Stella-Jones Inc

TSX:SJ

Earnings Call Transcript

[Operator]

Good morning, and thank you for standing by. Welcome to Stella-Jones' Fourth Quarter and Year-End 2023 Earnings Call. [Operator Instructions]

I would like to remind everyone that this conference call is being recorded on Thursday, February 29, 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 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'll now pass the call over to Eric Vachon, President and Chief Executive Officer of Stella-Jones. Eric?

[Eric Vachon, executive]

Thank you, Matthew. Good morning, everyone, and thank you for joining us. With me on today's call is Silvana Travaglini, Senior Vice President and Chief Financial Officer of Stella-Jones.

Earlier this morning, we issued a press release reporting our results for the first quarter and year-end 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.

Our strong operating and financial performance made 2023 a resounding success for Stella-Jones, recorded a 23rd year of continuous sales growth and we generated a record increase in profitability. Our solid results not only reflect the continued growth and momentum of our infrastructure product categories, they are also indicative of our team's forward-looking preparedness and ability to leverage their expertise and industry intelligence to take action and seize opportunities for the business.

Much of last year was focused on building additional capacity and inventory levels to meet growing demand for our infrastructure products. Standing on the heels of 2023, a number of factors support a solid demand environment over the long term. For utility poles, we have several of our customers shift to long-term sales commitment to secure supply for their ongoing maintenance program and expansion projects. Utilities and governments, both in Canada and the U.S., have also publicly announced broadband expansion and electrical grid hardening projects. The railway tie product category remains underpinned by steady demand driven by railroad maintenance and our railway tie and industrial products are expected to benefit from important government infrastructure investments and mandates.

In addition to the strong long-term fundamentals of our infrastructure businesses, the value-driven dynamics of our residential lumber customer base provide a relative steadiness and positive prospects for this business. Our loyal and dedicated customers recognize Stella-Jones' value-added proposition of premium lumber products, accessories and composite products distribution.

In the face of these trends, we've taken a proactive approach to both procurement and capacity. With our robust growth CapEx program for utility poles, we actively expanded our peeling, drying and treating capabilities, making significant investments in 6 peeling and treating facilities in the U.S. and Canada. Additionally, we bolstered these investments with targeted and accretive acquisitions. In 2023, we completed three acquisitions, which added two treating facilities and two [indiscernible] operations to our network in the Southeastern United States. These capital expenditure projects and acquisitions reinforced our procurement and production capabilities and enabled us to secure new customers and expand our customer base.

Our strategic approach to augmenting capacity was upheld by our procurement capabilities and financial strength to secure ample wood supply. In 2023, we seized procurement opportunities, benefiting from fiber availability and prioritizing mutually beneficial relationships with sawmills and loggers across North America to build a robust inventory position.

As always, ESG is a significant company-wide focus. Through our formalized ESG strategy titled Connecting Our Sustainable Future, we identified long-term and measurable near-term targets across 6 strategic topics, including climate change, greenhouse emissions as well as health and safety. In 2024, we look forward to reporting on our progress and to move forward on key initiatives that will drive sustainable improvements across our value chain.

All of these initiatives, coupled with the strong performance from each of our key product categories, enabled us to finish 2023 satisfied with our performance and with the progress we are making on our business objectives.

Allow me now to elaborate on the performance of our key product categories. Our infrastructure products sales benefited from strong organic growth and the contribution of strategic investments. Utility pole sales grew organically by 18% in 2023, profiting from favorable pricing dynamics and the emergence of growth investments during the year. While the long-term market fundamentals and growth prospects for this product category remain unchanged, we experienced lower volumes year-over-year and noted a softer pace of purchase mostly attributable to certain customers' capital budget constraints.

During the year, we've shifted our focus to preserve existing and capture new business for the long term. As electrical and telecommunication utilities across North America remain dedicated to grid maintenance and upgrades, the request for sales contracts with a long-term horizon instills confidence in the upcoming demand for our products and in our investments to meet this demand.

Turning to railway ties. Following 2022, when the industry was faced with fiber availability challenges, our focus in 2023 moved to replenishing and maintaining adequate inventory levels to meet demand. We were successful in that regard and are now well positioned to cater to the commercial side of the market.

Railway tie sales grew above our expectations in 2023, driven largely by the pass-through of untreated tie cost increases from the previous year. Looking ahead into 2024, we expect the cost of untreated ties to remain relatively stable. While maintenance programs for Class 1 railroad customers should remain comparable to those in 2023, we anticipate additional sales volumes from our commercial business supported by a healthier inventory position.

As we see railway tie customer agreements gain in maturity in the coming years, a key area of focus in contractual discussions will be to reset pricing and establish improved cost recovery by reviewing agreements to ensure costs are better incorporated in our pass-through clauses. Lastly, we remain pleased with the performance of our residential lumber product category in 2023. We continue to prove our ability to provide consistent supply to big-box retailers, which comprise approximately 70% of our customer mix. Although the consumer base is contending with macroeconomic headwinds brought on namely by interest rates, our customers are noting good demand driven by persistent consumer trends, such as homeowners expanding their living spaces outdoors. This bodes well for our business and will certainly support our premium treated products as well as our composite products we distribute.

On the procurement front of residential lumber, Canadian sawmills have curtailed production in the last year, which has brought on challenges, making it difficult to source specific components in Canada. In response, our resourceful procurement team has started turning to alternate geographical regions to secure required materials and help maintain a healthy mix of inventory, and I commend them for their creativity.

With that, I will turn the call over to Silvana.

[Silvana Travaglini, executive]

Thank you, Eric, and good morning, everyone. As Eric stated at the top of the call, Stella-Jones delivered another year of solid financial performance, marked by increased sales and a record improvement in profitability.

Sales for the year were $3.3 billion, up $254 million from last year. This increase was driven by the 13% organic sales growth of our infrastructure products. All of our infrastructure products benefited from favorable pricing dynamics while residential lumber and logs and lumber sales pulled back due to the decrease in the market price of lumber.

The acquisition of Texas Electric Cooperatives late in 2022, and more recently, Baldwin, as well as the favorable currency conversion effect also contributed to the higher sales in 2023. For the fourth quarter, sales amounted to $688 million compared to sales of $665 million for the same period in 2022. The increase continued to be driven by the sales growth in utility pole and railway ties, offset in part by lower residential lumber sales. For utility poles, we generated $383 million of sales in the fourth quarter, up 17% over the same period last year. Pricing gains and contribution from acquisitions were partly offset by lower volumes, mainly due to the slower pace of purchases of certain utilities. Volumes were down 5% versus Q4 of last year.

For the fourth quarter, sales of railway ties were $165 million, up 2% compared to $161 million in the fourth quarter of last year. Pricing was up 8%, but was largely offset by lower non-Class 1 volumes compared to Q4 last year.

Similarly to previous quarters, sales of residential lumber decreased compared to last year. Sales were $82 million in the fourth quarter of 2023, down from $100 million in the fourth quarter of 2022. While pricing in 2023 pulled back, residential lumber sales benefited from higher sales volume due to solid consumer demand. We ended the year with sales of $645 million, within our $600 million to $650 million target range.

Turning now to profitability. EBITDA for the year increased to $608 million, up by a record 36% compared to last year. The higher EBITDA was largely driven by the margin expansion of the company's infrastructure businesses. The utility pole acquisitions in late 2022 and in 2023 and the positive impact of currency conversion further contributed to the increase in EBITDA.

We ended the year with an EBITDA margin of 18.3%, up from 14.6% last year. As a percentage of sales, EBITDA also benefited from a better product mix led by the strong growth of utility pole sales and the lower relative proportion of residential lumber sales now representing 19% of the company's total sales. For the quarter, EBITDA increased $120 million, an increase of 38% compared to the EBITDA generated in Q4 last year and the margin grew from 13.1% in the fourth quarter last year to 17.4%. Compared to the third quarter, all product categories generated similar margins as a percentage of sales. The sequential decrease in EBITDA margin was a result of the lower volumes and operating leverage that is typical in Q4 versus Q3 when the margin percentage benefits from strong seasonal volumes.

Consistent with the EBITDA growth in 2023, net income for the year increased 35% to $326 million. Earnings per share also continued to benefit from our share buybacks and grew by 43% to $5.62 per share. During the quarter, we initiated another normal course issuer bid as part of our strategy to return capital to shareholders.

During the year, we deployed the cash generated from operations of $107 million in available credit to maintain our network assets make capacity enhancing investments, which included the acquisition of three businesses as well as return capital to shareholders.

In line with our capital allocation policy in 2023, we increased dividend by 15% to $0.92 per share. And yesterday, given the record increase in profitability, the Board of Directors announced a 22% increase in its quarterly dividend to $0.28 per common share. This marks the 20th consecutive year that we have increased our dividend, which speaks to our overall confidence in the long-term fundamentals of our business.

We ended the year with a net debt-to-EBITDA ratio of 2.6x, deviating slightly from our leverage target as we invested in strategic growth CapEx and acquisitions. These growth opportunities totaled over $150 million and are expected to contribute to future profitable growth. At year-end, inventories stood at approximately $1.6 billion, an increase from $1.2 billion at the close of last year. In addition to the increase in inventories in the fourth quarter due to the slower pace of purchases of certain utilities, we also built inventory to support the anticipated infrastructure demand growth and to secure longer-term utility pole sales commitments.

Further, following the limited availability of untreated ties in 2022, received procurement opportunities in 2023 to replenish our railway ties inventories. This higher investment in inventory places the company in a good position to service the anticipated increase in customer demand.

Subsequent to year-end, we amended our syndicated credit agreement in order to increase the amount available under the revolver to USD 600 million and extend the maturity, demonstrating our lenders' confidence in our ability to execute our plan and grow the business.

In summary, with a healthy financial and inventory position as well as solid market fundamentals, we have confidence in the financial strength of our business and believe Stella-Jones is well positioned for success in 2024.

I will now turn the call back to Eric for his closing remarks.

[Eric Vachon, executive]

Thank you, Silvana. By all measures, we had a strong year and a strong start to our 3-year strategic plan. After the first year, sales reached $3.3 billion, but we're $3.2 billion on an organic basis. Based on our progress in 2023, we remain confident in the sustained growth of the company and our ability to attain or exceed the $3.6 billion organic sales objective set out in our financial guidance.

In 2023, our infrastructure product categories represented [ 77% of ] sales mix and residential lumber sales represented 20%, in line with our expectations. Looking ahead, we expect continued profitability for the business. External factors like the continued higher cost of capital and increased supply from the utility pole industry bear undetermined effects, which could impact our EBITDA margin. In light of this, we remain confident in attaining our 16% objective through 2025. We are also optimistic that the proactive planning and execution of our business strategy will enable us to continue returning capital to shareholders, having already returned almost 40% of the minimum $500 million objective outlined in our guidance.

We are focused on maintaining our leadership position in North America and that requires us to evolve with the needs of our customers. With our growth CapEx program largely complete, our attention in 2024 will remain on growing our business. Acquisition on the wood treating side of the business as well as investing organically in our network remain key elements of our strategy, but we'll also pursue growth through acquisitions and other infrastructure products and services where we can leverage our continental network, industry-leading customer relationships and solid reputation.

In closing, I want to mention that we have high standards for our business. And if I'm confident in our capabilities, it's because of our nearly 3,000 employees. Whether our products enable power to flow through the electrical grid, help move merchandise on the continent rail network or help retailers in North America supply lumber products and accessories, our employees are the ones who make it all happen. I want to thank everyone for their contributions in 2023 and beyond and for their ongoing dedication to customer service and maintaining our leading reputation in the industry. Stella-Jones is ready for the future, and this is in great part, thanks to you.

And with that, I will open the line for the questions.

[Operator]

Thank you, Eric. The line is now open for questions. [Operator Instructions] Our first question is from James McGarragle from RBC Capital Markets.

[James McGarragle, analyst]

On the utility pole segment, you mentioned some constraints. We've heard a slow pace of federal funding has some utilities cautious about their pace of purchases. But to what extent do you see this as a temporary headwind? I mean, you're making significant investments in inventory, I guess. So what gives you that confidence that this situation will resolve during the remainder of the year?

[Eric Vachon, executive]

Thank you for the question. I mean several factors, right? So let me address for the business slowdown piece. In our view, it's not necessarily related to federal funding. It's the timing of the availability of capital budget at our customers. Many leaders in North American utilities have pointed out to me that the cost of capital right now is a bit of a headwind has obviously increased cost of capital is making certain projects a bit harder to get off the ground. That being said, I'm not an economist, but I think we feel generally or seen the new [indiscernible] interest rates will be dropping in the next year, let's say, and I think all of this will resolve itself.

On the second part of your question, we have secured long-term contracts with several customers in the United States. We have secured new customers in 2024 that [indiscernible] not serviced in the past. So we've definitely built some inventory to be able to address those customer demand. Most of our customers, although at a slower pace, are still increasing demand for their maintenance projects going forward. I'm very optimistic and looking forward to see those projects execute. But we're quite confident as we look at the remainder of our, let's say, guidance period that we will continue to see growth to our 2025 objectives, and it would be driven by some volumes.

And lastly, I just want to point out some public information that you're probably aware of and maybe for everybody listening. Obviously, there's been some public announcements from Canadian utilities, U.S. utilities as well as and the government, which indicate that -- and all of these announcements, talk about a decade worth of work. So when we say we're future ready, we have definitely positioned ourselves in [indiscernible] building the capacity, building the procurement, getting the long-term contracts, we hold all the right cards to be very successful for the long term.

[James McGarragle, analyst]

I appreciate that. And just my other question is going to be on margins and the longer-term outlook. You put up a really strong margin in a seasonally weak quarter in Q4. I know there's some uncertainty due to potential cost inflation, pricing can move around with some of the new pole supply coming online. But anything to call out specifically in the quarter? Looking ahead of like mix shift, continue to shift towards poles. You mentioned some of those extremely long-term investments on the utility side. Just trying to better understand the puts and takes in the quarter and to what extent these levels of margin will be sustainable in '24 and potentially longer term.

[Eric Vachon, executive]

Well, with regard to the quarter, we're actually very pleased with the percentage margin. [indiscernible] but it's probably one of the highest on the record for us. You know that we have a cycle throughout the year, the fourth quarter is usually a lower volume quarter, which makes us such as the margin percentage compresses to some extent because we have a certain network that has base cost that we need to support.

So very happy with the year-over-year performance, I think at least 4 points plus compared to last year. And maybe if I understand your question, going into the future, we finished the year at very strong year sitting in over 18%. We were -- had a very good product base, definitely weighted towards utility poles. So we're very pleased with the performance. And we are talking in my last remarks, there are certain dynamics in the spot markets, not a long-term contract piece of it, but the more -- the spot market or contractor market where we feel that additional capacity in the industry right now might -- will probably put some pricing pressures later in the year on that part of the business.

[James McGarragle, analyst]

And just a quick follow-up on that. The spot market, I think you mentioned last quarter is about 30% of your overall pole mix. So that -- if we're going to see for that as an example, a 100 basis point decrease in your consolidated margin, that would imply extremely significant drops on the spot market. Any color you can kind of share with regard to what you're seeing in the spot market? And after that, I can turn the line over.

[Eric Vachon, executive]

No, certainly. So we haven't seen it as of today. So we're calling it out because we're observing the dynamics in the market, and we're paying close attention to it. By default, Stella-Jones, getting into long-term agreements and welcoming new customers, suppliers, every action we take has a reaction in the market, and I would expect dynamics in the spot market to become a bit more active. So that could be compensated by a very healthy demand throughout the rest of the year and we may never talk about it. But I do think it's something we'll observe this year and most likely will be short-lived. I think it's a bit of a -- it will follow a bit of the trends in the general market as interest rates subside a bit. And we see some pickup with the bigger utilities with their business.

Hard to predict this, but I can't give you much color, just sort of explaining to you a bit of my logic and how we're seeing things. And we're being cautious, I guess, not initially wanting U.S. analysts to take this 18% and sort of projected straight line out. I think we can live through a few cycles here, a few quarters to see where this is going to lead.

[James McGarragle, analyst]

Thank you very much.

[Eric Vachon, executive]

Thank you very much.

[Operator]

Thank you. Our following question is from Hamir Patel from CIBC Capital Markets.

[Hamir Patel, analyst]

Good morning. Eric, just sticking with the poles category, what type of volume growth would you expect there in 2024? And just given some of your comments around near-term demand being perhaps less robust, do you think it will be capacity constrained? Or is your growth in the capacity front going to likely track ahead of demand in '24?

[Eric Vachon, executive]

So obviously, with the investments in the acquisitions we've done, we were obviously planning ahead -- capacity constraints, not one of my concerns at all at this point.

To answer your -- the first part of your question, I guess I will answer it, refer you to our guidance in 2025. If you look at our first year of performance, called the $3.2 billion organic, sorry, yes, in the utility pole business in there to be able to reach that objective, we're probably looking at a, call it, 14% to 16%, like midpoint of 15% CAGR for the next two years for utility poles and that would mostly be volume.

[Hamir Patel, analyst]

Mostly volume, okay. That's helpful. And Eric, in terms of the share of poles that is spot, just given the capacity bringing on, would you expect that share to change? Or is that already kind of contracted out?

[Eric Vachon, executive]

I don't think so. It's part of the -- a bit of the general approach and we'll be planning production. We have our steady base, which is great, and we're growing it. Obviously, as I mentioned, because we have new customers. But part of it is to, I guess, to plug the holes will sort of fit in where it makes sense that this is a spot market business. We've run the network. Obviously, we've got new treating facilities with our Baldwin acquisition and we've increased cylinder sized at certain facilities last year. So we've grown the capacity. We're growing the long term and then we'll continue complementing with the spot market and with certain strategic partners also, should I say?

[Hamir Patel, analyst]

That's helpful. And just last question I had was on res lumber. Could you give us a breakdown of how the volume and price mix was for 2023? And are you expecting any volume growth in res lumber in '24?

[Eric Vachon, executive]

Yes. So for 2024, we keep guiding to our [ 6 to 650, ] and I think could there be marginal growth there, perhaps. We do feel like there's good consumer dynamics. So last year, we had some volume growth in the business around, call it, 7% and that was obviously all overshadowed with the reduction in price of lumber.

So coming out of a good year on the volume side, I would say relatively comparable. If I listen to our customers, they feel that there's some potential increase, call it, the mid-single digits. That's sort of the discussions. I mean, looking outside today, it looks like spring here in Montreal. And obviously, it gets those projects started earlier. So that could also be very helpful for us. But if you look at our guidance, I still think we're going to be in that range of the [ 6 to 650, ] and we got a great customer base to support that thesis and maybe a bit of growth there, but we'll see how the season rolls out.

[Operator]

Our following question is from Jonathan Goldman from Scotia Capital.

[Jonathan Goldman, analyst]

Maybe just a housekeeping. I wanted to start off with on weather. Are you noticing impacts on your business from the flooding in California or even the colder weather in the Northeast? Do you anticipate that impacting any sales levels, anything in that regard?

[Eric Vachon, executive]

Well, obviously, we had cold snaps in January and some ice storms in the South, and obviously, that doesn't help. But there are winter conditions. And last year, we had these river storms in California and mud slides and actually a record snowfall. So it seems like every year, we have some of these weather events. So I guess, yes, it might -- does slow down a bit business, but it's one month out of the year. I think our customers have plenty of time ahead of us to readjust. I'm not really concerned about that. Unless we keep seeing continued storms in specific geographical areas, which would have a long-term trend. But right now, it's down slightly, but it's one month.

[Jonathan Goldman, analyst]

Okay. And then maybe switching to capital allocation priorities for 2024. Maybe you can just remind us what the priorities are? And then whether or not you've earmarked any CapEx this year for additional capacity that would be required in 2025 to support additional potential spend in infrastructure-related assessments.

[Eric Vachon, executive]

Certainly, I'll let Silvana take that one.

[Silvana Travaglini, executive]

So Jonathan, for 2024, we -- our priority is first to complete the capital expenditures related to our growth CapEx or utility growth CapEx that we had told the market that in total. We had a 5-year project capital expenditures to grow our utility poles of $115 million. So there's about $25 million to $30 million left to complete that in 2024. We have maintenance and other efficiency projects being looked at and targeted, and we always mentioned somewhere between $65 million and $75 million of let's call it, more regular CapEx. So that is always top priorities for us.

We continue, as I noted in the conference call that we have initiated a new NCIB program. So still committed to returning capital to shareholders, both through dividends and through repurchase of shares, always keeping in mind that we have a 3-year commitment to return $500 million to shareholders. We do not have specifically earmarked any additional growth CapEx in 2024 that will be looked at as we prepare for our budgets for 2025.

[Jonathan Goldman, analyst]

Perfect. And maybe just a quick follow-up, Eric. How long would it take to bring on additional capacity? I guess, you can quantify however you want in similar magnitude to the capacity you're bringing on this year. What would be the sort of [ brand safe ].

[Eric Vachon, executive]

So we do have an interesting question. So we do have a bit of a cheat-sheet of what we could do in the next 12 months than what we could do in 18 months to execute quickly on capacity. And when I hear that question, I think of a few things. It's when I think of sun yellow pine, it's a drying capacity. And we do have quick access to [ Killen's ] if we would need to execute on that. I would say, within 6 months, I could get [ Killen's ] installed that or additional [indiscernible] installed facilities.

The quickest with increased treating capacity right now would be to add treating cylinders or increase the size of cylinders at certain facilities and we have those earmarked and lead time currently right now is about 6 months to get it and call it another two months to put it in place, so maybe 8 months to install the cylinder. So I would say pretty much anything we want to do within 12 months, we most likely execute on that. I'm excluding a greenfield plant because that's a bigger endeavor because permitting and finding a facility and working with the community, so that's a longer piece. So greenfield plant is something that if you ever hear us talk about that, it will be ahead of time, [indiscernible] well thought out plan. Right now, I think we've got enough capacity to execute on what we want to do for at least 18 months, and I feel comfortable that in our 5-year planning exercise that we'll be doing in the next few months, we already started talking about what could happen, what we would need to do to capacity.

So trying to give you a bit of flavor, but I think within a year, we could easily execute if something would happen quickly as far as demand. But we are -- what we've done in the last 18 months was really trying to plan for increased demand, potential new customers that we have now. And I am hoping for some other new customers in '25 at this point that where we keep talking to. So I think we're well positioned to address any unexpected demand coming our way.

[Jonathan Goldman, analyst]

No, that's really helpful. I appreciate the color. I'll turn the line over. Thank you.

[Operator]

Our following question is from Benoit Poirier from Desjardins Securities.

[Benoit Poirier, analyst]

Silvana, just to come back on the utility pole volume, I think you mentioned earlier on the call that you felt comfortable with a 14%, 16% growth in the coming two years. I'm just wondering about pricing expectation, what we could expect in 2024, whether pricing could be incremental to volume?

[Eric Vachon, executive]

Good morning Benoit. So whether the question is for me or for Silvana?

[Benoit Poirier, analyst]

One of you.

[Eric Vachon, executive]

Thank you. So it is mostly volume. I think. So if you recall, we've had two years of growth or good pricing increases -- pricing growth. I'm very confident that we will hold those prices. Could we see a bit of an uptick, maybe offset by what I was talking about pricing headwinds in the spot market potentially. But when we think about the future growth, it will be on volume and there's some pricing uplift, there will be a bonus.

[Benoit Poirier, analyst]

Okay. And just coming back on the railway ties, you made great color about the slab expectation from Class I, although you have additional ties to serve the commercial customers. So what could be reasonable in terms of overall organic growth expectation? And I would be curious to get your thoughts about the pricing environment. It looks like there was an improved pricing in Q4, and I don't know how significant it was on the organic growth.

[Eric Vachon, executive]

The pricing on the organic growth was -- I did figure it out because obviously, we had lower volume. So we had lower volumes because obviously, we focused our inventory to service our Class 1 numbers. So that overshadowed the sales growth, call it 5-ish percent pricing increase over the year just as a pass-through of untreated high cost passing through. As I said, going forward, we think the untreated price of ties would be relatively stable. So going forward, I know we're missing all on volume. So you can call it in that low single-digit range. And I'll leave it up to you to define the low single digits. In my mind, it's not 1 or 2, but I'll let you model it out.

[Benoit Poirier, analyst]

Okay. Perfect, plus some pricing on top of that.

[Eric Vachon, executive]

Depending on the price of ties, well, there's always a bit -- it's true for both also. Every year, there's a bit of a -- our calls have like inflation indicators and different things that can give us a couple of percent here or there, that would be part of it. But yes, I would agree with that.

[Benoit Poirier, analyst]

And given the favorable mix, Eric or Silvana, in 2024 talking about bigger contribution from utility pole stabilized residential lumber, better mix from commercial on the railway ties, could it be enough to offset the potential risk around additional post supply toward the back half of 2024? Just wondering if you could sustain kind of an 18% margin profile, one could offset the other positive implication from a mix standpoint?

[Silvana Travaglini, executive]

I guess it would be difficult for us to say because, obviously, we could quantify quite easily what the improved mix would do to our margin, but harder for us to sort of determine what potential impact the spot market pricing would have.

[Eric Vachon, executive]

Yes. The negative impact, as I mentioned in the previous answer, is we haven't seen it or felt it. It's something we're monitoring. So it's kind of hard to quantify. So I do think we'll see some of that. To what extent it will be significant or not, we'll have to see Benoit.

[Benoit Poirier, analyst]

Okay. And just Silvana, in terms of working capital, any thoughts about working capital requirements for 2024? I understand you're still growing, but there might be some reversal at one point, given the buildup in 2023. So if you could provide some color on that. And maybe given the leverage situation a little bit higher than the targeted range, should we expect you to be maybe less focus on the buyback activity in 2024?

[Silvana Travaglini, executive]

So to answer the first part of the question, in terms of the working capital going into 2024, we would not be expecting any significant increase. We think we'd be fairly flattish when we compare end of this year -- end of 2023 to end of 2024. Keeping in mind there will be some seasonal variations, as you know, in the first quarter, there will be a pickup, but then there will be a release expected in the second half of the year.

In terms of the leverage, I do not expect the higher leverage to impact the buybacks. We are still focused on returning that $500 million over the three years. So the buybacks will be in line with that target. Comfortable, again, that the uptick in our leverage was really based on our opportunities to invest in the three acquisitions that we did as well [indiscernible] CapEx. So expect the leverage as it usually does to go a little bit higher in the first quarter, but then to leverage back down subsequently in the second half.

[Operator]

Our following question is from Michael Tupholme from TD Securities.

[Michael Tupholme, analyst]

Eric, maybe just to start on the utility poles product category. For Q4 2023, can you talk more specifically about the pricing versus volume changes seen in the quarters in terms of pricing being a tailwind and volume being a headwind, what the kind of what the actual numbers were for those two?

[Eric Vachon, executive]

The question was about -- sorry, the volume was about 5%. So obviously, the organic growth you see is net of that. And the -- sorry, the volume was a bit of a 5% downside.

[Michael Tupholme, analyst]

Okay. And then we can back into the pricing.

[Eric Vachon, executive]

Exactly [indiscernible] I'll give you [indiscernible] right, that's simple.

[Michael Tupholme, analyst]

And then just to be clear, I guess just to go back, I think it's been asked a few times now, but as far as the outlook for organic growth in poles, I think if I'm understanding correctly, you're talking about something in and around the 15% range. Organic growth for poles over the next two years as sort of a CAGR. I guess first question is just if you can reconfirm that for me. And then just to follow on, though, how do we think about that over the next two years for modeling? Is there much variance from one year to the next as we look at '24 versus '25? Or is that a fairly steady state expectation in each of the next couple of years?

[Eric Vachon, executive]

So you -- this is probably, call it, 15% CAGR over two years, and it would be sort of even between the two years evenly spread out.

[Michael Tupholme, analyst]

Got it. Okay. And this is just to be clear, this is an organic growth for poles? Or is this 15% inclusive of the benefit of the acquisitions you announced earlier?

[Eric Vachon, executive]

Purely organic. I'm carving out whatever gains we would have in the first 6 months for the Baldwin acquisition.

[Michael Tupholme, analyst]

Okay. Perfect. And then I guess just talking about the -- you mentioned some of these announcements from North American utilities about longer-term CapEx plans as far as meeting increased power demands and how they're going to do that. In your conversations with utilities, I mean, I think it's an area you've been excited about for some time now. But the conversations you've been having more recently, I mean, are you feeling more encouraged by the medium- to longer-term outlook than previously? Or is it -- is this just sort of unfolding as you would have expected as far as your views on that?

[Eric Vachon, executive]

So the slowdown that we sort of called out today, I guess, was not in our 3-year guidance. It's not something that we saw coming. But to your point, in talking with leaders of utilities, they have a lot of projects and a lot of work to do. There's lots of maintenance and grid hardening and upgrades to be done across North America. And I'll tell you, it's even before considering the impact of electric vehicles, that is apparently something that is still very difficult to model. Everybody knows that there will be an expansion that is going to be some hardening in terms of adjustments because you need more transformers and more cables in the network. But right now, it's not clear for our customers.

And I understand it actually. It's not clear for them to how to model? Where do we upgrade and how much? Until they see where the different projects are going to get established, they're not necessarily even modeling that. So I'm very optimistic about what our customers have to do. It is unfolding as it goes, but as I pointed out, it's not by coincidence that all of these announcements usually cover a 10- or 15-year period, and we're now signing supply agreements that cover those periods.

So it's -- and as utilities CapEx budget increase over time, we do observe a correlation with our utility pole division sales increase on the volume side. So as all of this sort of unfolds and we will benefit and can see continued growth. And I don't want to stretch myself, but I would say beyond our current guidance. And yes, to answer your question, in my discussions with leaders of utilities in the U.S., I am quite optimistic of what next two years for our guidance hold, but also probably the next decade as I sort of look at those announcements.

[Michael Tupholme, analyst]

Okay. That's very helpful. And then just back on the margin question. You've also had a few times about strong margins in 2023, and you've highlighted a couple of potential headwinds. Doesn't sound like you've necessarily seen much impact as it relates to any kind of spot market pricing for poles so far. So understandably that could come and you're correct to be cautious about that, I gather. But should we be thinking about margins sort of holding in at least through the early part of the year given that you have yet to see those kinds of pressures materialize yet?

[Eric Vachon, executive]

I think that's a fair assumption for now, Mike, because if I follow my statement, I did say we haven't seen it yet and before we get those quotes done and delivered, they'll probably be a few months out. So we could see -- you're right that we could see a good first part of the year with softening if it happens in the summer and the back half of the year.

[Michael Tupholme, analyst]

Got it. And then just -- maybe just lastly, the - I don't know you've been asked about this today, but just on the acquisition front, is that still a focus area for you? And if so, what are you seeing and what are you looking at right now, if you can comment?

[Eric Vachon, executive]

Certainly. Always interested in increasing our network and doing some acquisitions. We have a very large and strong network in North America. So there are geographical regions where I don't necessarily need more capacity in other parts of the world/continent where I would definitely consider some acquisitions. So definitely, utility pole is top of mind, if that business comes with a good asset and a good book of business, we'd be really interested in that.

There's still some opportunities potentially on the railway tie side and we keep our eyes open. We are very patient. But I think there's some opportunity that could come there. And last but not least, I've expressed infrastructure products that support our customer base remains very appealing to us. It's something that we keep investigating and studying and had discussions in the last year with different parties to see what could the future look like.

But I guess my top of mind is how do we better service our current customers. And I do have a positive signaling from our customers of encouraging us to consider other products and even services, I'll add actually. So we're very structured and disciplined in how we're approaching this, but it's definitely something of interest, especially when we got the green light from important customers. I think it's -- it really makes things easier to consider. We just want to make sure that whatever -- whenever we do it, we will be very successful at what we -- in our new endeavors.

[Michael Tupholme, analyst]

Okay. Perfect. And just one follow-on to that. This latter part that you were just discussing there that ways to better serve existing customers. Could these be impactful opportunities? Or are these sort of more likely to be smaller tuck-in type situations?

[Eric Vachon, executive]

These vary in sizes might from very impactful to small. And my view is if we are going to enter something that is different than treating wood, it would be at a certain size where there's good structure, good leadership, good knowledge, a strong base to ensure what I just mentioned about being very successful at what we do. I don't think we buy a small shop thinking we're going to grow it to $1 billion. I think we'd probably buy medium sized, if I can make it the analogy of medium size that has a good engineering team and a good footprint and good customer access and already thriving with that potentially adding on with our customer relationship and distribution network as potential synergies.

[Operator]

Our following question is from Maxim Sytchev from National Bank Financial.

[Maxim Sytchev, analyst]

Eric, so just in terms of -- to think about the poles dynamic, so you don't think it's a reaction to the price increases that we've seen over the last two years and it's really in relation to kind of the CapEx pacing on the part of the clients. Is that how you guys are thinking in internal?

[Eric Vachon, executive]

Yes. That's 100%. No, not in my mind. So nothing to do with the pricing.

[Maxim Sytchev, analyst]

Okay. And then in terms of -- like obviously, you said minus 5% in terms of volume in Q4, but what are you guys seeing in Q1, like at the rates of sort of volume headwinds, are they similar, different? What can you tell us?

[Eric Vachon, executive]

For now, I would say similar, obviously. We got one month really under our belt in the last few weeks, I've been focused on our quarterly. So I have to say I haven't spent much on our February. But -- so a bit of the same for now, but as someone asked earlier about the weather in January, that's sort of a bit of a headwind, so I can't draw a conclusion on that part.

And maybe a thought, Maxim, our customers [indiscernible] I was talking about decades a few minutes ago, we're working on the long-term asset. So the quarter-to-quarter impact -- quarterly, we want to deliver great results, and we typically do, but you also to keep in mind what does that trend look like for the year, for '24 and '25, because part of our team is now actually planning on 2025 business and looking at contracts and renewals and extension in new customers. So it's a bit of a long-term play when we talk to utilities.

[Maxim Sytchev, analyst]

Right. Yes, makes sense. And then Silvana, just in terms of thinking about sort of the margin profile for poles, like we're not in a situation where kind of like a higher cost inventory cycling through the P&L, right? So I mean that's kind of the comment around margins staying relatively stable in poles. Is that how we should be thinking about this?

[Silvana Travaglini, executive]

Yes. So the increase in the inventory was mostly volume, right, and not cost. So no impact on the expected margins that -- on that volume.

[Maxim Sytchev, analyst]

Okay. Okay. That's great. And then Eric, just circling back to kind of the -- like, obviously, you're looking at M&A, and I think also the market appreciates that. But in terms of commitment to sort of all the verticals in your current platform, no incremental thoughts in relation to the resi exposure, if that's something that you "need in the long term?" Maybe any thoughts there?

[Eric Vachon, executive]

Well, Maxim, the way we look at it, that business, out of the three product categories that the business inventory 4 or 5 times a year, healthy margin and definitely is a good contributor to the business. So I don't know what the future holds as far as dynamics and what comes our way. We've obviously been vocal that we're investing in our infrastructure business and that business is proportionately shrinking, although stable the net revenue and very steady on the margin piece, it is shrinking. So as long as it's accretive, contributing to the business, [indiscernible] trading, which is part of our core knowledge, it still fits very well with what we do.

[Maxim Sytchev, analyst]

Okay. Perfect. And then -- so just one last question, clarification. When you talk about sort of additional services, potentially for your time post clients, so you would not be averse to potentially looking at something, which is sort of less manufacturing and maybe a little bit more kind of headcount driven in terms of M&A, assuming that it meets certain ROIC targets. Is that the way we should be thinking about this?

[Eric Vachon, executive]

No, definitely. We find the right partner that is, if I could say, the Stella-Jones equivalent in their own segment. I wouldn't hesitate to especially as we got customers saying 100% Stella-Jones can bring value in a combined service/product offering.

[Operator]

We have no further questions in the queue. Thank you.

[Eric Vachon, executive]

Well, thank you, Matthew, and thank you, everyone, for joining us today. We look forward to updating you on our first quarter results in May. Have a great day.

[Operator]

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