Stella-Jones Inc
TSX:SJ
Stella-Jones Inc
TSX:SJ
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Earnings Call Transcript
Earnings Call Recording
Other Earnings Calls
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Stella-Jones Q1 2022 Earnings Conference Call. [Operator Instructions]
Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference is being recorded on Wednesday, May 11, 2022.
I'll now turn the conference over to Eric Vachon, President and CEO. Please go ahead.
Good afternoon, everyone. I'm here with Silvana Travaglini, Senior Vice President and Chief Financial Officer of Stella-Jones. Thank you for joining us for today's discussion of the financial and operating results for Stella-Jones' first quarter ended March 31, 2022. I will provide an overview of the quarter, then I'll turn the call to Silvana to review our results in greater detail. I'll then return with concluding remarks before we open the call to questions.
Before that, let me start with a brief recap of our Annual Meeting of Shareholders, which we held earlier this morning. All resolutions brought forward to shareholders were approved, including the election of all nominees to our Board of Directors, including Ms. Sara O'Brien as a new director, the appointment of auditors and support for our approach to executive compensation, or Say on Pay.
Turning to our results. Our press release reporting first quarter results was published earlier this morning and can be found on the Stella-Jones website at www.stella-jones.com in the Investor Relations section. It's being posted on SEDAR today as well. As a reminder, all figures expressed in today's call are in Canadian dollars unless otherwise stated.
First quarter sales exceeded last year's Q1 sales and met expectations. This was primarily attributable to increase in sales in our infrastructure-related product categories, which were up 14% in Q1 versus the same quarter last year. Within our infrastructure-related businesses, utility poles benefited from increasing pricing, strong demand from maintenance work and broadband expansion, steady demand for transmission poles, and contributions of the Cahaba acquisitions.
As you recall, we closed the acquisition of Cahaba Pressure Treated Forest Products and Cahaba Timber in November 2021. So this was our first full quarter being able to leverage the acquisitions. Additionally, our Kirkland Lake pole plant, which we commissioned last year, played a valuable and timely role in supporting strong customer demand during the quarter. For railway ties, the trend was also positive, although the tightness of untreated ties in the market has continued for a longer period than initially anticipated. Q1 railway tie sales were up, mostly driven by pricing, while volume remained unchanged.
As expected, sales for residential lumber decreased from last year. Demand for pressure-treated lumber in the first quarter last year was exceptionally high, and we're expecting lower sales this quarter. Sales were nevertheless higher than anticipated in this seasonally slower period. The second and third quarter will be better performance gauges for this product category. In terms of margins, they remained under pressure due to increasing input costs. We continue to anticipate a certain degree of lag as contractual price adjustments are being implemented.
With that, let me turn the call to Silvana for a detailed look at our financial performance.
Thank you, Eric, and good afternoon. Earlier today, we reported net income for the first quarter of $46 million or $0.73 per share compared to $56 million or $0.85 per share last year. During the first quarter of the year, we generated sales of $651 million, up from $623 million for the same period in 2021. Excluding the contribution from the acquisitions of Cahaba Pressure and Cahaba Timber of $15 million, pressure-treated wood sales rose $21 million or 4%. This increase was essentially driven by strong organic growth in our infrastructure-related product categories namely utility poles, railway ties and industrial products, partially offset by lower residential lumber sales as we lapped a very strong first quarter last year.
Looking at results by product category, sales of utility poles amounted to $254 million in the first quarter of 2022, up from $206 million last year. Excluding acquisitions, sales rose 16%, led by continued improvement in maintenance demand, selling price adjustments to reflect cost increases and a more favorable sales mix, mainly due to higher fire-resistant wrapped pole sales. Railway tie sales reached $175 million this year, up 11% from $158 million last year. The variation essentially stems from selling price adjustments with Class 1 customers to reflect higher fiber costs and higher pricing for non-Class 1 customers. Volume remained relatively stable compared to last year.
Residential lumber sales totaled $132 million, down from $166 million last year, as lower volume following the exceptionally strong Q1 in 2021 was partially offset by the higher market price of lumber. As Eric mentioned, a sales decline was expected this quarter. More importantly, Stella-Jones' momentum remains solid in this product category as this year's Q1 sales are more than double our pre-pandemic first quarter sales of $58 million.
Industrial product sales were $33 million, up from $28 million last year, largely due to greater demand for pilings and timber. Finally, logs and lumber sales amounted to $57 million versus $65 million a year ago. The decrease stems from lower lumber trading activity compared to the same period last year.
Turning to profitability. Gross profit was $100 million in the first quarter of 2022 versus $112 million in the same quarter last year. As a percentage of sales, gross profit margin was 15.4% this year compared to 18% last year. The decrease in absolute dollars mostly reflects the lower sales volume for residential lumber when compared to last year's exceptionally strong demand. Meanwhile, the reduction in gross profit margin is mainly attributable to the time lag in contractual price adjustments as rising costs outpaced selling price increases during the quarter. As reminder, a large part of Stella-Jones' infrastructure-related sales, our contractual include price adjustment mechanisms to cover cost increases. In a rising cost environment such as the one we are presently into, the normal time line before selling price adjustments reflect the new input costs temporarily impact margins.
Turning to cash flow. This year's first quarter cash flow from operating activities before changes in non-cash working capital components and interest and income taxes paid was $88 million compared to $100 million last year, mostly reflecting lower profitability. Given the normal seasonal increase in working capital, changes in non-cash working capital component reduced liquidity by $207 million this year versus a reduction of $213 million last year. As a result, cash flow used in operations was $136 million in the first quarter of 2022 compared to $141 million last year.
We repurchased approximately 1 million shares during the first quarter for a cash consideration of $39 million. Since initiating the current Normal Course Issuer Bid program last November, Stella-Jones has repurchased more than 1.7 million shares out of an authorized maximum number of 5 million shares. Our financial position remains sound with a net debt to EBITDA ratio of 2.75x and $86 million available under our credit facilities. The variation in both metrics during the quarter stemmed from higher seasonal working capital requirements.
Finally, the Board of Directors declared a quarterly dividend of $0.20 per common share payable on June 22, 2022 to shareholders of record at the close of business on June 1.
I will turn the call back to Eric for concluding remarks.
Thank you, Silvana. Let me take a moment to add some color as to how we see our business progressing. We are optimistic about utility poles, thanks to a combination of price increases and strong coal demand, which I expressed earlier. This aligns with our decision to grow capital investment in the category between $90 million and $100 million over the next 3 years. To date, purchase orders have been finalized for popular dry kilns and treating cylinders with deliveries expected by the end of 2022, all of which will help us continue to meet demand. We also continue to work closely with our customers to phase out Pentachlorophenol. We now have 2 of our plants offering DCOI. And by the end of 2022, we expect to convert between 2 and 4 more of our treating facilities to DCOI.
Our investments in future growth notwithstanding, we will see some short-term challenges. Raw material sourcing will continue to be a hurdle this year and likely beyond. Right now, access to untreated ties is presenting a challenge and has led to fiber cost increases. We had similar issues in 2021 and it was a strength of our procurement network that set us apart when it came to successfully meeting customer needs. The flexibility of our customer agreements allows us to recoup most, if not all, of any cost increases, albeit on a delayed timeline. That can result in short-term headwinds for our margins, but it does not impact the solid fundamentals of this business.
Turning to residential lumber. We continue to see volatility in the price of lumber, which started at the beginning of the pandemic, it has continued until today. While this year's price swings are not as extreme as 2021, we are still seeing prices move by more than 500, a 1,000 board foot from the low to the high during the quarter. That being said, the residential lumber division is operating, where we expected would be over the long-term.
In summary, this quarter provides a good start in laying the foundation to our 3-year strategic plan. Our business remains very strong. Demand from our infrastructure-related product categories continues to grow. We have a strong balance sheet, a season in sophisticated team with a well-developed relationship network with customers and strong procurement and distribution capabilities. We intend to pursue acquisition targets as we return capital to shareholders. In short, we are building upon a well-established and strong fundamentals.
That concludes our prepared remarks. And we will now turn the call over to your questions. Can I please ask the operator to begin?
[Operator Instructions] Our first question comes from Walter Spracklin, RBC Capital Markets.
Good, good. I guess, my question to start is really to see how your guidance both for this year and into the 3-year guide you provided, how the quarter has played out to that. And it would seem that on the surface at least, and I know you gave some color about waiting to see how the summer months go in residential lumber and so on. But it looks like you're off to a very strong start. So my question, I guess, starting with ties and poles where you were kind of guiding low-single-digit ties, high-single-digit poles, your experience in Q1 has come out of the gate a lot stronger than that. And just curious if you're -- you see upside now to your '23, I think you were talking about flat year-over-year, if your '23 target would be or your '23 guidance for the full year is moving higher and whether it's enough yet to start to move higher, some of your guidance for the full throughout 2023 in those 2 segments?
I'll answer your question. We're talking about the 3 main product categories. I guess, first, the general comment would be, it is a bit early to think about readjusting the total guidance for the full 3-year guidance. However, as you mentioned, strong start with utility poles, driven in part by volume has very healthy maintenance that is supporting that number, but also price increases, which are driven by increasing fiber costs and increase in oil costs. So, I would suspect, as we look at how this year unfolds, as we were thinking about that high single-digit, could it be the low teens for this year? Seeing how our pricing has started off this year, I would probably say yes, that would be a fair statement for this year, but we'll still maintain the high single digits for the 3-year period.
With regards to railway ties, again, strong start to the quarter this year prompted essentially all by pricing and cost pass-throughs of price increases we saw in Q4 last year. And again, no more increases to come with what we're seeing in Q1. We still remain cautious with railway ties because of the tightness of availability and product. If I need to describe this year, but the dynamics wouldn't be flat, probably the pricing wouldn't be up but I think, it would be probably offset by some volumes. And I guess the caveat there is if availability of railway ties sort of opens up better than we're seeing right now for the second half of the year, we could potentially get back to that low single-digit growth for railway ties.
Last but not least, the Residential Lumber product category, we're very happy of how we started off the year, we've been very tactical on the procurement side to make sure that we maintain very reasonable cost profiles, even though the market has a 1.2 the quarter isn't to hire lumber prices, but our team was very smart about how they went about that. So, we have a good start to the year, yes. Still early to understand fully to demand, how that is going to unfold at the retail level, although R&R indicators do demonstrate some strong interest for renovation. That being said, our guidance was -- our 3-year guidance, we wouldn't 35% of the 2019 benchmark. And I think that's the whole.
That's great. And just my follow-up is actually exactly on that point, Eric, and that is the 35% guidance of pre-pandemic for Residential Lumber, right? I guess when you came up with that number, the first time, given the volatility and the uncertainty in predicting that 3 years out as to what your revenue stream will be in that segment must have been very difficult. I get a sense that you probably made an educated guess with a little bit of a conservatism built into it, if I know you well. My question is, what point and what markers are you looking for that would change that 35%? What can we follow or look for that might have been part of how the input into how you derived your 35% that we could follow and track to see, if it's doing better or worse when we look out your 2020, a year or 2-year guide?
Well, the base is really the input cost of the raw material, so the dimensional lumber. Obviously, random length is something that we look at and we look at the future pricing there. So, obviously, today the prices are probably sitting in the 1,100 ballpark number. Futures are sitting at 650, 700 or actually higher than either -- sorry, futures are sitting more around the 850. So, that would give you a sense of, how we look at it. That being said, 2019, price of lumber was around 500 and when we sort of did our educated guess where we were, we used about 650. So that gives you a bit of an idea of how to look at it.
Our next question comes from Benoit Poirier from Desjardins.
When we look at the residential lumber, you mentioned some pressure on the margins driven by obviously lower sales and increasing input costs. Could you quantify maybe the impact in Q1 and the timing of the lag before you get back to a more normalized level?
Well, First, the answer to the question, that lag is essentially behind us. We completed the shipment of certain orders earlier in Q1 that were booked in Q4, where we're trying to move some inventory in the market to lower our inventory levels. So that's a bit of the result of that. So that had the impact, but that was really, call it, the first half of Q1, but that's all behind us at this point. If I look forward, we've reset our prices for the Canadian market for the second quarter, it's pretty well established and it takes into consideration our current cost profile even considering the volatility we saw in the first quarter. So, I think we're well positioned going forward.
Okay. And when we look at your overall EBITDA margin, 13.5% for Q1, which tends to be typical given the seasonality. But given the improvement that we've seen and the completion of this shipment, what about the magnitude of the improvement we could expect in Q2? Would it be more similar to 2019, 2020 or 2021 there?
So, you're completely right. The first quarter is at 13.5% is probably typical for our first quarter as we usually see volumes as a whole for all product categories increased or being higher for Q2 and Q3. Pricing will have a play in the margin and the pricing. So, if I think about utility poles in the first quarter, we did not see the full impact of our price increases, and we will see those fulfill 100% in the second quarter and going forward. Same for railway ties, we had price increases in the first quarter, driven by increased cost of railway ties. And I suspect that on July 1, we'll have other increases. So, as you can understand, with railway ties, we're still chasing that margin profile. And so, we will keep increasing our pricing and our margins will recuperate faster as soon as the cost increase is stabilized.
Okay. That's great. And for 2 people, what was the breakdown between volume and pricing? And how important was the contribution of the fire retardant sales fall in the quarter?
Right. So, excluding Cahaba because we carved it out in the MD&A. So if I exclude Cahaba, the increase was about 50% volume and 50% pricing. The fire-wrap, when I talk about it, we included in the pricing piece. And as we've talked about in previous calls, the fire-wrap is about now 10% of the product category, and we think that's where -- that's a good estimate to use for now as we're talking to different customers about adoption of the product, but it's still under analysis and review, but the current customers now have adopted it and it's fully in place.
Okay, perfect. And just lastly, on the capital deployment, given your overall working consumption of about $200 million in Q1, Silvana, do you still feel confident to finish the year with an overall consumption of about $50 million? And would you still feel comfortable with the $100 million of CapEx? Is it a good proxy for 2022?
Yes. So, the assumption, I guess, with the $50 million, I guess, just 2 factors to take into account. One is, it's a reasonable number, but obviously, always take into account the market price of lumber, if there's any significant variation there that could impact that number, as well, as Eric mentioned, the availability of ties, we do expect a gradual increase in availability over the 9 to 12 months. But if ever there is a difference in the module where there is more availability in the second half, that would also impact that number that we put forward.
Okay. And CapEx, for the last part, $100 million. Is it still a good proxy for 2022?
It is. It has not changed. It's still a good estimate.
Our next question comes from Hamir Patel from CIBC Capital Markets.
Eric, could you give us maybe the breakdown in res lumber how volumes fared in Q1? And also, are you seeing any signs from your major retailer partner about maybe end use demand differing in terms of sort of contractors versus DIY?
Yes. So, for the residential lumber product categories in Q1, obviously, Silvana explained year-over-year sales are down and the volume piece of it is, call it, 80% compared to previous year and the pricing actually being a bit better than last year, but slightly. So, call it, pretty much all on the volume part of it. If you remember, Q1 2021, there was a lot of expectations for a strong R&R year season and a lot of retailers and dealers stocked up on inventory just trying to make sure they had the product to sell in store. So that's a bit of the comparison, if you want.
As far as what we're hearing today from our customers at the big box level, they're not shying away from their expectations for the year. So that's relatively stable. Between us, as we're discussing today in April being behind us, the spring in Eastern Canada and how Quebec and Ontario was slow to start to remain cold for a long time. We got some snow. So I would say that the volumes were off to a slow start in April. But as I look at daily shipments and may think things are picking up and looking good.
So, right now, not really -- those signs of a downturn on demand and more precisely you asked about contractors and do-it-yourselfers, so we do have install reps. We do have contacts with the contractors. We understand that they're pretty much all fully busy for the balance of the season. The do-it-yourselfers, I mean, I can again point to the R&R statistics, but the proof will be when do-it-yourselfers who walk through in the store and actually pick up the product. The price is still relatively high if you compare it to last year, which could have been a bit of a disincentive. But right now, we remain really optimistic and we've done a good job also managing our inventory levels internally. So, I'm not concerned of, let's say, a repeat of last year.
Okay. Fair enough. And Eric, what impact do you expect the construction strike in Ontario to have on the res lumber business? And can you just remind us how much of that business is from Ontario?
Yes. I would say, good for our Canadian business, it's a good 50% of our sales are in the Ontario market. The strike you're referring to, I believe, is mostly framers. I don't think it's impacting the independent contractors. That was my understanding. So, obviously these framing is slowing down, housing has slowed down, maybe some of those deck that are built on new homes won't get built. But the team right now doesn't seem too concerned about that part.
Okay. Great. That's all I had. I'll turn it over.
Our next question comes from Michael Tupholme from TD Securities.
So, just picking up with a question on the residential lumber side, Eric, you mentioned that you're not seeing any signs of a slowdown in demand as you sort of look at how things have been trending so far through the second quarter. I guess, I'm taking that to be more of a comment, sort of in terms of the progression of Q2 versus Q1. I'm guessing on a year-over-year basis, the comp is still pretty tough from the prior year and would you expect to still see some volume decline on a year-over-year basis, or if you can clarify that? That'd be helpful.
So, the comp is difficult. You're right, because the sales price last year were higher than what we're seeing for the quarter this year. However, if we think about last year, sales dynamic for residential lumber in Canada, anyhow we did see a decline in demand, which was offset by the growth in the sales price. So that being said, for the second quarter, yes, difficult comp. I think, the lower sales price will, to some extent, get compensated by better volumes, but it is still a difficult comp. When I think about the year, where we could most likely match up to last year's numbers would be in Q3 where things really slowed down. All things being equal for now, that similar slowdown would not happen in the third quarter.
Okay. So, in Q2, it's a bit different than Q1 than just in terms of the composition on residential lumber, you'd actually expect volumes to be similar or possibly up even. And it's more on the pricing side where you'd give it back?
Yes.
Okay. Perfect. And then, on the margin side, again, you sort of ran through a couple of the various product categories. Is it fair to say that the only area where you're sort of lagging now is really on the ties side, when you look at the product categories in terms of catching up with the cost increases through the price increases you've put through?
So, yes, for ties, definitely, but also to some extent, also for poles. So, the contracts we have, the utilities are annual, and the adjustments on pricing are typically annual. A large part of our contracts have their anniversary in the first 5 months of the year, let's say, but they do actually have anniversaries throughout the year. But that said, majority is concentrated in the first few months of the year. So, as we're sort of adjusting for fiber and oil cost increases we saw this year and we're starting to see this year as well, those prices are coming into effect. So back to my comment about not seeing the full effect of price increases for Q1, but there's still some more price increases to come through in Q2 for a customer that would have their contract anniversaries in April and May, for example.
Okay. Obviously you don't break down the margins by product categories. So if we're looking at the entire company's margins, is it fair to then conclude though, notwithstanding some ongoing lag impact and catch up, the margin pressure you'd expect to feel in Q2 should be less pronounced than it was in Q1. And I'm not talking seasonally to understand Q2 is seasonally stronger than it's been on a year-over-year basis [indiscernible].
Exactly. We would -- our sentiment is that we would see less of the margin pressures in Q2.
Okay. Perfect. And then, just in terms of the acquisition pipeline, can you provide an update on what you're seeing, what's happening there? And also, I don't know if anything has happened here yet. But last quarter, when you unveiled your 3-year plan, you had talked about the possibility of evaluating growth opportunities in adjacent businesses, if there's any progress or developments or sort of preliminary comments on that? That'd be helpful as well.
Certainly. So, the topline comment is that there's no big news to share with anyone today. We continue to have discussions with different targets in the treated wood sector and as far as analyzing adjacent businesses, our internal review is progressing well. We have a group or task force internally that's looking into this. And the Board is being debriefed on our progress. And we're discussing and sharing strategies at that level to make sure that we're sounding -- we're board sounding all of the ideas we're bringing forward. But so far, nothing new to be able to disclose today.
Okay. And I took your response to be more focused on sort of the latter part of my question just as far as the more normal course acquisitions, if you will, that you'd be targeting in your existing product categories? Really, there's nothing to report on as of yet, but just the pipeline and sort of the opportunity set that it is, is there -- are there some things that are -- that you're looking at, at the moment that could come to fruition at some point, or is it too hard to call at this point?
So, we did guide like the $200 million to $300 million in potential pool of acquisitions. And in there, yes, we were talking to targets and there's some discussions and some interest, but I don't want to commit to anything in the next couple of months, let's say, but we're still very active and discussing with different parties.
[Operator Instructions] Our next question comes from Maxim Sytchev from National Bank.
Eric, just wanted to start with your capital investment. And I was wondering if you can please discuss some potential benefits of these projects? Maybe how you're thinking internally from either ROIC perspective, or how it could be helpful for labor, productivity margins, so forth, because we're still talking about relatively significant investments?
Yes. It's a good point. So, when -- and I think you're referring to the capital investment that we're targeting, especially for utility poles.
Exactly, yes.
Yes. So when we announced the range of $90 million to $100 million with our forecasts and projections on sales growth, and obviously, volume and pricing and margin growth, we were looking at a payback somewhere between 3 to 4 years. So some of these investments are in existing facilities. So, as we're enhancing our productivity and production capabilities, we're leveraging the current workforce. So that's one of the benefits of our plan and not wanting to, let's say, build a whole brand new plant in a new area and having to recruit an entire team and train them.
However, we are looking into some new procurement yards in different geographical regions in the country. And obviously we'll need to recruit some employees, but those teams are usually smaller crews, a pole peeling yard. We might need around 10 employees, let's say, if you want. And we definitely feel that in the regions that we're looking to expand, we have that opportunity to be able to hire the labor since we have the luxury of selecting the communities where we're going. That is one of our selection criteria if you want.
Okay. Super helpful. And then, last question just, if you can please comment in relation to the progress of Cahaba integration, how that's going? Any color there?
Yes. So, Q1 was our first full quarter. So, as of the end of the year last year, the systems were fully integrated. Q1 was still a bit of a training ground to some extent, educating employees in our ERP system, permanent inventory systems, it requires a bit more diligence providing more data. So, there was still some training ongoing. I feel that at the end of the first quarter, we had things pretty -- running pretty smoothly. The Cahaba facilities combined, because they're -- both of the requisites are adjacent. If you look at that footprint, in our case, it's probably the equivalent of 3 or 4 of our plants. So, it's 2 great production units. A lot of potential and power to produce a lot of volume, which I think we've pretty much got under control. But it takes a bit of time when you have such a big footprint to manage. But things have gone well, very impressed with all the time that our team has invested in the first quarter, spending time there with employees and training and monitoring performance month over month, but I think we're about there starting in Q2.
Okay. Excellent. That's it for me.
We have no further questions in queue. I'd like to turn the call back over to Eric Vachon for any closing remarks.
Well, thank you, Julian. And thanks, everyone, for joining us today.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.