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spk00: Results for the first quarter of 2024. Along with our MD&A, 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. After a highly successful 2023, 2024 has begun on an equally positive note with higher sales and record first quarter profitability. We are pleased with the solid momentum of our infrastructure product categories, which has continued into 2024. Our results continue to reaffirm our strategic approach of being future ready. We remain proactive in our pursuit of meeting customer needs while staying ahead of industry trends and dynamics, anticipating how we'll evolve and being prepared to capitalize on opportunities. We have done this through strategically and diligently building out our network through growth investments and acquisitions and investing in inventory levels required to meet demand. and we continue to leverage strategic locations of our operations. We have a large presence that spans North America, and this has allowed us to better cater to customer needs while serving them effectively, creating synergies and maximizing economies of scale. These initiatives are supported by the strong long-term fundamentals of our business. primarily the steady and growing demand for our products, which I will now discuss in more details. Sales of utility poles were higher year over year, driven by favorable pricing. In terms of volume, we noted sequential volume increases compared to Q4 last year, particularly from non-contract customers. For our contract business, which represents 70% of our pole sales, we continue to see a shift whereby certain customers are moving to longer term agreements. We also secured additional multi-year commitments from new and existing contract customers, which is indicative of their commitment and need to secure supply on a longer horizon. Our customers' projects are poised to span several decades, and there continues to be growing need to maintain the North American electrical grid. There's also sustained momentum from our utility customers to increase pole purchases to support their broadband access and expansion projects. Our goal is to be the supplier of choice and a company our customers can rely on when they proceed with their projects. As always, Stella Jones manages its business with an eye on the larger picture, making decisions that are best for the company's long-term stability and growth. Sales of railway ties also increased over the same period last year, above the low single-digit growth target. With the replenished level of tie inventory, we are now better positioned to service the non-Class 1 market. the ability to cater to this market is a significant shift from 2022 when the industry experienced limited availability of untreated wood ties. Sales for residential lumber pulled back slightly on account of the lower market price of lumber. We remain Canada's largest manufacturer of treated residential lumber, and many customers across North America rely on us for their premium treated lumber, composite decking, and accessories. I'll now turn it over to Silvana to provide a more detailed overview of our first quarter financial results.
spk07: Thank you, Eric, and good afternoon, everyone. As Eric indicated, Stella Jones had a robust start to 2024. We generated strong financial results that helped establish a solid foundation for the rest of the year. Sales for the quarter were $775 million, up $65 million from Q1 of 2023. The increase was driven by higher infrastructure product sales, which grew organically by $58 million or 10%. We benefited from favorable pricing across all our infrastructure product categories, higher railway tie volumes, and the contribution of the acquisition of the Baldwin assets. Utility pole sales increased to $402 million compared to $362 million for the same period in 2023 due to higher pricing when compared to Q1 last year. The slower pace of purchases this quarter largely stemmed from contract customers with long-term volume commitments. Though purchases from customers were deferred and remained lower relative to the first quarter of 2023, we saw a progression in our utility pole volumes over Q4 of last year. Sales of railway ties were $227 million, representing an increase of 16% compared to the first quarter of 2023. This increase was attributable to both higher pricing and volumes, particularly for non-Class 1 customers due to the available supply of railway ties. And residential lumber sales were $87 million compared to $90 million during Q1 2023. While volumes remained relatively stable quarter over quarter, the decrease in sales was attributable to the lower market price of lumber compared to the same period last year. Led by the strong organic sales growth for our infrastructure products, EBITDA increased to a record first quarter of $156 million compared to $120 million in the first quarter of 2023. EBITDA grew to 20.1% from 16.9% in the first quarter last year. Similarly, net income for the first quarter increased relative to the same period last year. We generated net income of $77 million or $1.36 per share. This compares to $60 million or $1.03 per share in the first quarter of 2023. The increase in profitability was attributable to the margin expansion realized across our infrastructure product categories, particularly due to the favorable pricing dynamics compared to Q1 last year for utility poles and railway ties. We ended the quarter with a net debt to EBITDA ratio of 2.7 times, which is within our expectations due to our typical working capital requirements in the first quarter of each year. During the quarter, we continued to invest in our inventory position, particularly for the seasonal build of residential lumber ahead of peak demand in the second and third quarters. Inventory levels are, however, expected to decrease by year-end and be in line with levels at the beginning of the year. Inventories are a significant component of working capital and an investment in our ability to provide service to our customers and meet their demand. During the quarter, we also used our liquidity to maintain the quality of assets and expand our production capacity, as well as return capital to shareholders. In the first quarter of 2024, we repurchased $15 million of shares and declared a dividend totaling $16 million. As a result of our buyback programs, we had 2 million fewer average shares outstanding this quarter compared to last year's Q1. As at the end of March, we had returned over $225 million of capital to shareholders out of the $500 million committed for the 2023 to 2025 period. Yesterday, our board of directors approved a quarterly dividend of 28 cents per share, reflecting the continued confidence in the long-term strength of our business. In summary, our financial performance to begin the year has positioned us well to remain on track to continue to achieve profitable growth and return capital to shareholders. With that, I will pass it back to Eric for his concluding remarks.
spk00: Thank you, Silvana. Our first quarter results helped set the tone for a positive year ahead, and our focus in 2024 will remain on the growth trajectory of our infrastructure business. we are well positioned to meet or exceed the objectives laid out in our three-year financial plan. We continue to work towards achieving more than 3.6 billion in sales by 2025. And despite the impact of short-term trends, the underlying fundamentals of our business remain rooted in maintenance and replacement requirements, which play out over the longer term horizon. For utility pool product category, we continue to expect sales to grow at a compounded annual growth rate of 15% for 2024 and 2025, largely driven by volumes. Expected volume growth is based on information shared with us by customers in terms of their needs, as well as additional volume commitments recently secured from new and existing customers. As our customers undertake many of their projects during the second and third quarters, we expect these big volume periods for our business to support the expected volume growth. While our railway type product category had a strong start to begin the year, we are reaffirming our annual sales growth rate in the low single digits. A Class 1 customer has recently modified their 2024 maintenance program, which is expected to reduce overall volume gains for the year. And we maintain our projection of sales between $600 and $650 million for residential lumber, which is expected to comprise less than 20% of our overall sales mix. In terms of profitability, considering the strong performance of our EBITDA margin through 2023 and into the first quarter of 2024, we are currently well positioned to exceed our 16% annual margin target. Potential pricing pressures in the second half of the year for utility pool spot market business are expected to impact our current level of EBITDA margin. We look to the future with confidence, thanks to the strengths, resilience, and profitability of our business. And we will continue to put in the work every day to keep reaching further and higher while creating value for our shareholders. I would like to conclude the call by acknowledging our employees across North America, many of whom are listening today. You are what makes Stella Jones unique. Our customers rely on us for quality products and timely service, and we have a best-in-class reputation because of our team and the care and attention to our work. Thank you for delivering your best every day. With that, I will now open the line to questions.
spk06: Thank you, Eric. The line is now open for questions. I would like to remind you that if you're on the phone and wish to ask a question, please press star 1. Our first question is from James McGarigle from RBC Capital Markets. Please go ahead.
spk05: Congrats on a great quarter. I had a question on the pool pricing outlook. You know, you flagged you expect recent strength to persist, you know, early in the year. You know, we clearly saw that in Q1. And then that you expect pricing to fall off in the back half. And, you know, given some of the, I guess, the near-term demand headwinds, do you see any risks to margins? I know you reaffirmed that margin outlook, but is demand coming in a little bit lower due to some of these near-term headwinds? Pricing comes on, falls off in the back half as new capacity comes on. Any risks to margins, you know, in Q3 and Q4? Any color you can provide there would be appreciated.
spk00: So thank you, James. So, you know, I guess I'll start by reaffirming our belief in our 15% CAGR growth for, you know, 24 and 25 supported in better part by volume growth. So to your point, I guess there's sort of took away two parts to your question. First, obviously, was the pricing. Had strong pricing in the first quarter, obviously, for utility poles. I believe, and I think we stated this before, we believe that the first half of the year, we will still see some uplift coming from pricing, and we still maintain our assumption of pricing pressures in the second half of this year driven or supported or justified by the fact that we're seeing a new capacity come online. That being said, the volume piece, as I said, we still have strong confidence because we have strong communications with our customers. We have brought on some new customers this year that were not part of our customer list last year. And so we feel pretty strong about our 15% growth for the year.
spk05: switching gears over to the railway ties business um you know we've highlighted in the past some potential catalysts related to funding from the u.s infrastructure bail bill um and you know we you've talked about uh you know losing that that cost one or that cost one customer reducing their their volume outlook a little bit but you know as we start to look into 2025 do you have any update on you know, if we could see an uptick related to the U.S. infrastructure bill and, you know, what type of upside that might represent if those funds start getting to be spent. Thanks.
spk00: So we are seeing subsidies for subsidy programs in the U.S. supported by... U.S. federal government's infrastructure plan. You know, as recently as, you know, April 30th, there was a deadline to apply for CRISI grants in the U.S. And that budget was around, I want to say, around 2.4 billion U.S. dollars, which is double the amount that was there in the previous year. So I do believe that, you know, obviously projects will most likely have been applied for. And, you know, we would see those funds deployed in the next 12 to 18 months. CRISI grants are grants that are in place to support rail infrastructure safety. And typically the short line in commercial business would be the targeted market, I guess, for those subsidies. So I do feel that there will continue to be strong dynamics, you know, in the non-class one business as we go forward into 2025. Thank you.
spk05: And I'll turn the line over. Thank you.
spk06: Thank you. Our following question is from Benoit Poirier from Desjardins Securities. Please go ahead.
spk04: Thank you very much and good afternoon. Just to come back on the utility, we've seen several large utilities like American Electric Power and Dominion that have mentioned seeing an uptick in future electricity demand for data centers coming from AI growth wave. So has this been a point of discussion with customers in recent months and how much of a tailwind could this opportunity be on top of the infrastructure and EV backdrop for you guys?
spk00: It's hard to say how much of an impact it would have, but you are correct. It is a topic of conversation that we've been hearing more frequently in the last year, I would say, where energy consumed by data centers is significantly higher, particular, you know, I'm assuming you're referring to AI, you know, versus your regular internet use. But I think in the end, it's for our customers, it's part of their consideration for overall requirement for electricity. Many utilities in North America are faced with, I would say, maybe a dual challenge. One is ensuring they have enough generating assets for the next few decades to support demand. And then obviously you need transmission and distribution to be able to support it. So it all fits in the same theme for me. But to your point, Benoit, the data-centric topic is something that has been coming up more frequently, but very hard to quantify that impact.
spk04: Okay. And just looking at your EBITDA margin, obviously above 20% marks a new record level for you. It's up almost 340 bids versus last year. So I don't know if you could maybe provide more color or break down the contribution between how much of the increase was driven utility poles versus railway ties and how confident are you that the margins could be maybe a little bit stronger than initially expected on the back of the start in Q1?
spk00: Well, you know very well, we don't disclose margins by product category, but obviously the you know, as stated in our MD&E, the better pricing for poles and the better pricing for utility, sorry, for railway ties did contribute to that, you know, favorable uplift in EBITDA margin. You know, also very proud on how our team is managing our costs and, you know, leveraging our network to make sure that, you know, we compressed costs as best we can. But going forward, with my comment earlier that pricing would be still strong in the second quarter, so I would still expect some relatively stronger EBITDA for the second quarter. Now, please I'll remind the listeners that we also usually have a stronger volume for residential lumber in the second quarter. So the mix would obviously make a difference because I guess the mix of residential lumber in the first quarter is obviously lower. But I do believe that our first half of the year will show very strong performance. from an EBITDA margin standpoint. And then the second half, you know, we are guiding to softer margins compared to H1, you know, driven by our belief that, you know, there will be more competition for utility pole sales.
spk04: Okay, that's great, Father. And last one for me on the residential lumber side. What are you seeing on the retail side so far in Q2 in your discussion with customers as we enter the summer peak season?
spk00: Obviously, it's a q2 data point but you know it seems that we're you know our customers are looking for similar you know volumes year over year pricing you know lumber price of lumber is similar to last year it ebbs and flows a bit but in the same range i don't think pricing would be a big factor necessarily, and volumes would be flattish or similar. So, you know, thus, you know, our conclusion, it would be the same range of 6 to 650, 100 million in sales annually.
spk04: Perfect. Thank you very much and congrats. Thank you. My pleasure.
spk06: Thank you. Our following question is from Jonathan Goldman from Scotia Capital. Please go ahead.
spk02: Taking my question. Eric, I appreciate the comments you made on the mix in Q2, but Q2 is typically your strongest EBITDA margin quarter. Wouldn't it be logical to assume margins would be up quarter on quarter?
spk00: Quarter on quarter? No, I think, you know, I think the mix will make it potentially slightly lower. It'll still be a strong EBITDA margin quarter, but, you know, it is the peak season for residential lumber. What we saw in April, May, and June, volume-wise, significantly outweighs the other three quarters of the year. But you are right that poles and ties are also, you know, have a large presence in the second quarter, but I still think that the mix would, you know, have it slightly lower.
spk02: Would that mix be different than historically?
spk00: Yes. Great.
spk02: Hold on. Somebody want to add some color?
spk07: Yeah, maybe just add some color, Jonathan. You know, also keep in mind that, you know, our polls sales with SYP being a bigger portion of our portfolio, there's a little bit more consistency throughout the year. So, you know, we have seen less seasonality, let's call it, currently versus in the past, just because of the greater weight that we have with SYP in our portfolio.
spk02: Okay, that's great, Keller. Thank you. And I guess the second one would be on poll volume outlook. Eric, you discussed 15% growth in your polls this year. That would be mostly volume, I think you said. That would imply 20% growth in the back nine months of the year. Is that the right way to think about it? And what sort of visibility do you have on growth accelerating to that degree?
spk00: So I think your math, you know, directionally is correct. And, you know, as I mentioned in my remarks, you know, that... you know, our capability to, to, uh, or assurance or certainty that which we come forward with our 50% growth comes from discussions we have with our key customers, uh, the, the projects that they have coming, you know, in, in the next quarters and lapping into actually 25. And as well, as I mentioned, we, uh, we have some new customers that we're ramping up in the first quarter that are now, uh, you know, uh, you know, fully supported by us going forward. So I do feel pretty good about it. And so does our poll team, spent a lot of time, you know, looking at our number, making sure that we could come today with a level of comfort in stating or reiterating our 15% growth.
spk02: Okay, perfect. If I could just squeeze one more in. Do you have a sense on the tie, the sales growth, the organic growth, how much of that was volume versus price driven this quarter?
spk00: It's about half and half, about 50%, 50%. You're talking for the entire growth, right?
spk02: The organic growth for TIE, so I guess it's all organic.
spk00: Yeah, for TIE it's 50-50. 50 volume and 50 on pricing.
spk02: Perfect. Thank you for taking my question.
spk00: Thank you.
spk06: Thank you. Our following question is from Michael Tapome from TD Securities. Please go ahead. Thanks.
spk03: Thank you. Good afternoon. Maybe a similar question to the one you were asked, Eric, but with respect to the polls product category, if you can provide a breakdown of the 7% year-over-year organic growth you saw in the quarter, how much of that was volumes versus price?
spk00: Thank you, Michael. So as we explained, actually, in February in a Q4 call, so our Q4 23 volumes were down 5% year over year. And at that point, we did take the opportunity to say that we would see a similar trend in the first quarter of this year. And that is exactly what we've observed. So no surprises there.
spk03: Okay. And then... What are you seeing through the first part of the second quarter as far as perhaps the month of April in terms of what you saw on the volume side year over year for pools?
spk00: So, Michael, that's really a Q2 question. So, you know, what really I want to reiterate is that we have confidence in our 15% growth for the year. You know, and obviously, it's a, you know, as I mentioned in my comments, it's really a long-term view on things. So, I really... you know, even with, say, 50% CAGR over 24 and 25, as we know that a lot of projects from our customers, although there's been a bit of deferral in Q4 and Q1 into, you know, the coming quarters, it is a long-term initiative for all our customers, but, you know, still feel comfortable with our 15% CAGR.
spk03: Okay, that's fair, and, you know, absolutely took your point that you reiterated the 15% CAGR and I think you were just talking with the prior analyst about what's implied for the remaining nine months to get you there. I guess maybe I'll ask the question a little bit differently. The question is really then, how do we think about the cadence here as we move through the year just to ensure we're not being too aggressive as we think about Q2 for the pools business in terms of organic growth? How does this ramp as you make your way to that 15% organic growth for the year?
spk00: Yeah. So, you know, as I mentioned, we've seen better volumes in Q1 this year and Q4 next year, and it's going to keep growing. And, you know, I'll reiterate that Q2 and Q3 would be our strongest volume quarters. So, you know, I guess you could expect us to have, you know, a jump, I guess, in the volume in the second and third quarter simply because you know it is the maintenance season in north america granted that in the south us as sylvana explained syp is a year-round activity uh canada and the northern part of the us uh you know april to october are the months where you know installation and maintenance a lot of it gets done
spk03: Okay, fair enough. And then maybe just one other one. You'd previously talked about the prospect or the potential for some pricing pressure. I think you reiterated that risk or potential here on this call as far as the polls business and pricing pressure, particularly in the second half. I think previously you'd talked about those pressures potentially materializing in the spot portion of the polls market. Can you just talk about where do you see potential pricing pressures now? Is it still very much in the spot market or do you see anything going on in the contract market? If you can just talk about that, it'd be helpful.
spk00: So our views is that it would be entirely in the spot market. Our contract pricing is set and has mechanism for adjustments that are based on the different cost drivers. So market trends much less or no influence at all. So it's entirely into the spot market. I can't say that it's something that we've necessarily seen or measured, but as I explained with the additional capacity in the market and us securing a lot of the long-term contracts in the North American market, I feel that a lot of our competitors to move their products will have to take a second look at their pricing. But obviously, that's an assumption that Stella Jones has taken and that's how we've laid out our expectations for our margins for the second half of the year.
spk03: But at this point, you're not yet seeing it in the spot market. This is more of a potential risk still? Still a potential risk, yes. Got it. Okay, thank you. I'll leave it there.
spk00: Thank you, Mike.
spk06: Thank you. Our following question is from Maxim Sychev from National Bank Financial. Please go ahead.
spk01: Hi, good afternoon. Hello, Maxim. Maybe the first question for Silvana, if I may. So when you talk about normalization of working capital kind of intensity, so when in 2023, there was a drug of $345 million for non-cash working capital, do you mind maybe providing some thoughts around where 2024 might land? Like, will we be able to unwind kind of the vast majority of that? How should we think
spk07: So our expectation for this year, for 2024, is that the inventory level at the end of 2024 will be at a similar level as at the end of 2023. So it will remain at those higher levels. Part of it is the need to have this higher inventory level to service additional volumes that we are projecting into 2025, particularly for utility poles, but also for railway ties.
spk01: Okay. And then I guess, I mean, I know that 2025 is a bit, you know, is a bit far, but I'm just trying to think about sort of a normalized, perhaps EBITDA to kind of, you know, free cash flow conversion. Maybe if you have any thoughts there, how we should be approaching this.
spk07: In terms of, I guess, maybe two data points that might be useful, the first one is that our expectation is that our inventory bill is always about 40% of additional revenue. So for every additional dollar of revenue, there's about, you know, 40 cents of inventory bill typically that is seen throughout the company. And in terms of free cash flow conversion on a normalized basis, I would say probably, you know, a 50 to 60% would be closer to 50% would be more of a normalized level.
spk01: Okay, that's super useful. Thank you so much, Silvana, for that. And Eric, I mean, I know obviously we're kind of beating that horse around price and dynamic, but how quickly do you think that can clear? Do you think it's really just a back half of 2024 event, and then there's sort of like a reset in 2025, or do you think it can have a bit of a longer tail? Like, what are your thoughts from that perspective? Thanks.
spk00: So, I mean, it's a good point. Obviously, it's an assumption, you know, is it going to happen in Q3 or start in Q4 and lap into early next year? You know, I think it's sort of like, you know, we'll have a, you know, the presence of this pressure will, you know, once it starts, it'll be there for a couple of quarters. The longer it takes, I would think the better off we are, and I think demand will normalize again because I think it's short-lived. You know, we're still expecting... to see interest rate drops, maybe not this year at this point, I don't know, later in the year or early next year, but I do think that as soon as we see interest rate moves, we will see more projects, you know, come forward in North America, and that will most likely help, you know, absorb some of that excess capacity.
spk01: Yeah, makes a lot of sense. Okay, that's great. Thank you so much. That's it for me.
spk00: Thank you, Maxim.
spk06: We have no further questions in the queue. Thank you.
spk00: Well, thank you everyone for joining us today and looking forward to talk to you again next quarter.
spk06: Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect your lines.
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