Stella-Jones Publishes Q3-2022 Results

Stella-Jones Inc. (“Stella-Jones” or the “Company”) today announced financial results for its third quarter ended September 30, 2022.

“Stella-Jones delivered strong results this quarter, reflecting the robust growth of our infrastructure-related product sales and the normalization of residential lumber sales,” said Éric Vachon, President and CEO of Stella-Jones. “Our performance demonstrates Stella-Jones’ ability to capitalize on growing utility poles demand, amplified by increased infrastructure spend and broadband network expansion programs. It also highlights the stability of our railway ties business and unique value proposition we deliver to our residential lumber customers. It is this resilience, in the face of inflationary pressures and supply chain constraints, that reaffirms the power of our business model and extensive network.”

“Subsequent to this quarter, we concluded the acquisition of Texas Electric Cooperatives Inc.’s utility wood pole manufacturing business, adding a 43rd wood-treating facility to our network. We also published our 2021 Environmental, Social and Governance (“ESG”) Report, highlighting our progress towards continuous improvement in ESG. We remain confident in our free cash flow generation and commitment to return value to our shareholders, as evidenced by the announcement of our 2022-2023 Normal Course Issuer Bid this morning. Based on our robust performance so far this year, we are favourably positioned to attain the objectives set forth in our three-year plan,” concluded Mr. Vachon.

Third Quarter Results

Sales for the third quarter of 2022 increased by 24% to $842 million, compared to sales of $679 million for the same period in 2021. Excluding the $17 million favourable impact of currency conversion and the contribution from the acquisitions of Cahaba Pressure Treated Forest Products, Inc. and Cahaba Timber, Inc. (together “Cahaba”) of $17 million, pressure-treated wood sales rose by $125 million, while sales of logs and lumber remained relatively stable. Pressure-treated wood sales attributable to infrastructure-related businesses, namely utility poles, railway ties and industrial products, grew by 15% and residential lumber sales increased by over 30% compared to the lower sales experienced in the same period last year.

Pressure-treated wood products:

• Utility poles (39% of Q3-22 sales): Utility poles sales amounted to $331 million in the third quarter of 2022, up from $256 million for the same period last year. Excluding the currency conversion effect and the contribution from the Cahaba acquisitions, sales increased 19%, driven by higher pricing in response to cost increases. During the third quarter of 2022, the continued growth in maintenance and project-related demand was offset in large part by lower volumes for fire-resistant wrapped poles.

• Railway ties (24% of Q3-22 sales): Sales of railway ties amounted to $199 million in the third quarter of 2022, versus $179 million in the corresponding period last year. Excluding the currency conversion effect, sales of railway ties increased by 8%, attributable to favourable sales price adjustments, largely to cover higher fibre costs, offset in part by reduced maintenance demand of certain Class 1 customers.

• Residential lumber (27% of Q3-22 sales): Residential lumber sales totaled $226 million in the third quarter of 2022, up from $170 million in the third quarter of 2021. Excluding the currency conversion effect, sales increased 32% as a result of higher sales volume, compared to the significant drop in demand in the third quarter of 2021.

• Industrial products (5% of Q3-22 sales): Industrial product sales amounted to $40 million in the third quarter of 2022, up compared to the $32 million of sales generated a year ago, largely due to higher volumes related to bridge and crossing projects and pilings.

Logs and lumber:

• Logs and lumber (5% of Q3-22 sales): Logs and lumber sales totaled $46 million in the third quarter of 2022, relatively unchanged compared to $42 million in the corresponding period last year.

Gross profit was $139 million in the third quarter of 2022, versus $82 million, in the third quarter of 2021, representing a margin of 16.5% and 12.1% respectively. The increase in gross profit both in absolute dollars and as a percentage of sales stemmed from higher margins across all the Company’s pressure-treated wood product categories, particularly residential lumber. In the third quarter of 2021, the gross profit of residential lumber was unfavourably impacted by elevated fibre costs, together with the market-driven decrease in pricing and drop in demand. In addition, an inventory write-down provision was recorded in the third quarter of 2021.

Similarly, operating income totaled $98 million in the third quarter of 2022 versus operating income of $51 million in the corresponding period of 2021, and EBITDA increased to $119 million, compared to $69 million reported in the third quarter of 2021.

As a result, net income for the third quarter of 2022 was $65 million, or $1.07 per share, compared to net income of $34 million, or $0.52 per share, in the corresponding period of 2021.

Nine-Month Results

For the first nine months of 2022, sales amounted to $2,400 million, versus $2,205 million for the corresponding period last year, driven by the 13% organic sales growth of the Company’s infrastructure-related businesses. Excluding the positive impact of the currency conversion of $39 million and the contribution from the Cahaba acquisitions of $47 million, pressure-treated wood sales rose by $146 million, or 7%, while logs and lumber sales dropped by $38 million. The year-over-year growth in pressure-treated wood sales stemmed from favourable price adjustments and increased maintenance and project-related demand for utility poles, as well as higher pricing for railway ties. These factors were partly offset by a decrease in residential lumber volumes and pricing, as well as lower railway ties volumes, particularly for Class 1 business. The decrease in logs and lumber sales compared to the same period last year is largely attributable to less lumber trading activity.

Gross profit increased to $412 million, or 17.2% of sales, from $391 million, or 17.7% of sales, in the corresponding period last year. Operating income amounted to $298 million, versus $294 million a year ago, while EBITDA was $361 million, compared to $348 million in the prior year.

Net income in the first nine months of 2022 and 2021 was $205 million, or $3.30 per share for 2022 and $3.14 per share in the corresponding period last year. Earnings per share for the nine-months ended September 30, 2022 was positively impacted by the Company’s ongoing repurchase of shares through its normal course issuer bids.

Liquidity and Capital Resources

During the third quarter ended September 30, 2022, Stella-Jones used the cash generated from operations of $193 million to repay the long-term debt related to the seasonal investment in working capital in the first quarter, invest $23 million in capital expenditures, acquire transportation assets for eight million dollars, pay $12 million in dividends and repurchase shares for $59 million.

For the nine-month period ended September 30, 2022, the Company repurchased 3,868,055 or 6% of its common shares for cancellation in consideration of $145 million. Since the beginning of the current Normal Course Issuer Bid, the Company has repurchased a total of 4,589,603 common shares for $175 million.

The Company’s net debt, including the current portion, stood at $935 million as at September 30, 2022 and the net debt-to-EBITDA ratio was 2.3x.

On November 2, 2022, the Company entered into a seventh amending credit agreement to increase the amount available under the unsecured revolving credit facility to US$400 million from US$325 million.

Acquisition of the Wood Pole Manufactguring Business of Texas Electric Cooperatives, Inc.

On November 1, 2022, Stella-Jones completed the acquisition of substantially all of the assets of the wood utility pole manufacturing business of Texas Electric Cooperatives, Inc., located in Jasper County Texas. Total consideration associated with the acquisition was US$32 million, including inventories estimated at four million dollars US.

Announcement of Normal Course Issuer Bid

On November 9, 2022, the Company announced that the Toronto Stock Exchange has accepted its Notice of Intention to make a Normal Course Issuer Bid. Please refer to the press release issued by the Company, a copy of which is located in the Investor relations section of its website.

Quarterly Dividend

On November 8, 2022, the Board of Directors declared a quarterly dividend of $0.20 per common share payable on December 16, 2022 to shareholders of record at the close of business on December 1, 2022. This dividend is designated to be an eligible dividend.

2022-2024 Financial Objectives

Stella-Jones’ sales are primarily to critical infrastructure-related businesses. While all product categories can be impacted by short-term fluctuations, the business is mostly based on replacement and maintenance driven requirements, which are rooted in our customers’ long-term planning. Corresponding to this longer-term horizon and to better reflect the expected sales run-rate for residential lumber and reduce the impact of commodity price volatility, in March 2022, the Company provided its financial objectives for 2022 to 2024. Below are key highlights of the 2022-2024 financial objectives with a more comprehensive version, including management assumptions, available in the Company’s MD&A. Management remains confident in the achievement of its three-year strategic guidance.

Key Highlights:

a. Compound annual sales growth rate in the mid-single digit range from 2019 pre-pandemic levels to 2024;

b. EBITDA margin of approximately 15% for the 2022-2024 period;

c. Capital investment of $90 to $100 million to support the growing demand of its infrastructure-related
customer base, in addition to the $50 to $60 million of annual capital expenditures;

d. Residential lumber sales expected to stabilize between 20-25% of total sales while infrastructure-related businesses expected to grow to 75-80% of total sales by 2024;

e. Anticipated returns to shareholders between $500 and $600 million during the three-year period;

f. Leverage ratio of 2.0x-2.5x between 2022-2024, but may temporarily exceed range to pursue acquisitions.

Publication of Environmental, Social and Goverance (“ESG”) Report

On October 26, 2022, the Company published its 2021 ESG report. It can be found on the Stella-Jones website at: www.stella-jones.com/en-CA/investor-relations/environmental-social-governance.

For the complete press release, click here.

About Stella-Jones

Stella-Jones Inc. (TSX: SJ) is North America’s leading producer of pressure-treated wood products. It supplies all the continent’s major electrical utilities and telecommunication companies with wood utility poles and North America’s Class 1, short line and commercial railroad operators with railway ties and timbers. Stella-Jones also provides industrial products, which include wood for railway bridges and crossings, marine and foundation pilings, construction timbers and coal tar-based products. Additionally, the Company manufactures and distributes premium residential lumber and accessories to Canadian and American retailers for outdoor applications, with a significant portion of the business devoted to servicing the Canadian market through its national manufacturing and distribution network. The Company’s common shares are listed on the Toronto Stock Exchange.

Contact:

Silvana Travaglini – Senior Vice-President & Chief Financial Officer – stravaglini@stella-jones.com – (514) 940-8660

Source: Stella-Jones Inc.