Stella-Jones Inc. (OTCPK:STLJF) Q1 2023 Earnings Conference Call May 10, 2023 1:30 PM ET
Company Participants
Eric Vachon – President and Chief Executive Officer
Silvana Travaglini – Senior Vice President and Chief Financial Officer
Conference Call Participants
Walter Spracklin – RBC Capital Markets
Gabriel Nicholson – CIBC Capital Markets
Michael Kypreos – Desjardins Securities
Michael Tupholme – TD Securities
Operator
Good afternoon and thank you for standing by. Welcome to the Stella-Jones First 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. [Operator Instructions] If anyone has any difficulties hearing the currents, please press Tan for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Wednesday, May 10, 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 SEDAR. These documents are also available in the Investor Relations section of Stella-Jones website at www.stella-jones.com. We have also prepared a corresponding presentation which we encourage you to follow along with during this call.
I now pass the call over to Eric Vachon, President and Chief Executive Officer of Stella-Jones. Eric?
Eric Vachon
Good afternoon everyone and thank you for joining us today. I’m here with Silvana Travaglini, our Senior Vice President and Chief Financial Officer, Stella-Jones. Earlier this morning, we issued our press release reporting the results of our first quarter of 2023. 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 SEDAR.
As a reminder, all figures expressed on today’s call are in Canadian dollars unless otherwise stated. The positive momentum we generated from our record year in 2022 has carried into 2023. Our first quarter results were excellent, featuring strong sales and increase in EBITDA, which has outpaced sales growth. Our great start to the year reflects our growth plan in action. During the quarter, we successfully secured fiber supply, enhanced production capacity at our plants and invested in the network upgrades to further increase pulp production.
All of these initiatives speaks to our unwavering focus on continuity and quality of customer service, maintaining our American leadership position in the markets we serve. Now let’s turn to the performance of our product categories for the quarter. Our utility pole product category significantly outperformed during the quarter. Sales grew organically by 29% and also benefit from the contribution of our timely acquisition in 2022 of the treating assets of Texas Electric Cooperatives or TEC. The strong growth in this product category is a testament to our core procurement team, which once again continued to leverage their long-standing industry relationships to meet growing customer demand, while establishing the foundation to access new procurement areas.
Sales of roadways were also up, increasing organically by 5%. We were encouraged to see signs of continued increase railway tie availability in the first quarter of this year. At the current rate of procurement, we expect untreated tie inventories to be replenished by midyear with optimal dry inventory levels being reached in the second half of 2023. This will reduce the number of both nice charges and open opportunities to respond to customer demand, which is being driven by steady railroad maintenance and ongoing infrastructure spend. For Industrial Products, sales continued to benefit from higher demand.
Our industrial product category perfectly complements our rail and utility offerings. Finally, sales for residential lumber pulled back in this quarter, in line with our expectations. Before I turn the call over to Silvana, I want to provide an update on the ESG. As many of you know, health and safety is a priority at Stella-Jones. We strive to create a safe and healthy workplace that promotes responsibility and mutual respect. We are in the final phase of rolling out the skills program across North America. Shield stands for safety, health, improvement leading our decisions and is an integrated environmental health and safety management system.
These systems allow us to more accurately track and assess progress of our health and safety metrics to maintain our company-wide commitment to the safety and well-being of our people. At the start of this year, we reinforced our commitment to health and safety with the launch of a new employee-focused educational and informative campaign called safety matters because you matter. We believe that our most valuable asset is the people that walk into our facilities and offices each day. We almost play a role in owning health and safety and ensuring everyone performs successfully in their work environment and returns home safely at the end of the day.
With that, I will turn it over to Silvana to provide a more detailed overview of our first quarter financial results. Silvana?
Silvana Travaglini
Thank you, Eric, and good afternoon, everyone. As Eric mentioned, we began the quarter on a very positive note, which is reflected in our strong financial results. Net income in the first quarter was $60 million, up 30% compared to net income of $46 million last year. This translated into earnings per share of $1.03 compared to $0.73 in the same period in 2022. We generated total sales of $710 million compared to $651 million last year.
The increase was driven by an 18% organic sales growth of our infrastructure-related businesses. Sales this quarter also benefited from the contribution of the pole treating assets acquired from TC late in 2022 and the positive effect of currency conversion. This growth in sales was partly offset by the anticipated pullback of residential lumber sales. Utility pole sales rose to $362 million, up from $254 million from the same period last year. Excluding the currency conversion effect and the contribution from the acquisition of TEC assets, utility pole sales increased by $73 million or 29%, almost entirely driven by higher pricing.
Sales volume gains were limited this quarter by our current production capacity. Downtime related to the ongoing capital projects largely offset the increase in our treating capacity stemming from the installation of upsized lenders. Sales from our utility pole product category accounted for more than half of total sales for the first quarter. Sales of railway ties grew to $195 million versus $175 million in the corresponding period last year. Excluding the currency conversion effect, sales of railway ties increased by $9 million or 5%, all attributable to favorable sales price adjustments to cover higher costs. Volumes for non-Class 1 customers were lower due to the reduced level of treated ties inventory following the limited fiber supply availability in 2022.
However, the steady maintenance demand for railway ties enabled this product category to account for 27% of total sales for the quarter. Residential lumber sales were down compared to the same period last year, which, as Eric mentioned, were in line with our expectations. The decrease was attributable to lower volumes and pricing compared to the stronger demand and the rise in the market price of lumber in the same quarter last year. Sales in residential lumber accounted for 13% of total sales during the quarter.
Turning now to profitability. Led by the strong organic sales growth, particularly for utility poles, our EBITDA increased $120 million in the first quarter of 2023, up 36% compared to $88 million in the first quarter of last year. We saw notable strength in our EBITDA margin, growing 340 basis points to 16.9% in the first quarter from 13.5% last year.
The increase was largely due to the margin expansion of the company’s infrastructure-related product categories, particularly stemming from favorable price adjustments realized for utility and railway ties as well as the impact of a better product mix. The relative proportion of utility coal in the first quarter amounted to over 50%. During the quarter, we continued to actively invest in our inventory position. We invested $138 million inventories to build our position to support the continued strong demand for poles and to replenish our untreated tie inventory given the market availability.
Inventories are a significant component of working capital and the turnover is relatively low. We consider this 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 toll production capacity, including acquiring the pole pealing and drying assets of industry as well as return capital to shareholders. Yesterday, our Board of Directors announced a dividend of $0.23 per share and during the quarter, we repurchased over 6 shares for a total of $30 million. Since the beginning of the current NCIB program in late 2022, we have repurchased over 1 million shares for $50 million. As a result of our buyback programs, we had almost 4.5 million fewer average shares outstanding this quarter compared to last year’s Q1.
We ended the year with a net debt-to-EBITDA ratio of 2.8x, which is within our expectations due to our typical working capital requirements in the first quarter of each year. We hold a strong financial position and are able to finance our business plans, meet working capital requirements and maintain our assets through our cash flow generation and available credit facilities. In summary, financial performance to begin the year has positioned us well to remain on track to treat future growth and value for our shareholders.
With that, I will now pass it on to Eric for his concluding remarks. Eric?
Eric Vachon
Thank you, Silvana. Our established track record of achieving robust results, delivering return to shareholders and maintaining a solid financial position has continued into 2023. We attribute these achievements to our proven and resilient business model as well as our ability to supply the growing demand for our products in the marketplace. We are well positioned to meet or exceed the targets laid out in our 3-year plan. From a sales perspective, we continue to benefit from strong demand on the utility pole side. Building on the growth trend for 2023, utility poles 2024 sales are now projected to grow at a compound annual rate of 20% from 2022 and the company also expects the EBITDA margin to exceed its 15% target by 100 basis points.
We also continue to enjoy steady growth in our railway high product category, driven by stable partnerships and maintenance programs by our customers. The forecast for utility pool growth CapEx stood between $90 million and $100 million since the beginning of 2022, we have committed to equipment purchases and spent $49 million. So far, we have successfully changed retreating cylinders and increase our Douglas fir network trading capacity by 15%. We will also benefit from the production of 2 new sudden Yellow Pine olein and drying facilities starting midyear.
Finally, we have returned $273 million of capital to shareholders since 2022. We’re on track to achieve the target we outlined in our 3-year plan of between $500 million and $600 million. We have started 2023 on the right foot. We will continue to build on our achievement to support future growth of our infrastructure-related product categories and continue to return capital to shareholders. Before I conclude this call, I would like to acknowledge all of our employees across North America. They are the reason behind the great brand and reputation we have built. Our customers can rely on us for quality products, customer care and meeting deadlines. All of those traits are because of our dedicated employee base. Thank you for all of your efforts. I also want to extend a special thank you to those who attended our Annual Meeting of Shareholders earlier today, both in person and virtually. We are grateful for your ongoing support and trust in our business and look forward to seeing you again next year.
This concludes our prepared remarks. Thank you for your time today and I will now open up the lines for questions.
Question-and-Answer Session
Operator
Thank you, Eric. [Operator Instructions] Our first question is from Walter Spracklin from RBC Capital Markets. Please go ahead, Mr. Spracklin.
Walter Spracklin
Thanks, operator and good afternoon, everyone. Congratulations on a great quarter here. Eric, I guess, starting with you on poles. It’s a pretty high run rate, 20% now out to 2024 on a CAGR basis. I guess maybe you can give a little color. I apologize, I was only connected in later in the – a little later in the call, but the main drivers of that? Is this kind of a fast and furious situation or higher for longer? I don’t think it’s going to drop off from 20% down to 5% in 2025. Is this something that kind of stays at a heavy clip for many years based on what you’re seeing or do you see a lot of upfront here and indeed falling off quicker after a few years…
Eric Vachon
Thank you, Walter. So if you recall, last year, we had a great year in organic growth, 20% plus in March when we disclose our Q4 results, we provided more insight for this year stating that we would see in 2023 similar growth to the prior year. So obviously, us seeing a CAGR of 20% over, let’s say, the whole year of ‘23 and ‘24 would suggest something that’s a bit front-loaded, obviously, since we would be in the 20-ish this year. We’ve seen great growth in the last 2 years on the pricing side and the volume side. I do see going beyond continued maintenance from our customers and continued maintenance and that is our beliefs to that are supported by our growth CapEx initiatives. As I mentioned a few minutes ago, we’ve got two opening yards that are coming online midyear, which will offer us more fiber in our network, and we do plan on seizing more opportunities in the market. To your question, will it be 20% every year for the next 5 years? I would think so, we will provide more insight on our Investor Day on May 25. But I could confidently say that the levels that we’re seeing now will be sustained through time for a number of years at the very least.
Walter Spracklin
That’s fantastic. The 100 basis point improvement in margin, would you say like that’s a function of pricing or kind of scale with higher volumes? Or would it be a bit of both? And I’m trying to ascertain whether this is something that we can put in our model now longer-term is the new 16, the new 15? Or is this something that you think may be just a temporary benefit you’re receiving and maybe 15% is still the better number to use longer-term?
Eric Vachon
So the short answer is our recommendation with in 16. We will see – we have seen in the first quarter improved pricing, and we will continue to see that throughout the year. We believe that will be sustained over time and there is also a product mix, if you want, in the sense that obviously, our fast-growing product categories, utility poles. So their weight in the mix of products is heavier, therefore, enabling us to reach better EBITDA margins.
Walter Spracklin
Okay. Last question for me is now that the CPP deal is done. KCS is now part of the new CPKC and given CP’s historical decision to kind of outsource tie treatment versus KCS’s focused on doing it in-house. Can you size that for us, just not whether you’re going to get it or not. But from your understanding of what KCS does in-house, how would that be – what percent of your overall tie volume would that be on just a rough basis to get a sense of upside if you were to get that contract?
Eric Vachon
Well, so Walter, so we know the team at that treating facility in Louisiana well. As I stated before, we do have interactions with them for bridge timbers and some very small volume of railway ties. It would be a low percentage of our total business. If I have to size those annual sales from outside, I think we’ve been privileged to any information, I would say it’s, call it, $30 million to $35 million in annual sales if we were to be supplying them and obviously, I’m sort of not an educate yes, but it’s fairly – it’s our appreciation of what that could be.
Walter Spracklin
Yes. That’s great. Okay. That’s all my questions. Really appreciate the time and again, congratulate a great quarter.
Eric Vachon
Thank you, Walter.
Operator
Thank you. Our following question is from Gabriel Nicholson from CIBC Capital Markets. Please go ahead, Mr. Nicholson.
Gabriel Nicholson
Hey – Hi. I hope you all are doing well and once again, congrats on the quarter. You mentioned that you were capacity constrained in poles and this is kind of building off of Walter’s first question. How much additional volume growth do you think you could have realized if you had the capacity? And do you think that the two new pool additions would cover that unmet demand.
Eric Vachon
It’s a great question. Thank you. Our constraint right now is not on the treating capacity. It’s on the procurement capability and even then when I say procurement, it’s really more on the drawing capability on the stern yellow pine. It’s a wood species that you need to kill dry and right now, we’re putting in new 14 yards intercos yards have killed capacity. So we’re definitely going to leverage that up, and everything we will be able to produce out of those facilities will be sold going forward. We have no doubt of that. We have discussions with customers on their needs, and we’re adjusting our offerings to them and they are adjusting their maintenance schedules based on our long-term commitments to them. So I feel very optimistic about our ability to be able to start seeing volume growth in the coming quarters.
Gabriel Nicholson
Okay. Yes. Great. And then also on poles, the high-teens growth, your poll guidance is embedding for 2024. How much is price versus volume?
Eric Vachon
I would say it’s heavily weighted towards the price, but call it, 30%, 70%, let’s say, on being depressing.
Gabriel Nicholson
Okay. Great. I’ll leave it there.
Eric Vachon
Thank you very much.
Operator
Thank you. Our following question is from Michael Kypreos from Desjardins Securities. Please go ahead, Mr. Kypreos.
Michael Kypreos
Thanks. Congratulations on the great quarter. Maybe just on the Canadian federal budget that was released since you last reported 4Q results that included a 15% investment tax credit for Crown corporations like Hydro-Quebec and some positive comments on electrical grid expansion and demand in Canada. Is there maybe anything that specifically call your eye and could be a driver for utility pools moving forward?
Eric Vachon
Well, obviously, we’re always happy when we hear different governments for Canada and the U.S. put in place programs to help utilities or companies investing in their infrastructure. So obviously, yes, our utilities are well in tune, our customers are well in tune with those programs. Our forecast doesn’t – when we talk about potential growth does not scope in those infrastructure initiatives. It sometimes takes a while to start seeing them. If I think about our – the U.S. infrastructure bill, I can’t say we’ve seen much of that to date, maybe a bit on the rail tie side. So these programs take a while to get to market. So they are not scoped into our – to our views in future sales and future demand for us. So obviously, all of this would be just over and above and obviously great news for us.
Michael Kypreos
Thanks. That’s very helpful and maybe just on residential number. I know seasonal we put a factor in the first quarter. But looking forward, do you get confidence in $600 million to $650 million in sales for the year? And maybe are there any changes or tone and commentary that you could share from your discussions with your retail partners on [indiscernible] the Maopao spring. Thank you very much.
Eric Vachon
No, no change in views on that on our part. I think we were – why is in establishing this base of expectation in sales? I think it’s something that, as a company, we can create year-over-year confidently and if then there is favorable R&R trends, if there is different dynamics, lumber prices impacting this business, I think it would be just upside for us on that point on, but we remain confident with that 66%.
Michael Kypreos
Thank you.
Eric Vachon
My pleasure.
Operator
Thank you. Our following question is from Michael Tupholme from TD Securities. Please go ahead, Mr. Tupholme.
Michael Tupholme
Thank you. Good afternoon. Eric, just a question on the 16% margin. So I understand that, that’s the number we should be focused on for 2024 and beyond. Is that also what we should be thinking about for this year? I mean, really, you had a strong start to the year, but is that the 2023 number as well?
Eric Vachon
16% would be your guidance going forward. And if I could maybe clarify, our Q1 result to 16.9% is very number. But obviously, we don’t have a full year mix of products, right? Other products such as residential lumber have a stronger presence in our product mix in Q2 and Q3. So I do expect to average down during the course of the year, but using 16% would be my recommendation or our guidance presently for coming years.
Michael Tupholme
Okay. That’s helpful. Thank you. Yes, and sorry, just to – I think to say the overlaps a little bit with one of the last questions. But just in terms of the demand the market demand you’re seeing in the utility pools area now, I realize in Q1, it was primarily price or almost all price that drove the organic growth. But it does sound like from your comments, there is strong market demand and it’s just a function of being able to meet that demand and hence, the investments you’re making in capacity and drying and whatnot. But is this really just heightened replacement activity and I guess, the benefits of the Fire app and there is really nothing contributing at this point at all in terms of any sort of EV-related infrastructure initiatives or broadband initiatives and things of that nature?
Eric Vachon
Well, so there is some of that in the mix of the demand we’re seeing. A good example is the Ontario broadband program. There is a $4 billion program over it was over 4 years. Now we’re a bit into it right now. But obviously, that spend will increase demand for products. That’s a public example I could point to. There are other similar examples across different provinces and states in North America. EV is a growing point of discussion with our customers. I think utilities realize that there is going to be increased demand from the network. So obviously, as maintenance is being planned out, all of these factors are now taken into account, right? Because you’re replacing a poll.
It has more hardware and more line loads than it had 50 years ago and there’ll probably be increased demand going forward with AC with electric vehicles. So our customers are discussing about it and are planning accordingly. So obviously, all of that, it’s hard to say how much dollars would go to one of these. It’s now part of the new mix and demand of our customers are designing line and designing their maintenance programs and this general approach is driving the volume for a greater number of products from our part.
Michael Tupholme
Okay. That’s helpful. It makes sense. I guess, not to belabor the point, but it just sounded like earlier on, you were suggesting you haven’t really built that into the sort of the 20% CAGR number you would put out there for the polls business. Is that correctly notwithstanding the fact that there is things happening in that area, you’re not – that’s not really a driver of your 20% number?
Eric Vachon
So all of that is in. What’s not in is government infrastructure bills, for example, the previous question was about the federal budget that came out a few weeks ago and had a special acknowledgement its reserves for particular infra program. So that – I don’t know what’s going to come out of this, so we can’t speculate so that’s not in there. But definitely, everything that our utilities are talking about to increase their network that is definitely scope in our 20% CAGR.
Michael Tupholme
Got it. Okay. Just shifting over to the ties business, 5% organic growth in the quarter, how do you see that trending over the balance of the year? Because if I’m not mistaken, originally, you were thinking maybe a little lower than that. Just curious about how to think about the rest of the year here.
Eric Vachon
Yes. So I would see the pricing fees decline slightly throughout the quarters. We’ve been increasing sales prices to our customers every quarter of last year. So obviously, we’re coming into the year in Q1 with four quarters of price increases. So as we’re lapping ourselves, you would see that pricing effect reduce over time with my comment on increasing dry inventory, I think we will have the opportunity to sell a bit more volume in the back half of the year. So I still think that low single digit, maybe a bit lower than the 5%, somewhere in there is where we will end up the year.
Michael Tupholme
Okay, and raw high availability, is that improved now?
Eric Vachon
It has. I mean the last two quarters – sorry, the last 2 months of Q4, so November to December was great. The four can actually talk to April now the first four quarters of this year. Supply has been coming in at a very healthy rate we will be at optimum inventory levels by midyear. And obviously, the inventory procured in December, January, February will be dry by, call it, September, so somewhere in H2, we will have more dry inventory. Therefore, we will be boltinizing less and have an opportunity to treat more ties and take advantage of some bidding opportunities in the market.
Michael Tupholme
Okay. Perfect and then just lastly, and I also had some issues earlier with the call, so I don’t know if I missed this or not, but the industry acquisition that’s called out in the release, is that – is there any revenue associated with that? Or is that more just in order to enhance your production capacity?
Eric Vachon
No. It’s– There is no revenues. It’s enhanced production and optimize the cost profile of our product and optimize production.
Michael Tupholme
Okay and that’s one of the things that you were pointing to in terms of seeing enhanced ability meat market in sort of over coming quarters here?
Eric Vachon
Correct.
Michael Tupholme
Great. Okay, thank you.
Eric Vachon
Thank you, Mike.
Operator
We have no further questions online. Thank you.
Eric Vachon
Well, thank you, operator, and thank you, everyone, for joining us today. We hope you can listen in to our Investor Day on May 26 in Toronto. Details for virtual attendance will be posted on our website as we get closer to date.
Operator
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may disconnect your lines.
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