Stella-Jones Inc.

Good morning and thank you for standing by. Welcome to Stella Jones's second 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 1 and a moderator will contact you. If anyone experiences difficulties hearing the conference call, please press star 1 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Wednesday, August 7th, 2024. 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 CDAR+. 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 CDAR+. 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 Éric Vachon, President and Chief Executive Officer of Stella Jones. Éric?

Thank you, Matthew. Good morning, everyone, and thank you for joining us today. I'm here with 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 second 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. Our financial and operating performance during the second quarter was characterized by the continued strong organic growth in sales and increase in profitability. Our Q2 results reflect our proven strategy to consistently meet customer demand and leverage the breadth of our operations to solidify our long-term propositions. Standing at the halfway mark of our three-year financial plan, we are well positioned to meet or exceed the targets we set out last year. As part of our growth strategy, we undertook a significant CapEx program over two years ago, focused on increasing our utility poles capacity. This additional capacity allowed us to solidify our existing customer relationships as well as secure new commitments. Though we continue to note a slower pace of incremental purchases from some of our customers, their ongoing focus on strengthening the electrical grid to support heavier loads instills confidence in our long-term prospects. Their projected increase in the use of electric vehicles and data centers for artificial intelligence and sustained demand for broadband projects are all catalysts for our business growth. Our utility pole CapEx program, which will be largely completed later this year, represents the culmination of our approach to plan for long-term demand. Much of our success in recent years is a direct result of our operational expertise, solid customer relationships, and acute industry intelligence, and I'm very pleased with what we continue to accomplish as a business. Turning to an update on each of our product categories, Utility polls continued on its growth trajectory in the second quarter, with sales benefiting from both favorable pricing and improved volumes. With the second quarter marking the start of a more active maintenance season, we were pleased to see the expected uptick in utility poll volumes, including the addition of new contractual customer businesses. For the non-contractual business, we have started to see some pricing normalization, but it is sparse and localized to regional markets. As a result, it is now our expectation it will not significantly impact our results in the second half of the year. With the utility pole product category being anchored in strong fundamentals, we remain confident in the outlook for this category heading into the second half of 2024. While we are still witnessing some conservatism from utilities in terms of project spending, Teladult has benefited from volume gains thanks to our expansive network and established customer base. We continue to see a growing shift with both new and existing customers towards longer-term sales agreements, which aligns with our business philosophy of ensuring that we can cater to long-term needs. Sales from our railway-type product category increased from last year largely due to higher volumes, a trend that has persisted since the beginning of 2024. We are better able to service our non-Class 1 client base given the ample supply and financial resources available to replenish our inventory levels. While sales growth of our non-Class I business is a positive catalyst for the railway-type product category, we also continue to focus on servicing our Class I customers with whom we maintain strong relationships. These railway operators provide a stable source of revenue for the company, and this contributes to the inherent consistency in terms of growth and results of this product category. Turning now to residential lumber, Sales were down relatively to the second quarter of last year, driven largely by lower consumer demand. The price of lumber has also remained lower than expected due to several factors impacting market demand, including a slowdown in housing and construction projects, as well as reduced activity from sawmills. Our focus for the residential lumber product category remains to ensure our customers stay stocked in premium quality products, so that when retail customers decide to move ahead with their decking and fencing projects, we will be there for them as a supplier of choice. In line with our ongoing focus to be a partner of choice to all stakeholders, CelloZones prioritizes meaningful action across all facets of its organization and value chain to ensure its long-term sustainability. As part of this commitment, on August 1st, we publish our annual Environmental, Social and Governance Report, which articulates our ESG performance against our strategy and achievements over the past year. For the first time in our company's history, we have completed a company-wide climate transition risk and opportunities assessment, aligning with the TCFD and ISSB, and including scope three emissions amongst our overall greenhouse gas reporting. These were significant undertaking in an industry and business such as ours, and I'm very proud of our collective accomplishments over the last year. I encourage you to refer to our website to review our 2023 ESG report and learn more about our sustainability approach. I will now hand it over to Silvana, who will provide a more detailed overview of our second quarter financial results.

Thank you, Eric, and good morning, everyone. We are very pleased with our strong second quarter financial performance, which translated into notable increases across all of our key metrics. Sales for the quarter increased by 8% to over $1 billion. This increase was largely attributed to higher utility poles, railway ties, and industrial product sales, which grew by 17%. These infrastructure-supporting product categories benefited from volume gains and favorable pricing compared to the same period last year, as well as from the contribution of the Baldwin acquisition. On the heels of our strong sales growth, operating income increased to $168 million from $149 million in Q2 last year. Similarly, EBITDA grew by 14% to $200 million this quarter, following a similar 14% increase in Q2 last year. We expanded the EBITDA margin from 18% in 2023 to 19.1% in the second quarter of this year. Compared to the first quarter, all product categories generated similar margins as a percentage of sales. The sequential decrease in EBITDA margin was largely a result of the product mix, given that residential lumber typically represents a higher relative proportion of sales in the seasonally strong second quarter. We ended the quarter with net income of $110 million or $1.94 per share versus $100 million or $1.72 per share in the second quarter of last year. Now let's take a closer look at the performance of our product category. Sales of utility poles increased to $470 million compared to $388 million for the same period in 2023, a robust growth of over 20%. Utility pole sales benefited from our accretive Baldwin acquisition and a strong organic increase of 16%. This ongoing growth was driven by price adjustments and additional volume stemming from existing and new sales commitments. The volume gains this quarter represented about 40% of the total increase. Sales of utility poles accounted for 45% of total sales for the quarter and almost 50% on a year-to-date basis. Sales of railway ties grew by $27 million for a total of $265 million compared to the second quarter of 2023. This increase was largely attributed to higher volumes for non-Class 1 customers, which as Eric noted, is a trend that has persisted since the first quarter. Better pricing also contributed to the sales growth. Railway tie sales accounted for 25% of overall sales for the quarter. Residential lumber sales were $243 million, a decrease of $28 million compared to sales of $271 million during the comparable period last year. While the market price of lumber has remained weak, most of the decrease quarter over quarter came from lower sales volume due to slower consumer demand. Given the seasonally strong second quarter volumes for residential lumber, this product category accounted for 23% of total sales in the second quarter. Our company is highly cash generative, which enables us to finance our growth plans and maintain a strong financial position. In the second quarter, we generated cash from operating activities of $177 million and used this cash to invest in our network reduced leverage following the typical build in working capital in Q1, as well as returned capital to shareholders. We ended the quarter with a net debt to EBITDA ratio of 2.5 times, which is within our target range. As part of our normal course issuer bid, we purchased $20 million of shares and paid $32 million of dividends in the second quarter. As of the end of June, we were on track on our commitment to returning capital to shareholders, having returned over $260 million out of the $500 million committed for the 2023 to 2025 period. And yesterday, our Board of Directors approved a quarterly dividend of $0.28 per share. We ended the quarter with inventories of $1.7 billion, relatively in line with the $1.6 billion of inventory as of December 31, 2023. We continue to expect inventory at year-end to be in line with levels at the beginning of the year. This investment in inventory places the company in a good position to continue to service its customers on a timely basis. In the second half of 2024, we are focused on continuing to deliver strong performance and growth while returning capital to shareholders. In summary, with the financial strength of the business and the solid market fundamentals of our product categories, we remain well positioned for continued success. With that, I will now pass it on to Eric for his concluding remarks.