Stella-Jones Inc.

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Stella Jones Q3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Wednesday, November 9, 2022. I will now turn the conference over to Eric Vachon, President and CEO. Please go ahead.

everyone. I'm here with Silvana Travolini, Chief Financial Officer of Stella Jones, and we thank you for joining us this morning for a discussion on the financial and operating results for Stella Jones' third quarter ended September 30, 2022. Earlier this morning, we issued our press release reporting Q3 results. Along with our MD&A, it can be found in the investor relations section of our website at StellaJones.com and will be posted on CDAR today as well. As a reminder, all figures expressed on today's call are in Canadian dollars unless otherwise stated. I will first provide a business update and overview of our quarter before turning the call over to Sylvana to review our results in greater detail, after which we will open the floor to your questions. So let's get started. Headlining Q3 is Stella Jones's delivery of another robust quarter and strong results, demonstrated chiefly by the growth in our infrastructure-related products, but also by the normalization of residential lumber sales. Our sales increased by 24% driven by all product categories. We generated a significantly improved margin over last year's comparable period and maintained a solid financial position. This stellar performance is owed in large part to our network and team, and I want to thank them for their contribution to these results. In addition to these strong fundamentals, our contractual sales agreement structures continues to provide us with the ability to pass through cost increases and deliver steady margins, which is especially impactful in the current inflationary climate. Demand for our products remains vigorous, particularly in the utility pole product category, which continues to see strong volume growth. The demand is magnified by utility companies investing heavily in their networks, not only in regular maintenance programs, but with increased infrastructure spend allocated to build new and stronger lines and from the expansion of broadband networks. Our long-standing relationships with leading utilities across the continent, combined with our second-to-none procurement and logistics capabilities, allows us to continuously ensure certainty of supply through timely shipment of high-quality products under a wide array of circumstances. For instance, in the aftermath of Hurricane Fiona touching down on Atlantic Canada, hundreds of thousands of homes were left without power. Our team in Truro, Nova Scotia was at the ready to support power restoration efforts. They were aided by our crews in Quebec and Ontario, who lent assistance by shipping additional poles to meet demand via various logistic partners, including our new owned in-house transport provider, Timberland Express. This is a fitting example of the strength, reliability, and rapid response of the Stella Jones expansive network, and how it can be mobilized to restore essential services to communities affected by emergency and natural disaster situations. In sum, ensuring certainty of supply builds trust. As utility companies are increasingly looking for long-term supply commitments with reliable partners, we believe the breadth and strength of our continental network positions Stella Jones to be a preferred long-term supplier to North American utilities. Moving on to railway ties, the market indicators are porting towards improving demand, with projections from the Railway Tie Association calling for a 1.1% volume increase in 2023. Though rail traffic has been trending down lately in comparison to last year, we also observe that the ongoing use of the network over time will generate a need for maintenance and repair. On the supply chain front, although we are still noting tightness in the procurement of untreated ties, I am pleased to report that year-over-year data shows improvement. Though not at historically high levels, the incoming trend has been positive in recent months. We're still observing increased pricing in untreated ties, which, combined to inflationary pressures, will result in further price increases to our customers over the coming quarters. As the leading purchaser and manufacturer of railway ties across North America, we are grateful to be able to depend upon our team's expertise as well as its ability to leverage well-established relationships with our sawmill partners. This helps us navigate through these challenging procurement conditions. Industrial products is a third product category in our infrastructure portfolio and is deserving of acknowledgement and its steady contribution to our business. Currently, we see good demand for new infrastructure projects, maintenance for rail bridges and crossings, as well as marine pilings. Not only do industrial products deliver additional value to our rail customers, but they also make alternate logs obtained in our procurement process for utility poles to support the construction industry. As such, this category is a fully integrated addition to Stella Jones's infrastructure offering. With regards to residential lumber, we are pleased with the solid market demand for our products during the third quarter, which allowed us, here again, to deliver strong results. More importantly for residential lumber, we managed our inventory position, procurement, and sales in an efficient and proactive manner. This enabled us to capitalize on market conditions and make certain purchases when costs were advantageous. We concluded the seasonally strong period in a much better inventory position this year compared to last. So far in the year, the performance of our residential lumber business has exceeded the expectations set forth in our three-year plan, as it benefited from above normalized pricing levels in the first half of the year. Subsequent to quarter end, we completed the acquisition of the wood pool manufacturing business of Texas Electric Cooperatives Inc., or TEC, in Jasper, Texas. This acquisition adds a 43rd facility to our North American network and enhances our product offering in Southern Yellow Pine, while expanding our capacity to meet the growing needs of the utility pole industry. I would like to welcome all TEC employees to the Stella Jones family and look forward to continuing to build on TEC's long-standing partnerships as we begin supplying the cooperative's utility customers with poles for their infrastructure and maintenance projects. As a business, Stella Jones understands the impact of its activities on the world. and recognizes that integrating environmental, social, and governance best practices into all facets of its operation is crucial in maintaining our planet's health and our long-term success as a company. With this, I'm pleased to say that we issued our 2021 ESG report on October 26 and is now available in the investor relations section of our website. The report highlights the advances we made as an organization on our commitments to continuous improvement across our four ESG pillars, which are our people, environmental commitment, product stewardship, and governance principles. We are dedicated to continuously improving our sustainability and health and safety practices through learning, training, and data collection. This increased focus on knowledge will allow us to know better and do better as a business. We are pleased with our performance so far in 2022, and looking forward, we are confident in our ability to attain the financial objectives set forth in our three-year plan at the start of the year, including our commitment to continue to return capital to shareholders, as evidenced by this morning's announcement of our new 2022-2023 normal course issuer bid. We remain confident in our ability to sustain strong free cash flow generation and maintain a solid financial position that will allow us to continue investing in our network with capital expenditure projects to increase capacity for utility poles and enhance operational efficiency through automation, all while seeking strategic acquisitions. In summary, the power of our business model and extensive network is reasserted by our enduring resilience in the face of an inflationary climate and challenging supply chain conditions. This, in addition to our proven ability to meet customer demand, favorably positions Stella Jones to create value for shareholders. In closing, Stella Jones is more than ever building on its strong fundamentals, and we look to the future with confidence. Our robust performance is a testament to our business strategy and a rigorous execution has positioned us as a leading North American provider of infrastructure-related treated wood products and a strategic supplier of residential lumber to big box stores and retailers desiring a strong value-added partnership. I look forward to providing the status of the progress made in the achievement of the company's financial objectives next March, once we will have completed the first year of our three-year plan. I will now turn the call over to Silvana for a review of her financial results.

Thank you, Eric, and good morning, everyone. During the quarter, Stella Jones generated sales of $842 million, compared with $679 million for the same period in 2021. Excluding the contribution from the acquisition of Cahaba Pressure and Cahaba Timber and the favorable effect from currency conversions, together totaling $34 million, pressure-treated wood sales increased by 20% compared to last year, driven by all product categories. Sales attributable to infrastructure-related businesses, namely utility poles, railway ties, and industrial products, grew by 15%, and residential lumber sales increased by over 30% compared to the lower sales experienced in the same period last year. Looking at results by product category, sales of utility poles amounted to $331 million in the third quarter, up from $256 million last year. Sales rose organically by 19%, driven by higher pricing in response to cost increases. The continued growth in maintenance and project-related demand was largely offset this quarter by lower volumes for fire-resistant wrap holes compared to the same quarter last year. Railway tie sales reached $199 million this year versus $179 million in 2021. Excluding the currency conversion effect, sales increased by 8%, mostly due to favorable selling price adjustments to cover higher fiber costs. This growth was partially offset by reduced maintenance demand of certain Class 1 customers. Residential lumber sales totaled $226 million, up from $170 million last year. Excluding the currency conversion effect, sales increased $54 million, or 32%, due to higher sales volume compared to a weak demand quarter last year. Industrial product sales were $40 million, up from $32 million in 2021, largely due to higher volumes related to bridge and crossing projects as well as marine pilings. Logs and lumber sales amounted to $46 million, up slightly from $42 million a year ago, reflecting variations in lumber trading activity. Turning to profitability, gross profit was $139 million in the third quarter of 2022 versus $82 million in the corresponding period last year. As a percentage of sales, gross profit margin was 16.5% this year compared to 12.1% last year. The increase in gross profit dollars and margin reflects higher results across all pressure-treated wood product categories. The improvement in gross profit margin was more significant in residential lumber as last year's performance was affected by higher fiber costs a significant market-driven price decline, and lower demand. Led by the strong growth of our infrastructure-related sales, as well as the higher residential lumber sales compared to the third quarter of 2021, Stella Jones generated EBITDA of $119 million, or a margin of 14.1% this quarter, of $50 million, compared to EBITDA of $69 million or a margin of 10.2% last year. The net income for the quarter was $65 million or $1.07 per share compared to $34 million or $0.52 per share last year. Earnings per share was positively impacted by the company's ongoing repurchase of shares through its normal course issuer bid. Turning to cash flows, operating activities generated $193 million this quarter versus $225 million last year. During the quarter, we used the cash generated from operations to repay the remaining indebtedness related to the seasonal investment in working capital in the first quarter, invest $23 million in capital expenditures, acquire transportation assets for $8 million, paid $12 million in dividends, and repurchased shares for $59 million. As of September 30th, the net debt to EBITDA ratio was 2.3 times, and we had $338 million of liquidity available under our credit facilities. Subsequent to the end of the quarter, we amended our syndicated revolving credit agreement under which the amount available was increased from $325 million U.S. to $400 million, demonstrating our lenders' confidence in our ability to execute our plans and grow the business. We are pleased with our strategy to minimize the impact of rising interest rates on our financing costs. As of September 30th, 80% of our debt was at a fixed rate, which provides the company additional cash flow stability. Yesterday, the TSX accepted our notice of intention to proceed with a new NCIB program. By virtue of this program, Stella Jones is authorized to repurchase up to 5 million common shares, representing approximately 10% of the public float. These repurchases will take place over a 12-month period ending November 13, 2023. Considering the shares repurchased up to this day, Stella Jones has bought back all 5 million shares under its 2021-2022 normal course issuer bid at an average price of $38.26 per share for a total consideration of $191 million. On November 1st, we concluded the acquisition of substantially all of the assets of the wood utility pole manufacturing business of Texas Electric Cooperatives for a total consideration of $28 million U.S. plus inventories of approximately $4 million. TEC's wood pole sales for the year ended December 31st, 2021 totaled $28 million U.S. Finally, the Board of Directors declared a quarterly dividend of 20 cents per share Payable on December 16th, 2022 to shareholders of record at the close of business on December 1st. This marks the end of our prepared remarks. I will now turn the call back to the operator for Q&A.