STLJF Q2 2025 Earnings Call
Operator: Good morning, and thank you for standing by. Welcome to Stella-Jones Second Quarter of 2025 Earnings Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Thursday, August 7, 2025. I will now turn over to David Galison, Vice President, Investor Relations of Stella-Jones. Please go ahead.
David Galison: Thank you, Ina, and good morning, everyone. Earlier this morning, we issued our press release reporting our results for the second quarter of 2025. Along with our MD&A, it can be found on the Investor Relations section of our website at www.stella-jones.com as well as SEDAR+. As a reminder, all figures expressed on today's call are in Canadian dollars unless otherwise stated. Please note that the 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+. These documents are also available in the Investor Relations section of Stella-Jones website at www.stella-jones.com. Additionally, during this conference call, the company may refer to non-GAAP measures, which have no standardized meaning under GAAP and are not likely to be comparable to similar measures presented by other issuers. For more information, please refer to the company's latest MD&A available on Stella-Jones website and on SEDAR+. Lastly, we have prepared a corresponding presentation, which we encourage you to follow along with during this call. I'll now hand the call over to Eric Vachon, President and Chief Executive Officer of Stella-Jones, for a strategic business update, followed by Silvana Travaglini, Senior Vice President and Chief Financial Officer of Stella-Jones, who will provide a more detailed financial overview for the quarter. Eric, over to you.
Eric Vachon: Thank you, David. Good morning, everyone, and thank you for joining us today. Our Q2 results reflected the disciplined execution of our strategy for value creation, supported by the scale and reach of our extensive network. Though volumes were softer, we focused on sustaining a strong EBITDA margin and generating healthy cash flows while executing on our strategy to broaden our infrastructure offering. With the acquisition of Locweld, which was completed in Q2, we now have a presence in the steel transmission structure market and a platform to further expand our reach and share of wallet as we leverage our robust customer relationships. The integration of Locweld into our business and the operational investments to increase production capacity are well underway, and we are already seeing the benefits of this addition to our network. I will now turn to a performance overview of our main product categories before moving to the outlook for the remainder of the year. Starting with utility poles. Since the end of Q2, we've seen a pickup in quoting activity, particularly in the Southern Yellow Pine region in the U.S., and we have started to benefit from new customer agreements secured last year. While utilities continue to acknowledge the need to upgrade the grid and expand capacity, in the current economic environment, certain utilities have maintained a more cautious purchasing pace with this trend being particularly pronounced in Canada. Although sales volumes were lower when compared to the strong shipments reported in the same period last year, volumes were above those seen since Q2 2024, and we expect continued improvement in the second half of the year. Based on the lower level of demand experienced since mid-2024 and the expectation of a return to a mid-single-digit growth only towards the end of 2025, we have reduced our utility pole sales outlook for the back half of the year. We now expect sales growth for utility poles for the remainder of the year to be in the low single-digit range versus 2024. Our extensive network and strong offering utility pole positions us well to benefit from the meaningful investments required by our customers over the long term to replace aging infrastructure and increase grid resiliency. Timing of these investments will continue to be influenced by our customers' capital expenditure programs and their capital deployment strategies. In July, there was a fire incident at our Brierfield, Alabama utility pole treating facility. We are pleased to report that no Stella-Jones employees were injured. The fire impacted the site's oil treating facility, but its CCA treating, peeling, drying and framing capabilities remain unaffected. Within hours of the incident, the team developed plans to leverage our network to reallocate the facility's orders. As a result of this exceptional agility, we do not expect any significant impact on our capacity to fulfill customer orders. The swift turnaround following the fire incident highlights the strategic value of our extensive network and the capabilities of our experienced management team. I'm very proud and appreciative of all employees involved for their mobilization and dedicated efforts. For railway ties, sales in the second quarter continued to be impacted by a Class 1 customer now treating more of their railway ties internally. This shift follows this customer's acquisition of the only Class 1 railroad that operated its own treating facility. We expect this volume loss to provide a headwind for the remainder of the year. While we anticipate recovering some of the volume shortfall with more commercial sales in the second half of the year, certain project starts are taking longer than expected. As a result, we are now forecasting a low single-digit year-over-year decline in railway tie sales. Railway tie customers continue to look to Stella-Jones to deliver solutions to address their evolving needs and optimize their business model. This allowed us to achieve a mid-single-digit sales growth over the last 3 years. Over the long term, we continue to leverage our customer relationships to deliver low single-digit sales growth for this business. While residential lumber's performance this quarter remained relatively stable, we are encouraged by the improved volume performance we noted in June. We anticipate demand for the remainder of the year to trend favorably, and we remain optimistic about achieving sales within the $600 million to $650 million target range for this product category. As we enter the second half of 2025, we have adjusted our revenue outlook for the year, but remain confident in the long-term sales growth trajectory of our infrastructure product categories. For 2025, we now expect to generate approximately $3.5 billion of sales, including the contribution from Locweld versus our previous outlook of approximately $3.6 billion. We are maintaining the same level of profitability with the EBITDA margins over 17%. Our commitment to return more than $500 million to shareholders cumulatively over our outlook horizon while maintaining leverage within targeted levels remains unchanged. With that, I will now ask Silvana to provide a more detailed overview of our second quarter financial results.
Silvana Travaglini: Thank you, Eric, and good morning, everyone. Sales for the second quarter were down 4% organically compared to a strong prior year quarter, largely explained by lower railway tie volumes. While utility pole sales were also down, the decrease was modest, and we observed a positive sequential volume trend. Including the contribution from our recent acquisition and relatively stable sales for residential lumber, total sales were down about 1% or $15 million compared to Q2 last year. Despite lower sales, we continue to deliver a solid EBITDA margin of 18.3%. For utility poles, we generated $476 million in sales in the second quarter. Compared to a strong shipment quarter last year, sales were down 4% organically. While the pace of purchases of some utilities remained slow, incremental volumes from new customers and improved quoting activity in the Southern Yellow Pine region provided a partial offset. Volumes in the quarter were down 2% with a corresponding decline in pricing largely attributable to an unfavorable sales mix. Offsetting in large part the lower utility pole sales was the contribution of Locweld, whose results are reported in the utility poles product category. Locweld sales were better than anticipated as they had backlog orders that existed prior to the acquisition that were completed during the quarter. Sales of railway ties were down 11% organically this quarter to $240 million as volumes continued to be impacted by a Class 1 customer treating more of the railway ties at their company-owned facility. While we expected to offset some of the sales shortfall with commercial sales, delays in the timing of major projects and funding grant reviews impacted these recoveries. In the second quarter, all of the sales decline for railway ties was attributable to lower volumes. Residential sales were $246 million in the second quarter of 2025 compared to $243 million in Q2 last year. Sales benefited from the higher market price of lumber, but volumes continued to be soft, particularly in the earlier part of the quarter. As the weather improved, we saw an upward trend in demand towards the end of the quarter. Turning now to profitability. EBITDA declined by $11 million to $189 million in Q2 of 2025. The decrease was largely attributable to lower sales volume and a less favorable sales mix in our utility poles business compared to the same period last year. Despite lower volumes, the company delivered an EBITDA margin of 18.3% for the quarter and 18.8% year-to-date, excluding the insurance settlement gain recorded in the first quarter. Our strong EBITDA performance underscores the resilience of our business and ability to deliver results in a dynamic environment. During the quarter, cash generated from operating activities was $224 million compared to $177 million in Q2 last year. This improvement was largely attributable to a more significant decrease in inventory levels compared to the same period in 2024. In addition to the typical seasonal decrease in inventory expected in Q2, we reduced inventories as part of our efforts to optimize the higher levels at the start of the year. We continue to expect to end the year with a lower inventory level compared to the beginning of the year. We remain committed to a balanced approach to capital allocation. Over the last 12 months, we generated cash from operations of approximately $500 million, allowing us to invest over $100 million in our business, acquire Locweld and return $155 million to shareholders. The remaining capital was used to bolster our liquidity. As of the end of June, we returned $470 million of capital to shareholders out of the $500 million that was committed for the 2023 to 2025 period. And yesterday, our Board of Directors approved a quarterly dividend of $0.31 per share. We ended the quarter with almost $700 million in available liquidity and a net debt-to-EBITDA ratio of 2.4x, down from the 2.6x at the end of the previous quarter. With a continued focus on profitability and working capital management, the leverage ratio was reduced within the desired target range. We remain committed to maintaining our strong balance sheet, which allows us to execute on strategic growth initiatives and to continue to pursue value-accretive acquisitions core to our growth strategy. In summary, with the breadth of our network, the strength of our business and our teams, combined with our healthy financial position and strong cash generating ability, Stella-Jones is well positioned for continued growth and success in 2025 and beyond. I will now turn the call back to Eric for his closing remarks.
Eric Vachon: Thank you, Silvana. While our lower sales guidance reflects some near-term softness largely associated with ongoing macroeconomic conditions, the mid- to long-term market dynamics remain intact. As such, we maintain our confidence in the growth prospects of each of our infrastructure businesses. We are encouraged by the progressive improvement in utility pole volumes, and we are positioned to further capitalize on the growing North American infrastructure demand. For railway ties, we're focused on exploring opportunities that will mitigate some of the near-term headwinds and leverage the evolving railway tie landscape. Our customers view Stella-Jones as a partner that is capable of delivering impactful business-enhancing solutions, and we are fully committed to fulfilling that role. Enhancing our growth through acquisitions remains a cornerstone of our value creation strategy as we focus on expanding our offering and strengthening our market position. We are dedicated to pursuing acquisitions that are accretive and complementary to our current infrastructure portfolio, further strengthening our overall business resilience. We expect to continue to maintain EBITDA margins above our 17% target, reflecting the strength of our business. Compared to our original guidance from 2023, where we projected a 9% EBITDA CAGR for the 2023 to 2025 period, the EBITDA CAGR is now expected to be closer to 11% despite softer sales over the past year. We look forward to providing further insight on our growth strategy at our next Investor Day, which is planned to be hosted in November. Thank you for your continued support and trust in Stella-Jones' vision of connecting communities through stronger infrastructure. This concludes today's prepared remarks. I will now open the line to questions.
Operator: [Operator Instructions] And your first question comes from the line of Hamir Patel from CIBC Capital Markets.
Hamir Patel: Eric, if we start with the poles side of the business, the 4% organic decline in Q2, how much of that was pricing versus weaker volumes?
Eric Vachon: Roughly half and half, 2% on pricing and 2% on volume.
Hamir Patel: Okay. Great. And then in terms of the outlook for the remainder of the year, pointing to low single-digit organic growth in poles. What's the -- similarly, what's the pricing and volume assumptions underlying that? And could you speak to what you're seeing in the spot market for pulp prices?
Eric Vachon: Right. So I would say pretty much all volume for the back half of the year, progressively growing now moving forward, as I said, very encouraged to see the steady trend of increase in volumes year-over-year. So to answer your question, all volume, I think we have much of the pricing headwinds now behind us.
Hamir Patel: Okay. And then in the spot market, in the past, you pointed to some pockets of weakness. Is that still the case? Or have things stabilized?
Eric Vachon: Compared to last year, it's slightly down still compared to last year. Luckily for us, the larger percentage of our sales are through the long-term contracts, which is around 75%. So that is mitigating that impact. But yes, we're seeing the spot market being softer.
Hamir Patel: Great. And just the last question I had, Eric, with respect to Locweld, can you speak to how the integration has been going over the past 2 months? And how are you feeling about your plans to sell through the capacity expansion that you have planned over there?
Eric Vachon: Yes, certainly. We -- obviously, it's been 3 months now. I would say the integration has gone extremely well. That I want to say pretty much behind us. We've committed to the capital investment to expand the capacity. So that was announced at $15 million. You can expect by the end of this year, we'll have spent a first tranche of, let's say, $9 million to $10 million of that CapEx and delivery of equipment is expected between well, some equipment is actually going to be delivered in September and then the balance will be early next year. So that is progressing well. Happy to inform the listeners that we secured a 5-year commitment from a large North American utility to produce structures, which will take up or utilize a large part of that -- or a good part of that capacity. So that's very encouraging as we're making this investment. I'm confident now for the next 5 years, we've got a solid book of order, and we're actually quoting a lot of long-term projects right now that span between the 2- to 5-year horizon. And there's actually some discussions about quoting the period from 2030 to 2035. So it's an interesting environment, the transmission world as projects get planned over a much longer horizon, the 7- to 10-year time frame. So -- but things are looking very well. Thank you for the question.
Operator: And your next question comes from the line of James McGarragle from RBC Capital Markets.
James McGarragle: Just on the change in guidance, can you just elaborate a little bit on some of the primary challenges that you're seeing at the customer level? I guess, kind of what changed with those conversations between Q1 and Q2? And I guess just what underpins your confidence in achieving that [indiscernible] utility poll guidance in the second half of the year?
Eric Vachon: Thank you, James. What encourages me and what we're seeing is that there's a constant trend in improving volumes. And in recent discussions with shareholders, I mentioned what's important for me is to see that trend and for me, it will continue into 2026. So obviously, a bit more softness. I pointed out. We're seeing some softness in the Canadian market. So Canadian utilities have definitely taken a more prudent approach to projects. But that being said, we're still confident about seeing that volume growth in the back half of the year. It's just a slower pace, as I mentioned in my notes.
James McGarragle: Appreciate the color. And then you alluded to M&A in your prepared remarks. I guess, can you just remind us how you're viewing your balance sheet capacity right now? And any color that you can provide on your recent acquisition of Locweld and any potential opportunities that might have opened up in the U.S. for you? And after that, I'll turn the line over.
Eric Vachon: Thank you, James. As Silvana pointed out, we have a lot of availability on our credit facilities right now around $700 million. Our leverage sitting at 2.4 for this time of the year bodes very well as typically, we actually leverage down in the second half of the year. So I think from a financial perspective, we have a lot of dry powder to go out and execute on acquisitions. And to that extent, we are looking at a few projects that are related to the wood treating industry and also related to, as I had qualified in the past, adjacent businesses. Now to the point of the Locweld question, we definitely executed on that transaction with the intention to use it as an entrance to this market, which we've qualified to be like CAD 5 billion in annual sales, which would be lattice and tubular poles. But that being said, our intention is definitely to keep pursuing M&A in that space in North America.
Operator: And your next question comes from the line of Maxim Sytchev from National Bank Financial.
Maxim Sytchev: The first question, actually, I just wanted to follow up on Locweld and your thought process as you learn more about sort of the lattice market and the capacity to expand organically in the U.S., what are your thoughts there? And can you provide maybe a little bit of an update there in terms of what's happening in that market specifically?
Eric Vachon: Yes, certainly. So thank you and happy to provide more details. So the last 2 months, our sales team and the Locweld team have been meeting with customers, introducing the new joint forces of the 2 businesses and definitely introducing Locweld to new potential customers. It has been widely welcomed by all our customers. And -- the same question you have our customers have for us now is that so what are your intentions? Are you guys going to acquire something in the U.S.? Is Stella-Jones going to expand? And so there's a lot of interest for us to do so. So we're definitely putting some time behind analyzing that possibility. So I think right now, there's a very positive feedback from our customers, which is usually the hardest part of a project is to probably scope out the commercial aspect and the ability to penetrate the market. So I think that is indicating very positively for us right now. The balance of executing on that comes back down to CapEx, which obviously, we have a lot of financial means, know-how, which we now have with the Locweld team and to say that this team at Locweld is definitely very high on the idea of expanding the division and becoming the largest lattice manufacturer in North America. So yes, I would say we're definitely exploring those avenues.
Maxim Sytchev: Okay. And do you have a sense of potential timing to kind of making a decision? Is it 2025, 2026 time frame? Or is it too premature to talk specifics?
Eric Vachon: It's a bit early to talk specifics. Obviously, we do have governance. I need to have discussion with the Board. Do we need to structure a project. But I guess I want to say we don't want to drag our feet. I think there's an opportunity and being first to market is key in my mind. So it's too early to talk about the timing, but it's definitely something that's on my priority list.
Maxim Sytchev: Okay. Okay. Great to hear. And then just one quick question around ties. I mean, now seeing speculation around additional consolidation in the rail space. Do you have a sense in terms of if there could be some spillover effect in terms of in-sourcing? Or do these companies don't have their own treatment capacity? Just any color there would be great.
Eric Vachon: It's a good question, Max. It's a question that has come up recent -- several times in recent months. So to clarify, there was only one Class 1 that had a treating facility and they merged with another Class 1. So there's only one Class 1 that owns a treating facility and now they're using it internally. So all the other customers do not have this capability. And I would say if I were to personally comment, I don't think any of them are interested in owning those assets. We have customers talking to us about doing treating services where they would actually be -- they could own the ties, but to leverage our network. Some of us are talking to us about expansion projects. So they're definitely wanting Stella-Jones to service them better in certain geographical regions. So we do have some of these discussions with our customers, which indicate to me that this is not a trend in the industry of seeing the railroads start investing in these assets, which are not their core business.
Operator: [Operator Instructions] And your next question comes from the line of Benoit Poirier from Desjardins Capital Markets.
Benoit Poirier: On the rail tie, could you maybe provide an update on the rail tie customer projects that could help compensate for the volume shortfall we see with this Class 1?
Eric Vachon: Yes, certainly. So as I said in the prepared remarks, we're definitely looking to compensate some of the headwinds with some commercial business. There was a bit of delay in the first half of the year with federal funding in the U.S. as certain programs got reviewed and there were some delays in those funds being made available to our customer base. But now we've been quoting and got awarded contracts here in the second half of the year, which will -- which supports my view that we'll be able to compensate some of the lost volumes into the -- sorry, the lost volumes that we had in the first part of the year. Once we get into next year, obviously, the -- this headwind of this Class 1 will be behind us. So it's like a once and done. And then I do believe, as I said, we're going to continue growing our business at that low single-digit pace. But I also see some opportunities with certain of our customers looking towards us for some capital investments so we can enhance our business with them. So more to come in -- obviously, it take a bit of time, but in '26 and '27. But we'll put this behind us, and I think the future looks good for the railway tie division.
Benoit Poirier: Okay. And could you talk a little bit about the upcoming contract renewals to come with the Class 1? How many might we see in 2025? And should we expect this to be more a positive or negative catalyst, Eric?
Eric Vachon: So well, without naming them, one is behind us and another one to go this year, which is renewed at the end of October. Obviously, as we're renegotiating these contracts, we're looking to adjust pricing favorably for us in the sense that we need to catch up on some cost increases that we've seen over the last few years. These contracts are for the long term, and we still, in certain cases, feel the pain of cost increases through COVID, which has not receded and have maintained. So as we execute on these contracts and look for adjusted pricing or, I would say, favorable triggers to incent us on good pricing. And by that, I mean, if someone wants to give me more volume, I can definitely be more flexible on pricing. I think it looks favorable for us for the balance of the year, obviously, but I'd say we got renewals now in '26 and '27 also. So it will gradually sort of make its way in our results over the next 24 months, let's say.
Benoit Poirier: Okay. And moving on utility poles. When we look at the U.S. electric companies, they've asked $29 billion in rate increase for this year, which more than doubled their request for the first half of 2024. American Electric Power also completed some divestiture equity issuance. So it looks like that the fundamental is quite strong, although we see still elevated interest rates. So is it still going to put some pressure on spending? Or would you say that utilities now realize the importance to spend despite the elevated interest rate environment? Any thoughts about the fundamental for utility poles?
Eric Vachon: Well, thank you, Benoit. I think you described the fundamentals very well because what you just stated is what we observe as well. So rate base increases have been allocated to several customers. We see some customers adjusting their capital structure to be able to go to move forward with their investments. And I associate that -- those facts to what we expressed in seeing our volumes picking up here in the second half of the year. And I'd like to think we will keep doing so into '26. There's no doubt about the investment being required in the grid as a whole. And I think no matter what the interest rate environment does at this point, I think our customers have adjusted to this reality. I mean if the interest do drop in the U.S. in the next several months, it would only be favorable, I would say. But at this point, I think our customers have found ways to move forward.
Benoit Poirier: Okay. And just looking for residential lumber, it's been flat. We've seen, obviously, the housing starts down home renovation also down, home prices are down, although weather -- any thoughts whether it was more driven by rain or any thoughts about what we should expect from residential lumber in the second half?
Eric Vachon: Yes. Well, I reiterated our views of the range of $600 million to $650 million. And I think we will be largely fine to hit the range, the middle of the range, let's say, for this year. You're completely right that we had some headwinds early spring with a lot of rainy weekends and I guess, unfavorable weather. But the month of June has actually -- was actually very good, and we're seeing positive trend on the volume side right now. We definitely, again, have a great partner on the retail side is very aggressive on the pricing and is dedicated to get market share in Canada. So that is a real positive thing for us. So you're right. I mean, if housing starts pick up again, that would also be very favorable and contribute positively to the business. But even that at this point, I still think we're -- that business is doing fine.
Operator: [Operator Instructions] And your next question comes from the line of Jonathan Goldman from Scotiabank.
Jonathan Goldman: Eric, just a question on the outlook for poles for the rest of the year. Do you assume any rate cuts there? What sort of macroeconomic variables are you considering in that guidance?
Eric Vachon: No, we're not baking in any rate cuts. That would be very difficult for us to speculate on. So we use the information we have today, the current FX or some projections of FX and current interest rates and anything else that happens if there are rate cuts, it's positive. First, it takes a while to scope into our -- to trickle back down to us. I think it's a leading indicator of positive for us. But -- and we also follow what our customers say. So at this point, if the rate cut, it might impact next year's plan at this point, probably not as much this year. But as I said, it's a good leading indicator for us.
Jonathan Goldman: All right. So if the macroeconomic conditions stay the same, what gives you confidence that volumes will accelerate through the back half of the year? And if it's the order book, what sort of visibility do you have on that? And could customers delay orders and push them out potentially further?
Eric Vachon: Yes. That's a good question. At this point, and I guess, we went through this exercise last year in the third quarter. So we definitely scrubbed the order book and had good discussions with our customers. With regards to what's expected this year. You will notice the guidance slightly adjusted, right, in the expected growth, but it's still a positive growth for the year. To be honest, there's also an easier comp year-over-year because we had a decline last year in Q3 and Q4. So I'm quite comfortable with what's going on right now as far as the order book is, conversations that our team is having with customers. I myself had a couple of discussions with some key customers as well. I think what we've put out is definitely achievable.
Jonathan Goldman: Okay. That makes sense. And then maybe moving to the margin guidance, still the same sort of guide at above 17%. I mean that gives a lot to the imagination. You're above 18% for the second quarter in a row now. Why wouldn't we assume that you can do 18%? I mean spot volumes have been weaker for a bit now, and you're still able to maintain that 18% mark.
Eric Vachon: So I'll give you the reference. If you look last year, but it's true in many years, the second half of the year typically has less volume. So the residential lumber business sort of slows down. The maintenance season also sort of for poles and ties sort of slows down as well. So typically, the H2 is a bit of a lower volume and the EBITDA margin is slightly lower than the first half of the year. So if you scope that in sort of pulls us a bit downwards from the point we are today on the year-to-date. So yes, 17% is the floor. You're right, it leaves a lot to the imagination. As I like to say, the team always swing for the fences. We're always looking for home runs. I don't let anyone on the hook easily looking for good performance. But there's always that impact here of H2 that would bring us slightly lower than the year-to-date number we have now.
Jonathan Goldman: Okay. That makes sense. And if we look at the historical cadence from the first half to the second half in terms of margins, is the last couple of years, 3 years, maybe a good reference point? Or is it better to look further back to kind of remove some of the pricing dynamics we've seen in the past couple of years?
Eric Vachon: I'll let Silvana because we actually spent some time talking about it in the last few days.
Silvana Travaglini: So I would say, Jonathan, that in most years, it's pretty representative starting last year, I would say probably one of the anomalies that we saw was in 2023. It was a year as probably you remember when there's a lot of demand and a little bit of craziness in the market. But other than that year, I think if you go back historically, I think you'll always see probably that gap between first half and second half.
Operator: No further questions at the queue.
Eric Vachon: Thank you, Ina, and thank you, everyone, for joining us today. We look forward to updating you when we release our third quarter results. Until then, enjoy the rest of the summer and stay safe.
Operator: This concludes today's call. Thank you for participating. You may all disconnect.