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.