Stella-Jones Inc.

Good morning and thank you for standing by. Welcome to the Stella Jones third quarter 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 the questions by phone, please press star 1. A moderator will contact you. If anyone has any difficulties hearing the conference, please press star 1 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Tuesday, November 7, 2023. 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 SIDAR. These documents are also available in the Investor Relations section of Stella Jones' website at www.stella-jones.com. We have prepared a corresponding presentation, which we encourage you to follow along with during this call. I'll now pass the call over to Eric Vachon, President and Chief Executive Officer of Stella Jones. Eric.

Thank you, Shirley. Good morning, everyone, and thank you for joining us today. With me on today's call is Silvana Travolini, Senior Vice President and Chief Financial Officer of Stella Jones. Earlier this morning, we issued a press release reporting our results for the third quarter of 2023. Along with our MD&DNA, it can be found in the Investor Relations section of our website at www.stella-jones.com, as well as on CDAR. As a reminder, all figures expressed on today's call are in Canadian dollars unless otherwise stated. During the third quarter, we made notable progress in our growth trajectory, generating strong sales growth and a record increase in profitability. Our results speak to the continued positive momentum and performance of our infrastructure-related businesses, as well as our residential lumber business, which delivered results in line with our expectations. While our organic growth so far has been supported by favorable pricing dynamics, 2023 has also been a year where we focused on building additional capacity and inventory levels to take on more demand from our customers and meet their long-term needs for our infrastructure products. We're doing this with ongoing investments and acquisitions to support our growth while ensuring predictable and consistent customer service. Let's take a closer look at the performance of our key product categories during the quarter. Building on the momentum it has generated since the start of the year, our utility polls product category continued its strong performance during the quarter, driven by favorable pricing dynamics and a continued increase in production volumes. In Q3, we benefited from added bandwidth stemming from a number of capital projects, which I'd like to provide some color on. Since January, we concluded three utility pole-related acquisitions, adding pole-treating facilities and pole-pilling operations to our expansive North American network, as well as securing fiber supply. The latest of these acquisitions was Baldwin's two treating facilities in Baymanette, Alabama, and Wiggins, Mississippi. We've also made important inroads in bolstering our assets on the procurement front. with the addition of pole peeling facilities to optimize efficiencies and enable us to deliver on growing demand. Our own new peeling facility in Durant, Mississippi became operational in June and our Enfield, North Carolina facility is set to be commissioned earlier next year. Both focus on augmenting our Sun Yellow Pine offering. Additionally, we are targeting the commissioning of another peeling facility in Kamloops, British Columbia in 2024, which will serve to further support our western species operations. These facilities, along with our new treating operations acquired from Baldwin, are presented by the yellow dots on the map you see on the current slide. Significant investments has been also made to upsize treating equipment at a number of our whole treating facilities through 2023, further building out our production volume capacity. These projects and initiatives showcase our proactive and thoughtful planning and execution in building a robust procurement and manufacturing platform, which in turn will allow us to further reap the benefits of favorable conditions and enhance our leadership position. The added capacity provided by these capital projects in Q3 and throughout the year allowed us to grow our inventories to the levels needed to deliver on long-term sales commitments to our utility customers and secure agreements with new customers. We don't take it for granted that our teams can quickly ramp up existing capacity or commission facilities on time and on budget, because sometimes not everything goes as planned. To that end, a portion of our Silver Springs manufacturing operations in Nevada was damaged by fire during the quarter. Fortunately, there were no injuries following the incident, and work is already underway to repair the damaged equipment. We have been able to adjust production and to continue serving our customers with the help of our extensive network while repairs are ongoing, a testament to our agility in responding to unforeseen situations. Moving on to railway ties. This product category experienced a strong quarter with increased sales, which speaks to our continuing ability to pass along price increases to our customers. The limited supply of untreated tie inventories in 2022 has impacted sales volumes so far in 2023. Having replenished our untreated Thai inventory by June of this year, we now find ourselves standing at an optimal level of dry inventory, which sets us up to meet customer demand as we move into 2024. However, in 2023, volumes are expected to remain lower, which will result in a year-over-year low single-digit sales growth in line with our guidance versus the mid-single-digit growth realized so far this year. Sales volumes for residential lumber were higher this quarter compared to the same quarter last year, which is indicative of our proven ability to supply consistently to big-box retailers. Even considering the decrease in lumber pricing year-over-year, our residential lumber product category is performing within management's expectation and in line with our stated guidance. Let me now take a moment to discuss ESG at Stella Jones. During the quarter, we published our fifth annual Environmental, Social and Governance Report, which is now available for download on our website. For the first time in our company's history, we have formalized our ESG strategy, titled Connecting Our Sustainable Future. This strategy is a product of extensive listening and data collection across our organization and has measurable targets across six key strategic topics. These topics include climate change, greenhouse gas emissions, as well as health and safety. an area where we have made great strides so far in 2023, namely through initiatives such as our Safety Matters Because You Matter campaign. Before I turn it over to Sylvana to provide a more detailed overview of our third quarter financial results, let me provide a brief update on our efforts to phase out the wood preservative PENTA through our network. Pentachlorophenol, or Penta for short, is an oil borer preservative which is being discontinued across North America. In the United States, our phase-out of Penta is largely complete, which places us well ahead of the 2027 end date required by the United States Environmental Protection Agency. In Canada, operations were required to cease use of Penta by October 4th of this year. Our team has gone to great lengths leveraging our network and internal resources to adjust our Canadian offerings to ensure continuity of supply for our utility customers. We have been at the forefront of the industry with respect to this transition and are working collaboratively with utilities to tailor solutions to meet their requirements. I am very proud of our team for their tireless efforts towards addressing this phase-out, the culmination of many years of hard work. With that, I will now hand it over to Silvana.

Thank you, Eric, and good morning, everyone. Our strong start to 2023 has carried into June 3. which featured another quarter of solid organic sales growth, a record increase in EBITDA and EBITDA margin, and a notable contribution from acquisitions. Sales in the third quarter reached $949 million, up from $842 million last year. This increase was driven by organic sales growth of our infrastructure-related businesses of 17%. Sales also benefited from the acquisition of Texas Electric Cooperatives in November last year, the more recent Baldwin acquisition, as well as the positive effect of currency conversions. Pricing gains for utility poles, railway ties, and industrial products, as well as volume gains for residential lumber, largely explained the increase in sales, which was mitigated in part by a decrease in residential lumber pricing. Utility pole sales grew to $438 million in Q3 compared to $331 million for the same period in 2022. The increase was largely explained by organic sales growth of 21% and the contribution from the acquisition mentioned moments ago. The organic growth was driven by higher pricing as sales volumes remained relatively flat compared to last year. As Eric mentioned, in the quarter we focused on increasing capacity and building inventory to support long-term sales contracts, which currently represent over 70% of our utility pole business. Sales of railway ties increased by $31 million to $230 million, compared to $199 million last year. Organically, sales were up $26 million, or 13%, all attributable to favorable pricing. Volumes were relatively unchanged in Q3 compared to the same quarter last year. The lower non-Class I volumes stemming from the limited supply of untreated Thai inventories in 2022 were largely offset by higher Class I volumes, mainly attributable to the timing of shipments. Class I volumes in 2023 are expected to be unchanged versus 2022. Residential lumber sales of $202 million decreased $24 million compared to the same period as last year. While sales volumes were higher in the third quarter of this year compared to the same quarter last year, the volume gains were not enough to offset the lower pricing attributable to the decrease in the market price of lumber. The overall decrease in sales was, however, in line with expectations as we continued to project $600 to $650 million of annual sales for residential lumber. Turning now to profitability, EBITDA increased to $193 million in the third quarter, up from $119 million in the same period last year. This increase was largely explained by the margin expansion of our infrastructure-related businesses, particularly utility poles, as well as the EBITDA contribution of our acquisition. As a percentage of sales, EBITDA also benefited from the higher proportion of utility pole sales this quarter, representing 46% of total sales compared to 39% in Q3 last year. EBITDA margin expanded to 20.3%, a record improvement this quarter from 14.1% in Q3 last year. Year-to-date, our EBITDA margin stood at 18.5%. We now expect the EBITDA margin for 2023 to be closer to the 18% mark. Looking forward into 2024, the uncertain effects of external factors, such as the higher cost of capital and increased supply from the utility pole industry, may impact our current level of EBITDA margins. With this considered, we remain confident in achieving the 16% margin objective stated in our guidance. Net income in the third quarter was $110 million. up 69% compared to last year, while earnings per share was up 79% to $1.91 per share. Earnings per share also benefited from the ongoing share repurchase program. During the quarter, we used the cash generated from operations of $130 million to maintain and upgrade our assets, expand and secure production capacity, which included acquiring the utility pole manufacturing business of Baldwin, as well as return capital to shareholders. During the nine months ended September 30th, we returned $145 million to shareholders through dividends of $40 million and share repurchases of $105 million. Since the beginning of the current normal course issuer bid program, the company has repurchased 2.2 million shares at an average price of $57 per share. Yesterday, the TSX accepted our notice of intention to proceed with the new NCIB program, which we announced in a dedicated press release earlier today. Pursuant to this NCIB, Stella Jones is authorized to repurchase up to 2.5 million common shares representing approximately 5% of the public flow. These repurchases will take place over a 12-month period ending in November of next year. At quarter end, we had $271 million available under our credit facilities and maintained a solid financial position with a net debt to EBITDA ratio of 2.4 times. Our strong balance sheet and ability to finance our business plans, meet working capital requirements, and maintain and upgrade our assets to consistent cash flow generation and available credit facilities reflect our disciplined financial strategy. Yesterday, our Board of Directors announced a dividend of 23 cents per common share payable on December 21st, 2023 to shareholders of record at the close of business on December 4th. In summary, our strong operating and financial performance positioned us well to achieve our long-term growth plans while returning near-term value to our shareholders. I will now turn the call back to Eric for his closing remarks.