Stella-Jones Inc.

Good morning and thank you for standing by. Welcome to the Stella Jones third 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 one and a moderator will contact you. 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, November 26, 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 Eric Vachon, President and Chief Executive Officer of Stella Jones. Eric?

Thank you, James. Good morning, everyone, and thank you for joining us today. I'm here with Silvana Travolini, our Senior Vice President and Chief Financial Officer of Stella Jones. Earlier this morning, we issued our press release reporting the results for the third quarter of 2024. Along with our MD&A, it can be found in the industrial 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. Stella Jones's strategy, as always, is rooted in the long-term growth of our resilient infrastructure businesses, and we are confident in the strong long-term demand drivers of the industries we service. The growth in Q3 sales, however, was lower than anticipated, and this was driven by lower sales volume for utility poles. As we keep our focus on our goal to deliver profitable growth, we are pleased with the continued solid margins and strong operating cash flows generated this quarter. The demand for utility poles remains very compelling, but over the last year we have witnessed a slower pace of purchases and deferral in the execution of certain projects by utilities. While our customers continue to acknowledge the need to increase their investments to replace aging infrastructure and increase grid resiliency, utilities are working through what we understand are various challenges impacting the timing of some capital expenditures. This includes inflation and utilities supply chain constraints, as well as timing of funding based on rate case filings. As such, our utility customers are currently investing in pole maintenance at a slower rate than their initial projections, and we have seen less project-based activity than we typically would in the third quarter. Based on our visibility on these current purchasing trends, we are updating our three-year sales target to approximately $3.6 billion by 2025. This compares to the above $3.6 billion organic sales objective set in May 2023. From an EBITDA margin perspective, our performance to date has exceeded our profitability objective. Since 2022, we have expanded our EBITDA margin by over 300 basis points and we are confident that we can sustain an expanded EBITDA margin of over 17% compared to our original 16% target. This represents an EBITDA CAGR of 11% for the 2023 to 2025 period compared to our initial CAGR of 9%. As we remain focused on value creation for shareholders, our aim is to continuously grow sales and profitability, as evidenced by our established track record of performance. Turning now to each of our product categories. For utility poles, as I noted, we are experiencing what we believe is a period of deferred spending on certain maintenance and projects across the utility industry. That said, aging infrastructure, our customers' forecasted capital expenditures, and the long-term sales contract that we continue to secure all underscore our continued confidence in the long-term demand growth. To this end, it is noteworthy to highlight that sales of our utility pole product category, even prior to the significant increases in 2022 and 2023, have grown on average in the mid to high single-digit range. When compared to the industry's increase in transmission and distribution capital expenditures, our organic sales growth has outpaced this increase. According to industry reports, the transmission and distribution spend of utilities is expected to sustain an average historic growth rate of 6% to 7%, supporting our views on the revised forecast for utility poles sales growth. Now let's turn to the performance of railway ties. As we talked about in the last calls, we expected lower sales volumes for railway ties in the second half of the year. As anticipated, third quarter sales were lower, and this was driven by the reduction in the maintenance program of certain Class 1 customers and the timing of shipments. On a year-to-date basis, sales of railway ties were up, largely due to the ongoing strong non-Class 1 demand, which we have serviced well in 2024, given our replenished levels of inventories. We remain confident in a stable source of revenue from railway ties and in this product category's ability to consistently deliver a low single-digit sales growth. For residential lumber, sales continue to be lower versus last year, but we are encouraged to see lumber prices trending upward as well as preliminary signs of increase in demand. According to various industry reports, the remodeling downturn is expected to reverse by the middle of 2025, and renovation and remodeling spending is expected to benefit from improvement in new home construction and existing home sales. We continue to forecast sales for residential lumber in the 600 to 650 million target range. With that, I will now ask Sylvana to provide a more detailed overview of our third quarter financial results.

Thank you, Eric, and good morning, everyone. Sales in the third quarter of $950 million decreased 4% year-over-year, driven by lower volumes for all product categories. This decrease in sales largely explained the lower operating income to $130 million and the decrease in EBITDA to $162 million. Though sales and EBITDA were lower compared to Q3 last year, we continued to deliver a solid EBITDA margin of 17.7%. Year-to-date, sales were up 4% to $2.7 billion. We increased EBITDA to $518 million and expanded the EBITDA margin to 18.9%. Now turning to the product categories. Utility pole sales were up 10 million this quarter to $448 million, driven by favorable pricing in response to cost increases. Offsetting in part this higher pricing was a decrease in volume. Volumes were down 6% compared to 2.3% last year and was mainly attributable to spot business, as we witnessed a slowdown in project-based activities. Railway tie sales decreased by $25 million, largely driven by lower volumes. In addition to the expected reduction in the maintenance program of certain Class 1 customers, the lower sales this quarter were also explained by timing, as the annual maintenance program of some customers were completed earlier this year. Residential lumber sales decreased 5% to $191 million due to lower volumes. Despite the weaker market price of lumber, year-over-year residential lumber pricing has remained relatively stable. During the quarter, we generated strong operating cash flows of $186 million, bringing our year-to-date operating cash flows to $301 million. During the quarter, we had a favorable non-cash working capital movement, including a drawdown in inventory. With the lower than expected sales volumes for utilities this quarter, the inventory balance at the end of the quarter of $1.6 billion was higher than anticipated. Considering the typical build of inventory for the other product categories in the fourth quarter of the year, we are forecasting our year-end inventory to be higher than the balance at the beginning of the year. In terms of working capital movement in the fourth quarter, the investment in inventory is expected to be largely offset by the seasonal decrease in accounts receivable. A key focus for the organization is to maintain a capital allocation approach with an investment grade profile. We are committed to a balanced capital allocation strategy investing towards growth of our business and returning capital to shareholders while maintaining a prudent leverage ratio. During the first nine months of the year, we returned $112 million to shareholders through dividends and share repurchases. Since the beginning of the normal course issuer bid last November, we repurchased over 1 million shares in consideration of $85 million. Our business is highly cash generative, which is why our board of directors had the confidence to authorize a new NCIB for the upcoming year, which we announced in a dedicated press release earlier today. Stella Jones is authorized to repurchase up to 2.5 million shares, representing approximately 4.5% of the common shares outstanding. As of the end of September, we were on track on our commitment to shareholders, having returned almost $310 million out of the $500 million committed for the 2023 to 2025 periods. And yesterday, our board of directors approved a quarterly dividend of $0.28 per share. At September 30th, we had $342 million available under our existing credit facilities and a net debt to EBITDA ratio of 2.5 times. As we head into 2025, we are pleased with our strong financial position and flexibility. which we were able to bolster on October 1st with an inaugural bond offering of $400 million for seven years at a rate of 4.3%. We used the proceeds from this offering to repay the amounts outstanding on our revolving credit facilities. As of October 1st, we had almost $750 million of available capital. The successful completion of this notes offering at attractive terms speaks to the confidence our lenders have in our underlying business and future prospects. With that, I will now pass it back to Eric for his concluding remarks.

Thank you.

As Sylvana mentioned, the note offerings provide us with additional financial flexibility heading into 2025, and this is especially important as we actively pursue acquisitions. Growing our business through acquisitions continues to be a cornerstone of our growth strategy. Our focus for acquisitions is to leverage our infrastructure customer base, unique North American footprint, and distribution network to better meet our customers' needs. We have dedicated significant resources towards identifying opportunities that we deem to be a good fit for our business, and we are confident that in 2025 we can realize a creative acquisition that will drive higher sales and profitability. We are enthusiastic about the long-term growth prospects and strong market trends across all product categories. If I can leave you with the following takeaways before we conclude today's call, first, It is our expectation, as has been the case historically, that sales continue to grow based on strong demand drivers of the infrastructure markets that we serve. On the profitability front, our updated margin targets of over 17% represent a significant expansion over our 15% historical average. We expect to maintain this and continue to work improving it over time. For 2024, as mentioned in our Q2 conference call, we continue to forecast a margin closer to 18%. In addition, we continue to leverage acquisitions as a conduit to expand our business. Strategically selected, accretive acquisitions will enable us to further meet our infrastructure customers' needs and pursue growth. And lastly, by remaining committed to an investment grain leverage ratio and disciplined capital allocation strategy, we are able to maintain a healthy balance sheet which provides the flexibility to seize growth opportunities. In closing, and in the wake of recent devastating storm events in the southeastern United States, I would like to say a word to recognize ours and our customers' emergency response operations. Teladon is always fully committed to supporting its utility customers and is ready to help bring power back to our communities. I want to thank our teams for their tireless efforts and dedication. Your commitment serves as a testament to the strength and solidarity of our organization. I will now open the line to questions.

Thank you, Eric. The line is now open for questions. I would like to remind you that if you are on the phone and wish to ask a question, please press star one. Our first question is from James McCarrigle from RBC Capital Markets. Please go ahead.

Hey, good morning, Eric and Savannah. Thanks for having me on. Morning, James. On the updated consolidated guidance, I know you put out the new targets for 2025. Can you just provide some additional color there on the pull and tie segment a little more specifically?

Certainly. So as I mentioned, we readjusted our goals, targets for the end of 2025 for sales for over or actually to be at 2025. $3.6 billion. Our view there is, and I'll get into some detail in a second, but our view there is that, as I mentioned, our whole sales growth would be closer to industry growth for this year and next year, that being the 6% to 7%. Our railway type business would maintain the low single digit and obviously the residential number, we maintain our views on the residential, sorry, on that sales range of $600 to $650 million. The big change comes from our thoughts on utility pole sales volumes. If I think about our first half of 2018, we saw an improving trend in volumes, you know, from going from Q1 to Q2, but not as strong as our expectations. Going into the second half of the year, we validated, you know, our customers' expectations, and we set our production schedule, and here we are today in Q3 with, you know, lesser volumes. A couple of drivers there. I mentioned that we've seen less project demand and less spot demand in the quarter than we usually see historically. And we're also seeing long-term customers being a bit more cautious in confirming orders. So although our customers in general are still indicating strong demand for their needs. And, you know, we see the headlines in the media, maybe for generating assets or transmission projects. There's the same interest and excitement around distribution maintenance projects. Those POs are not flowing through. So we need to sort of reset our views on it and say, well, our view will be more in line with what the industry is indicating. So that's 6% to 7%. Our customers in the end are faced with – I would say a few challenges, cost of materials have been increasing, the labor costs have been increasing, and they have a given pool of funds to allocate to different projects or different buckets that we can continually hear about. And in the end, They need to make some decisions and select some priorities. And I do think that as we see rate-based cases get more scrutiny but eventually get approval, they'll be able to catch up and change their allocation of funds. So those are our views essentially there. It's what we sort of determine as we're listening to what our customers say, what our experts are telling us, what the channel checking is doing. And we felt that today was an appropriate time to reset the expectation. It's a responsible approach. Still very happy in the growth that we're showing. As I said, it's a long-term perspective on our business. I do think we will see growth in the long term, but this might be just a period in time where there's a bit of a slower pace, but still forecasting growth for this year and next year.

I appreciate the caller. And then one follow-up on the poll pricing. I know in Q2, you flagged the pricing's holding up pretty well. Seems to be that that still looks like the case, but With some of this near-term headwinds to demand and some of the capacity that's coming on across the industry, do you still expect pricing on the spot side of the business to hold up or any color you can provide there? And after that, I can turn the line over. Thank you.

Certainly. So for this year, as we talked about on the last call, the pricing is relatively stable. There's some softness in certain areas, but, you know, nothing significant that we've observed and keep observing. Going into next year, you're completely right that the spot market might see some slight softness. Not significant, but you're right, there's more capacity, and we have proof of that capacity being online today. But, you know, we do think that it will be offset with just our regular contract increases. Obviously, as certain of our own cost, maybe labour or material cost increase and our contracts allow us to pass it through, we should see some increases there that would offset it. So for next year, I would say call it slightly slattish for pricing next year.

Thank you.

Our next question is from Michael Tupholm from TD Securities. Please go ahead.

Thank you. Good morning. Maybe I can just start by clarifying the last comment there, Eric. When you talk about slightly flattish pricing next year, are you talking about just in the spot polls market, or are you talking about within this 6% to 7% organic growth, it's flat pricing? It's just not clear there.

Yeah, it's in the total growth, Michael. As we get closer to the end of the year, we know we will assess our cost increases. We will look at what the different inflation indexes that are referenced in our contracts look like, and we'll have a better understanding of what that cost or pricing adjustment will be as we pass on those cost increases to our customers. You know, we have an idea, hard to predict, but I do think, you know, that it'll be part offset with the spot market. So you could call it slattish for the entire growth for the whole product category.

Okay. And so, sorry, just to be totally clear here, the expectation now for organic growth within the UtilityPulse product category for both full year 2024 and full year 2025 is 6% to 7%. Okay, and in 2025, it sounds like essentially all of that would be volume, and we're very close to all of that is volume-driven, and pricing is not really playing a role in next year's growth.

Yeah, I would say for now that's the visibility we have. Okay.

Just sort of the deferrals and the factors that led – to your commentary about utilities pulling back or deferring some of the projects and not seeing the order flow come through as you would have expected. Have you seen any improvement in any of these areas yet, or is that all still yet to come? And you had also previously talked about, you know, seeing the possibility of lower interest rates getting some activity, spring some activity among utilities. We have seen, obviously, Rates come down. We'll see what happens later this week in the U.S. But just kind of trying to understand if the factors that pressured result in the third quarter, are they all still at play or are you seeing any indications that things are actually kind of starting to move a little bit? So they're still all at play.

And I guess that justifies a bit why we felt we had to adjust our guidance. And we will actually see some of that early next year. To your question on interest rates, by the time the rates drop and projects get put back on the table and approved, you've got a lag. Hard for me to say. I would call it two, three quarters before we see that positive effect. So that's one thing. The other thing is I do think there is – I would say a slowness in approval of rate-based cases. There's more scrutiny and more administration around them. Last year was a record year for rate case increased demands, and obviously it's putting a bigger strain on the end users, so there's more questions and more scrutiny being put to those. that there's a bit of a slowness in the funding. And that's my perspective or my understanding. So obviously that sort of explains the slower rate that we're referring to, the slower rate of purchases.

Next question is just about the margin outlook, which you've updated for 2025, talking about over 17%, which is up from the prior level of 16. But you did 18.3%. full year 2023 EBITDA margin, you're talking about closer to 18% in 2024. Even with the downshift in your expectations for organic growth and polls, that still sounds like it's your fastest growing product category. And it's, correct me if I'm wrong, still your highest margin. So what is it that would cause EBITDA margins to decline year over year in 2025 relative to what you've seen in the last couple of years?

Well, first I want to point out we indicated greater than 17%, but I still don't understand very well your question. I guess I'll provide two clarifications. This year, we're seeing a residential lumber product category being at the lower end of our range. I do believe it'll be better at the higher end next year, so I do think the mix will impact the margins. And secondly, you know, we're seeing cost increases across our organization, you know, maybe, you know, under the direct margin line in this G&A and so on. And to your point, our biggest product category seems to be flattish a bit on pricing. So there might be some, you know, a bit of headwind there. So I'm giving myself a bit of wiggle room here to see how things are going to pan out. We're scrubbing our budget in the next four weeks, and I had a meeting with Mark's senior team to better understand where we're going with our year 2025. But happy to say and confidently say that we're increasing that target to greater than 17%. You know, you and your peers have questioned us a lot about, well, you know, when 16 seems low, you guys are outperforming, and now we feel comfortable, you know, etching it up to 17 or greater than. And we're very, you know, and I'm confident we can hold this over time to something that's sustainable.

So very, very happy to bring that forward today. Perfect. I will leave it there and get back in the queue. Thank you. Thank you, Michael.

Our next caller is from CIBC Capital Markets. Hamir Patel, please go ahead.

Hi, good morning.

Sorry about that. Just a moment. Amir Patel, please go ahead. Sorry. Thanks.

Hi, Eric. I just want to follow up on the margin question. You know, based on that sort of 17% plus for the three-year guide, I mean, that kind of sets an implied floor of maybe 15% next year. But just, I mean, it just sounds like you're saying you think 17% is a long-term number that you can sustain. I just wanted to clarify that.

Oh, no, I'm sorry, Hamir. I mean, thank you for the question. To clarify for our listeners, we're saying 17% is now our floor. So we've been comparing to our historical that, you know, before 22, 15 was the goal. And, you know, we've came close, we've hit it, we've missed it. And, you know, our new guidance had the 16. But today we're saying that we believe that our new floor is the 17%.

Okay, thanks. That's helpful. And then, Eric, just in terms of the poll capacity additions that have come on across the industry this year, do you have a sense as to whether these plants are operating or at what sort of level, and are there still plants that have yet to come on that then may further weigh on the spot market?

My understanding, there is one facility that has gone online in the last few months, and They're definitely operating. I can't talk, obviously, about their sales or what's going on there. So that's going on for sure. And there's a couple of facilities that are increasing some untreated pole capacity in the market. So we have noticed that as well. So I think we're well on our way to see that capacity being actually present end of Q3, but definitely in Q4.

Okay, fair enough. And turning to the Thai side of the business, I know the RTA had their annual conference a couple weeks ago. Do you have a sense yet as to what the various class ones are planning for 2025?

So in general, the programs are similar year over year, I would say.

I guess the only – I guess – call out I'd like to, I guess I'll make is we do understand that the TPKC is going to be leveraging the assets that they acquired through their merger. So we do understand that that asset is going to be fully utilized. So still need to appreciate what that will do for what that customer will need on the general markets. Other than that, the maintenance programs seemed relatively stable year over year. The demand on the non-class one, however, seems to continue to be healthy. We had some good gains this year, and our team is putting together a strategy to be able to leverage that business subsegment a bit stronger next year.

Okay, great. Thanks, Eric. That's helpful. And just the last question I had was just thinking about, you know, obviously the election results in the U.S., If we see potential tariffs on Canadian imports, how do you see the potential impact across your three main categories?

Very little impact. The general theme for all product categories is what we produce in the country we sell in that given country. We have very little cross-border sales. ship into the U.S. some untreated poles from British Columbia that has not been subject to tariffs to date, and we don't expect it to be the case. It is an integral sale for us as we would treat some of that wood for the U.S. market in the U.S., but it's a very small percentage, so very little exposure. We have no exposure today, and I don't see that or have no signs of that impacting us going forward.

Great. That's all I had. I'll turn it over. Thanks. Thank you.

Our next question is from Roman Sinashny from National Bank Financial. Please go ahead.

Good morning. Thank you. I'm just wondering, you rolled out the guidance through 2025 And I was wondering if you'd be able to provide any kind of insights or visibility on what's going to be happening beyond that, especially in the post-market in regards to pricing and really the long-term volume demand for utilities. Thank you.

Thank you, Roman. So the exhibit that we showed on the web that shows the Demand for the industry for polls goes out in time, I believe it's 2030. So if I have to give today a view, I do think we would be following that trend until the 6% to 7% goal going out. And for the other product categories, we remain to have the same views. We look forward at some point to come out and have an investor day next year to have a further discussion on the dynamics of our product categories. The date is yet to be set, but for now, that's the color I can provide.

Perfect. Thank you so much, Eric. My pleasure, Roman.

Our next question is from Benoit Poirier, Desjardins Securities.

Yes, thank you very much. Good morning, Sylvana. Good morning, Eric.

Good morning.

Just on the real... uh you mentioned some color about the outlook for class one going into 2025 with some feedback from the rta conference could you maybe share some color about the outlook for short lines uh given the latest record crazy funding awards that came in uh just a few days ago yeah so well thank you so

As I mentioned, the commercial business or non-class one, the definition is the same, is very healthy and is well supported by different funding. And historically, it's always been the case when the funding is made available to the short lines or for commercial projects, we do see enough left in demand. So I think it's healthy for the industry in general. Now we need to see what those bids are going to look like. The funds are available, which is great. The project needs to get structured. So I expect that we will see in the coming weeks and months some requests for proposals, because that's how that business works, with regards to the different projects. So looking forward to see that.

That's about what we have at this point.

Yeah. Perfect. And just with Hydro-Québec, obviously there's a big requirement. They need about 1,600 pylons for transmission with 850 kilometers of line. They are going to spend between $150 to $180 billion. So just wondering if there's any way for you to size those opportunities longer term.

Yeah, definitely. So, I mean, there is part of our product offering that today is transmission. And I do realize we were talking about more piloting, and that is part of our and many considerations, if you want, where we're studying different opportunities for us to benefit from that network. We have a strong presence in Quebec with our facilities and our distribution network. We have a great relationship with that given customer, and we know all the other players slash suppliers in Quebec. So that's definitely something that we're looking at closely.

Okay. And with respect to the election, the U.S. election, did you get a sense from the utilities that there was some utilities that were on the sideline waiting for election? So do you feel that there's a case that maybe there was some sideline people waiting on the sideline or any color with respect to the U.S. election in it?

That's an interesting question and honestly a difficult one to navigate because I don't want to do politics. So what you're referring to has been suggested to us, you know, by different third parties. But I think in the end, no matter what the color the state turned out to be, maybe red or blue, the customers that we have in those states all have the same needs, all have the same need for financing, need for product structure, and need for the grid hardening. So I do think that it'll play out what needs to get solved, whoever's in the leadership position. you know, needs to acknowledge that we need to get funding out to our customers to help them realize, you know, the green hardening and the expansion of the network, as we all know.

Yeah. Thanks.

Okay. And just in terms of leverage ratio or capital allocation, you ended the quarter at 2.5 times, so closer to the higher end of your guidance. Obviously, you renewed your NCIB. You're talking about M&A going into 2025. So just wondering the change in terms of priority with respect to capital allocation and Maybe if you could provide more details around M&A, what kind of envelope could we expect next year and maybe about the segment or products offering you would like to offer down the road?

Well, thank you Benoit. A lot to unpack there. I'll let Sylvana sort of cover off the first part of your question with capital allocation and our priorities and I'll follow up with the M&A piece.

In terms of our capital allocation, the priorities remain the same. Obviously, we continue to make sure that we invest in our business, in our current network, and we still have that commitment to return capital to shareholders, and that's why we renewed our NCIB, but always remember that our NCIB is really the excess capital that we have, that we use to return capital to the shareholders, always keeping in mind the leverage. And so, you know, we do pace that NCIB based on, you know, potential M&A. So, you know, maybe I'll let Eric elaborate on that, but that's, you know, that's the way we view it. So in terms of leverage, it's still very important for us to be able to remain within that 2 to 2.5. We have remained at 2.5 at the end of September. Our expectation was it to be lower, but because of the higher inventory levels that we had and the lower sales, we weren't able to bring it down within the range, but still at the upper end of that range is something that we're going to work to try to bring down.

Thank you, Silvana. To answer the second part of your question, Benoit, as I started my concluding remarks, we're very happy to conclude our note offering on October 1st. We have $400 million Canadian dollars that is now set at a very attractive price. Today, 70% of our debt is fixed. for the long term, and that gives us availability of over $750 million to give ourselves flexibility for acquisition. So, to answer your question about the size and the envelope, I'm not saying we're going to spend that next year, but what I'm saying is that we've definitely given ourselves the ability to execute on different opportunities that we're considering or that will be presented to us. With regards to what we're looking at, I think you sort of alluded to that in your earlier questions, you know, would Steel be a good fit for Stella Jones servicing our utility customers? And the answer is yes. Our customers are saying, like, we would love Stella Jones to be able to service more, leverage our distribution network, and be, I guess, a partner that's more in-depth or more intertwined in their activities. So definitely looking at that and, you know, same thing for the railway tie business. I think there's some opportunities for us to expand the product offering and answer to certain of our customer needs that, you know, in certain cases the wood is effective, but I think in certain applications or other products would have a better performance. We just need to keep working on finding that right partner that enables us to do a good acquisition and a good multiple as we've done historically.

Okay, and maybe just a quick one for Sylvana. Going into 2025, should we expect any big movement in terms of working cap? And given now that you have enough capacity on utility pole, just wondering about capex expectation as well for 2025.

Yeah, so in terms of the CapEx expectation, we pretty much have completed all the growth CapEx, so next year will be just sort of a regular CapEx program, so probably in the $75 to $80 million for CapEx next year, and in terms of working capital, like I've mentioned in the past, it's really a function of the growth in sales, so we are always pretty much at about, you know, a 40% investment in additional working capital for any incremental sales that we kind of are expecting next year. But, you know, we would expect probably, you know, in the $60 to $70 million investments in inventory, given the $3.6 billion of sales that we're forecasting.

That's great, Calder. Thank you very much for the time. Thank you, Benoit. Our next question is from Martin Pradier of Veritas.

Please go ahead.

Okay, thank you. In terms of the impact of tariffs, you said there is a very small portion that is coming from British Columbia, from the Poles. Would that be less than 10% or how can I think about that?

Actually, it doesn't show in sales, because it's a transfer of raw material to be treated in the US, so it's really an integral transaction. We don't sell directly from Canada into the US, so that's very negligible. What I was referring to is that we do harvest Douglas fir in British Columbia or Vancouver Island. And once, you know, we get the logs and we peel them, we typically would ship them by rail or truck to a facility in the U.S. to be treated. So it's, you know, so it's not a big volume, but I can't even give a percentage because it's not a percentage of sales. It's really our raw material flow internally.

Okay, but put it another way. What percentage of, you know, the total holes that you sell, you know, if you want some kind of...

Yeah, I'd call it maybe 5%. OK, fair.

And so you don't see much impact of any tariff increase in any of the other categories, like in the ties or all the?

No, we've never been impacted, yeah. OK, my pleasure. We have a follow-up question from Michael Temple, TD Securities.

Please go ahead.

Thank you. Eric, I just wanted to go back to some of the drivers or the factors you called out as negatively impacting the growth in the corridor for the utility pool segment. And specifically, I just wanted you to clarify, when you talk about

uh site or you site utilities things supply chain constraints can you expand on what you mean by that yes certainly i mean you know our customers procure a great variety of products you know to be able to execute on their project so if you know transformer supply is a bit tighter we sometimes see delays in project by a few months or quarters just because our customers need to make sure they have everything they need for the given project so that would impact delays for us uh so it's more in in that sense if i mean we have the confidence that we can and we pride ourselves and provide and then shipping our products to our customers on time and so on but you know i guess we manage our inventory to have less constraints internally But other suppliers for other types of products, other than the wood poles, might have different challenges on their own and to deliver on time. So we hear from time to time those challenges come up and we're asked to delay projects or to hold on to some inventory or change our delivery dates. So that is something that we've also seen. I guess I'll refer back also to our comment on projects for this quarter. Projects were significantly low for the third quarter compared to historical years for the same period.

So that would be part of that phenomenon also. Perfect.

And then just thinking about the reduction in the sales expectation for 2025 to approximately $3.6 billion from over $3.6 billion and the downshift in organic growth expectations for polls. I mean, I imagine when you decide to make an adjustment like that, you You're going to look at the numbers very carefully. You're going to probably try to incorporate a degree of conservatism, as you presumably don't want to have to make further adjustments. And then thinking about some of these factors that have weighed on demand recently, but still a very positive-sounding longer-term outlook, not really factoring in the impact, if any, of lower interest rates. Is there now a greater degree of conservatism built into this number than in your old guidance? And are there certain factors that could push you, you know, above this 6% to 7% if certain things come together? Is that kind of the right way to think about the sort of the dynamic here that you presented?

Right. Well, thank you, Michael. So our 6% is, I guess, an average growth. I would, to answer your question on conservatism, I would say no. I know what we've So we've reset from over 3.6 to, you know, 3.6. So the 3.6 now is a bit of a cap, if you want. So that's our goal. Could anything influence that? I mean, it's not on our radar today. Could, you know, federal funds in the U.S. or Canada be made available to support the – that there's strong needs for our customers to help them structure projects. But, you know, we could speculate on a lot of opportunities. But at this point, I think our 3.6 is a realistic goal. And, you know, it's going to require a lot of work from us to get there. There's different dynamics that, you know, we're working through.

But, yeah, I don't think it's conservative. Okay. Thank you. My pleasure, Michael. We have no further questions.

Well, thank you, James. And thank you, everyone, for joining us today. We look forward to updating you on our fourth quarter call later in February next year. Until then, we wish you all a pleasant year end.

Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect your lines.