and
Speaker Change: You know, projects get put back on the table and approved, you know, you've got a lag.
Speaker Change: Hard for me to say I would call it
Speaker Change: two, three quarters before we see that positive effect. So that's one thing. The other thing is I do think there is...
Speaker Change: I would say a slowness in approval of rate-based cases. There's more scrutiny and more administration around them. Last year was a record year for rate-based cases.
Speaker Change: increased demands and obviously it's putting a bigger strain on the end users so there's you know more questions and more scrutiny being put to those so.
Speaker Change: that sort of there's a bit of a slowness in the funding and that's my perspective or my understanding so obviously that sort of explains the slower rate that we're referring to the slower rate of purchases.
Speaker Change: Okay, next question is just about the margin outlook, which you've updated for 2025, talking about over 17%, which is up from the prior level of 16, but.
Speaker Change: You did 18.3%.
Speaker Change: full year 2023 EBITDA margin, you're talking about closer to 18% in 2024. Even with the downshift in your expectations for organic growth and pulls, that still sounds like it's your fastest growing product category. It's, correct me if I'm wrong, still your highest margin. So
Speaker Change: What is it that would cause EBITDA margins to decline year-over-year in 2025 relative to what you've seen in the last couple years?
Speaker Change: © transcript Emily Beynon
Speaker Change: Yeah.
Speaker Change: Well first I wanted to point out we indicated greater than 17% but so I still don't understand very well your question. I guess to provide two
Speaker Change: clarifications. So this year we're seeing a residential lumber product category being at the lower end of our range. I do believe it'll be at a better, at a higher end next year. So I do think the mix, you know, will impact the margins.
Speaker Change: And secondly, you know, we're seeing cost increases across our organization, you know, maybe
Speaker Change: you know, under the direct margin line in this G&A and so on.
Speaker Change: to your point, our biggest product category seems to be flattish a bit on pricing, so there might be some, you know, a bit of headwind there. So I'm giving myself a bit of wiggle room here to see how things are going to pan out.
Speaker Change: You and your peers have questioned us a lot about, well, you know, 16 seems low, you guys are outperforming, and now we feel comfortable, you know, etching it up to 17 or greater than. And we're very, you know, and I'm confident we can hold this over time, so it's something that's sustainable.
Speaker Change: So very, very happy to bring that forward today.
Speaker Change: Perfect, I will leave it there and get back in the queue. Thank you.
Speaker Change: Thank you, Michael.
Speaker Change: Hamir Patel, please go ahead.
Hamir Patel: Thank you.
Hamir Patel: I just want to follow up on the margin question, you know, based on that sort of 17% plus for the three-year guide. I mean, that kind of sets the...
Hamir Patel: implied floor of maybe 15% next year, but just, I mean, it just sounds like you're saying you think 17% is a long-term number that you can sustain. I just wanted to clarify that.
Speaker Change: Oh, no, I'm sorry, Amir. I mean, thank you for the question to be clarified for our listeners. We're staying 17% in our floor
Hamir Patel: So we've been comparing to our historical, that before 22, 15 was the goal, and we came close, we've hit it, we've missed it, and our new guidance had the 16, but today we're saying that we believe that our new floor is the 17%.
Hamir Patel: Okay, thanks. That's helpful. And then, Eric, just in terms of the pole capacity additions that have come on across the industry this year, do you have a sense as to, you know, whether these plants are operating or at what sort of level, and are there still plants that have yet to come on that then may further weigh on the spot market?
Eric Vachon: They're definitely operating and can't talk obviously about the
Hamir Patel: their sales are, you know, what's going on there. But so that's going on for sure. So yeah, and there's a couple of facilities that are increasing some.
Hamir Patel: untreated pole capacity in the market. So we have noticed that as well. So I think we're well on our way to see that capacity being actually present, you know, end of Q3, but definitely in Q4.
Speaker Change: Okay, fair enough. And turning to the Thai side of the business, I know the RTA had their annual conference a couple weeks ago. Do you have a sense yet as to what the various class ones are planning for 2025?
Hamir Patel: © transcript Emily Beynon
Speaker Change: similar year-over-year I would say
Hamir Patel: I guess the only, I guess...
Hamir Patel: Call out air
Hamir Patel: I'd like to, I guess I'll make it. We do understand that the TPKC is gonna be leveraging the assets that they acquired through their merger. So we do understand that that asset is gonna be fully utilized. So still need to appreciate what that will do for the,
Hamir Patel: you know relatively
Hamir Patel: table year-over-year. The demand on the non-class one, however, seems to continue to be healthy. We had some good gains this year and our team is putting together a strategy to be able to leverage that business sub-segment a bit stronger next year.
Speaker Change: Okay, great. Thanks, Eric. That's helpful. And just the last question I had was just thinking about, you know, obviously the election results in the U.S. If we see potential tariffs on Canadian imports, how do you see the potential impact across your three main categories?
Hamir Patel: © transcript Emily Beynon
Speaker Change: Very little impact. So, you know, our.
Speaker Change: So the general theme for all product categories is, you know, what we produce in a country we sell in that given country. We have very little cross-border sales.
Hamir Patel: We do.
Hamir Patel: ship into the U.S. some
Hamir Patel: untreated poles from British Columbia that has not been subject to tariffs to date and we don't expect it to be the case it is just it is an intercool sale for us as we would treat some of that wood for the US market in the US but it's a very small percentage so very very little exposure we have no exporters today and I don't see that or I have no signs of that impacting us going forward
Speaker Change: Great, that's all I had. I'll turn it over. Thanks.
Speaker Change: Thank you, Jamiro.
Speaker Change: Our next question is from Roman.
Speaker Change: Soneshni from National Bank Financial
Speaker Change: Eric Vachon, Eric Vachon TV
Soneshni: Good morning, Eric and Silvana. Please go ahead.
Speaker Change: Good morning. Go ahead.
Speaker Change: Oh, thank you.
Speaker Change: I'm just wondering, you rolled out the guidance through 2025.
Speaker Change: And I was wondering if you'd be able to provide any kind of insights or visibility on what's going to be happening beyond that, especially in the polls market in regards to pricing and really the long-term volume demand from utilities. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you, Roman. So, the exhibit that we showed on the web that shows the demand for the industry for balls, you know, goes out in time, I believe it's 2030, so we don't...
Speaker Change: If I have to give today a view, I do think we would be following that trend. It's still the 6% to 7% going out. And for the other product categories, we remain to have the same views.
Speaker Change: We look forward at some point to, you know, come out and have an investor day next year to have a further discussion on the dynamics of our product categories. The date is yet to be set, but for now that's the color I could provide.
Speaker Change: Perfect. Thank you so much, Eric.
Speaker Change: Our next question is from Benoit Poirier, Desjardins Securities.
Benoit Poirier: Yes, thank you very much. Good morning, Sylvana. Good morning, Eric.
Benoit Poirier: just
Benoit Poirier: You mentioned some color about the outlook for class one going into 2025 with some feedback from the RTA conference. Could you maybe share some color about the outlook for short lines given the latest record crazy funding awards that came in just a few days ago?
Benoit Poirier: Thank you, Benoit.
Speaker Change: The definition is the same. It is very healthy and is well supported by different funding. And historically, it's always been the case when the funding is made available to the shortlizer for commercial projects.
Speaker Change: You, you know, we do see enough less in demand. So I think it谢谢您们 Jánti呢, 我想 it's healthy for the industry in general. 还 xiāo biī Barcelona travagl JENN çıkar
Speaker Change: you know, some requests for proposals, because that's how that business works, with regards to do a different project. So looking forward to see that, that's about what we have at this point.
Speaker Change: Yeah, perfect. And just with Hydro-Québec, obviously, there's a big requirement. They need about 1,600 pylons for transmission with 850 kilometers of line. They are going to spend between $150 to $180 billion. So just wondering if there's any way for you to size those opportunities longer term.
Speaker Change: Yeah, definitely. So, I mean there is part of our product offering that today is transmission And I do realize you were talking about more or more piling and that is part of our
Speaker Change: and many considerations, if you want, where we're studying different opportunities for us to benefit.
Speaker Change: from that network. We have a strong presence in Quebec with our facilities and our distribution network. We have a great relationship with that given customer and we know all the other players slash suppliers in Quebec. So that's definitely something that we're looking at closely.
Speaker Change: In which respect to the election, the U.S. election, did you get a sense from the utilities that there were some utilities that were on the sidelines waiting for elections? Do you feel that there's a case that maybe there were some people waiting on the sidelines or any color with respect to the U.S. election, Eric?
Eric Vachon: That's an interesting question and honestly a difficult one to navigate because I don't want to do politics. So what you're referring to has been suggested to us, you know, by different third parties.
Speaker Change: The customers that we have in those states all have the same needs, all have the same
Speaker Change: uh, need for financing, need for products structure, and need for the, the, the grid hardening. So, I, I do think that, you know, it will uh, it'll play out what needs to get solved. Whoever is that in.. you know, whoever is at the leadership position.
Speaker Change: You know it needs to acknowledge that we need to get funding out to our customers to help them realize, you know
Speaker Change: to Green Harmony and the Expansion of the Network, as we all know. Thanks.
Speaker Change: Okay, and just in terms of leverage ratio or capital allocation, you ended the quarter at 2.5 times, so closer to the higher end of your guidance.
Speaker Change: Obviously, you renewed your NCIB.
Speaker Change: You're talking about M&A going into 2025, so just wondering any change in terms of priority with respect to capital allocation, and maybe if you could provide more details around M&A, what kind of envelope could we expect next year, and maybe about the segment or products offering you would like to offer down the road.
Speaker Change: Well, thank you Benoit. A lot to unpack there. I'll let Silvana sort of cover off the first part of your question with capital allocation and our priorities, and I'll follow up with the M&A piece.
Silvana Travaglini: In terms of our capital allocation, the priorities remain the same. Obviously, we continue to make sure that we invest in our business.
Silvana Travaglini: network and you know we still have that commitment to return capital to shareholders and that's why we renewed our NCIB but always remember that our NCIB is really you know the excess capital that we that we have that we used to return capital to the shareholders always keeping in mind the leverage and so you know we do pace that NCIB based on you know potential M&A so you know maybe I'll let Eric collaborate on that but that's you know that's the way we view it so in terms of leverage it's still very important for
Silvana Travaglini: to be able to remain within that 2 to 2.5. We have remained at 2.5 at the end of September. Our expectation was it to be lower, but because of the higher inventory levels that we had, you know, and the lower sales, we weren't able to bring it down within the range, but still, you know, at the upper end of that range is something that we're gonna work to try to bring down.
Speaker Change: Thank you, Solana.
Speaker Change: And so, to answer the second part of your question, Benoit, as I started my concluding remarks, you know, we're very happy to conclude our note offering on October 1st, so we've...
Silvana Travaglini: We have 400 million Canadian dollars that is now set at a very attractive price.
Silvana Travaglini: Today, 70% of our debt is fixed.
Silvana Travaglini: for the long term and that gives us availability of over $750 million to give ourselves flexibility for acquisition. So, to answer your question about the size and the envelope, I'm not saying we're going to spend that next year, but what I'm saying is that we've definitely given ourselves the ability to execute on our own.
Silvana Travaglini: different opportunities that we're considering or that will be presented to us.
Speaker Change: I guess so.
Speaker Change: a partner that's more in-depth or more intertwined in their activities. So, definitely looking at that and, you know, same thing for the railway tie business. I think there's some opportunities for us to expand the product offering and answer to certain of our customer needs that, you know, in certain cases, you know,
Speaker Change: is effective, but I think in certain applications or other products would have a better performance. We just need to find, or we need to keep working at finding that right partner that enables us to do a good acquisition and a good multiple as we've done historically.
Speaker Change: Okay, and maybe just a quick one for Sylvana, going into 2025, is there, should we expect any big movement in terms of working cap? And given now that you have enough capacity on utility pole, just wondering about CAPEX expectation as well for 2025.
Speaker Change: Yeah.
Speaker Change: So, in terms of the CAPEX expectation, we pretty much have completed all the growth CAPEX. So, next year will be just sort of a regular CAPEX program, so probably in the $75 to $80 million that
Speaker Change: for CapEx next year. And in terms of working capital, like I've mentioned in the past, it's really a function of the growth in sales. So we are, you know,
Speaker Change: always
Speaker Change: pretty much at about, you know, a 40% investment in additional working capital for any incremental sales that we kind of are expecting next year. But, you know, we would expect probably, you know, in the $60 to $70 million investments in
Speaker Change: That's great, Calder. Thank you very much for the time.
Speaker Change: Our next question is from Martin Pradier of Veritas. Please go ahead.
Martin Pradier: Thank you. Thank you.
Martin Pradier: Okay, thank you.
Speaker Change: impact of tariffs.
Speaker Change: You said there is a very small portion that is coming from British Columbia, from the Poles. Will that be less than 10% or how can I think about that?
Speaker Change: with Lovend.
Speaker Change: Actually, it doesn't show in sales, right, because it's a transfer of raw material to be treated in the U.S. So it's really an integral transaction. We don't sell directly from Canada into the U.S. So that's very negligible. So what I was referring to is that we do, you know, harvest Douglas fir in British Columbia or Vancouver Island. And once, you know, we get the logs and we peel them, we typically would ship them by rail or truck to a facility in the U.S. to be treated. So it's, you know,
Speaker Change: So it's not a big event, but I can't even give a percentage, it's not a percentage of sales, it's really our raw material flow internally.
Speaker Change: Okay, but put it another way, what percentage of the total poles that you sell are exported?
Speaker Change: Yeah, I'd call it maybe 5%.
Speaker Change: Okay, that's fair.
Speaker Change: and so you don't see much impact of any tariff increase in any of the other categories like in the ties or all the...
Speaker Change: We've never been impacted, yes. Okay, my pleasure. Thanks.
Speaker Change: We have a follow-up question.
Speaker Change: from Michael Tupholm TD Security. Please go ahead.
Michael Tupholm: in the quarter for the utility pool segment. And specifically, I just wanted you to clarify, when you talk about site, or you cite utility sink supply chain constraints, can you expand on what you mean by that?
Speaker Change: Yes, certainly. I mean, you know, our customers procure a great variety of products, you know, to be able to execute on their project.
Speaker Change: So, if transformer supply is a bit tighter, we sometimes see delays in projects by a few months or quarters just because our customers need to make sure they have everything they need for the given project. So, that would impact delays for us. So, it's more in that sense.
Speaker Change: I mean, we have the confidence that we can pride ourselves and provide and shipping our products to our customers on time and so on. But, you know, I guess.
Speaker Change: We've managed our inventory to have less constraint internally, but other suppliers for other types of products, other than the wood pole, might have different challenges on their own and to deliver on time.
Speaker Change: So we hear from time to time those challenges, you know, come up and we're asked to delay projects or to hold on to some inventory or change our delivery dates. So that is something that, you know, we've also seen.
Speaker Change: I guess I'll refer back also to our comment on projects for this quarter. Projects were significantly low for a third quarter compared to historical years for the same period. So, that would be part of that phenomenon also.
Speaker Change: Perfect. And then just thinking about the
Speaker Change: Reduction in the sales expectation for 2025 to approximately 3.6 billion from over 3.6 billion and the downshift in organic growth expectations for poles.
Speaker Change: I mean, I imagine when you decide to make an adjustment like that you
Speaker Change: You're going to look at the numbers very carefully. You're going to probably try to incorporate a degree of conservatism You know as you as you presumably don't want to Have to make further adjustments and then thinking about
Speaker Change: Some of these factors that have weighed on demand recently, but still a very positive sounding, longer term outlook, not really factoring in the impact, if any, of lower interest rates.
Speaker Change: Is there now a greater degree of conservatism built into this number than in your old guidance, and are there certain factors that could push you above this 6-7% if certain things come together? Is that kind of the right way to think about the dynamic here that you've presented?
Speaker Change: Right, well thank you Michael. So our 60% is I guess an average growth. I would to answer your question on conservatism I would say no, I know what we've so
Speaker Change: We've reset from over 3.6 to 3.6, so the 3.6 now is a bit of a cap, if you want, so that's our goal.
Speaker Change: Could anything influence that? I mean, it's not on our radar today could still
Speaker Change: federal funds in the U.S. or Canada be made available to support the strong needs of our customers to help them structure projects.
Speaker Change: But, you know, we could speculate on a lot of opportunities, but at this point, I think it's... Our 3.6 is a realistic goal, and, you know, we're...
Speaker Change: And it's going to require a lot of work from us to get there with the different dynamics that you know we're working through
Speaker Change: But I don't think it's conservative
Speaker Change: Okay, thank you.
Speaker Change: My pleasure, Michael.
Speaker Change: We have no further questions.
Speaker Change: Well thank you James and thank you everyone for joining us today. We look forward to updating you on our fourth quarter call later in February next year. Until then we wish you all a pleasant year end.
Speaker Change: Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect your lines.
Speaker Change: Please stand by and enjoy this music. If you wish to queue to ask a question, dial star 1.