Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Stella-Jones' Q2 2021 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. 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 call is being recorded on Tuesday, August 3rd, 2021. I will now turn the conference over to Éric Vachon, President and CEO. Please go ahead.
Good morning, ladies and gentlemen. I'm here with Silvana Travaglini, Chief Financial Officer of Stella-Jones. Thank you for joining us for the discussion on the financial and operating results of Stella-Jones' second quarter ended June 30th, 2021. Our press release reporting Q2 results was published earlier this morning. It, along with our MD&A, can also be found on our website at www.stellajones.com, and will be posted on SEDAR today as well. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Stella-Jones delivered strong performance in Q2, marked by solid sales growth in each of our three main product categories. Volume gains in utility poles and railway ties, combined with record high prices of lumber, drove sales to over CAD 900 million and EBITDA to a quarter record.
Increased profitability translated into strong cash flow from operations, which allowed us to reduce the indebtedness incurred in Q1 for the seasonal build in working capital, invest strategically in our network, and continue to return capital to shareholders. Sales for the second quarter reached CAD 903 million, up from CAD 768 million for the same period in 2020. Excluding the negative impact of the currency conversion, pressure treated wood sales rose CAD 136 million or 18%, while sales for logs and lumber increased by CAD 64 million. I will now discuss in more detail the performance by product category. Utility pole sales increased to CAD 236 million, up from CAD 230 million in the corresponding period last year.
Excluding the currency conversion effect, utility pole sales climbed CAD 30 million or 13%, driven by improved maintenance demand for distribution poles, upward price adjustments, and better sales mix strengthened by added fire-resistant wrapped pole sales volumes.
This growth was partially offset by less project-related volumes. railway tie sales reached CAD 216 million versus sales of CAD 225 million in the same period last year. Excluding currency conversion, railway tie sales increased CAD 15 million or 7%, largely attributable to higher volumes for Class I customers due to the timing of shipments. The higher sales volumes were offset in part by pricing pressures for non-Class I customers, which eased somewhat during the quarter. residential lumber sales rose to CAD 330 million compared to CAD 257 million in the period last year. Excluding the currency conversion effect, sales increased by CAD 84 million or 33%, driven by the exceptional rise in the market price of lumber. This increase was partially offset by lower sales volumes stemming from softening customer demand.
Industrial product sales were CAD 36 million compared to sales of CAD 33 million in the quarter last year, largely due to more timber and piling projects, offset in part by lower project-related bridge and crossing sales. The sales of logs and lumber, a category used to optimize procurement, was up threefold to CAD 85 million compared to CAD 23 million in the corresponding period last year. This exceptional increase was due to the rise in the lumber price of market during the quarter. Silvana will now provide further details regarding our results and financial position before I conclude with our outlook. Silvana?
Thank you, Éric, and good morning, everyone. Turning to profitability. Driven by our strong sales growth, gross profit increased 50% to CAD 197 million compared to gross profit of CAD 131 million in the second quarter last year. Similarly, EBITDA and operating income rose 50% to CAD 180 million and 59% to CAD 161 million respectively. The increase was largely driven by the rise in sales prices for residential lumber, which exceeded the higher cost of lumber, as well as improved pricing and volume gains for utility poles, partially offset by lower residential lumber demand. As a result, net income for the quarter increased over 65% to CAD 115 million or CAD 1.76 per share. Compared to CAD 69 million or CAD 1.02 per share in Q2 of 2020.
Turning to liquidity and capital resources. We generated CAD 173 million of cash flow from operations in the quarter, primarily driven by our significantly improved profitability.
Our capital allocation approach remains focused on balancing growth and returns. During the quarter, we invested CAD 16 million in capital expenditures and returned capital to shareholders by paying dividends of CAD 24 million and buying back nearly 300,000 shares for a total of CAD 14 million. There are now 1.1 million shares outstanding for repurchase under our Normal Course Issuer Bid. During the quarter, we repaid in full our short-term indebtedness and increased our long-term debt by CAD 26 million. As of the end of the quarter, Stella-Jones' long-term debt, including the current portion, stood at CAD 682 million. We maintained a strong financial position with a low net debt to trailing 12-month EBITDA ratio of 1.7x and had available liquidity of CAD 395 million. Subsequent to the quarter end, the company obtained a one-year extension of its unsecured, syndicated revolving credit facility to February 27th, 2026.
Yesterday, the board of directors of Stella-Jones declared a quarterly dividend of CAD 0.18 per common share, payable on September 17, 2021, to the shareholders of record at the close of business on September 1st. I will now turn the call back to Éric for the outlook. Éric?
Thank you, Silvana. We have revised our full-year financial forecast to reflect the softening of residential lumber demand in the second half of 2021. We continue to foresee solid EBITDA growth in 2021 compared to 2020, but expect EBITDA to be in the range of CAD 410 million-CAD 440 million in 2021, compared to the previously disclosed guidance of CAD 450 million-CAD 480 million. The margin expansion realized in the first half of 2021 is projected to offset the margin compression expected from declining market prices of lumber until the company averages down its higher cost of inventory. As a result, the company anticipates EBITDA margins as a percentage of sales for 2021 to remain comparable to 2020. Excluding the impact of currency conversion of about CAD 130 million on sales, the company's projecting sales growth in the low to high teens for 2021 compared to 2020.
Residential lumber sales are forecasted to increase 15%-20% compared to 2020, down from the previously disclosed forecasted increase of 45%-65%. For utility poles, the sales growth forecasted remains unchanged. We expect sales to increase in the high single-digit range compared to 2020. We increased our sales growth expectations for railway ties and industrial products. We now project sales increase in the low double single-digit range for both categories compared to 2020. Our priorities to create superior value for our stakeholders have not changed. We intend to be active on the acquisition front, focus on innovation, continue to improve our operating efficiency, and expand our capacity to sustain profitability. On that front, in the coming months, we will be starting up our Kirkland Lake, Ontario facility to support the strong growth in poles demand. The underlying fundamental of each of our key product categories remains strong.
Even as lumber markets conditions normalize, we expect our residential lumber product category sales to benefit from strong and enduring customer relationships. For our leading utility poles and railway ties product categories, we are confident that they will remain the core drivers of our sustained growth. This concludes our prepared remarks. We will now be pleased to answer any questions you may have.
Thank you. As a reminder, if you’d like to ask a question, press star one on your telephone keypad to retrieve your question. Press star one again. Please wait, how we compile all the questions. Your first question comes from the line of Walter Spracklin with RBC Capital Markets. Please go ahead.
Yes. Thanks very much, operator. Good morning, everyone.
Good morning, Walter.
Éric, perhaps to start on your guidance change with regards to residential lumber, that makes sense given where the market has been going. Just curious to size that. Are you assuming in that new guidance a deeper decline in lumber pricing or in demand? Are you looking at it kind of where it's ended the quarter? Just to get a flavor for the conservatism that you built into your guidance for residential lumber. Be appreciative. Thank you.
Certainly. Well, thank you for the question, Walter, and the topic definitely deserves some discussion. If we think about our Q2 results, very strong results for the residential lumber product category, two dynamics were underlying in those great results. One is pricing or sales prices that we were able to pass on to our customers were higher than expected, but they were also offset by lower customer demand. It's really that lower customer demand trend. When I talk about the customer, I'm talking about the retail end customer at the retail level. Seeing that demand drop off, we're seeing that trend continue into the second half of the year. I would say 2/3 of our guidance adjustment is related to the volume aspect dropping versus last year.
The other aspect to consider is the sharp decline in the pricing of lumber at the tail end of Q2. That sharp drop has put some pressures on pricing that we're going to give to our customers, but we need a bit of time to average down our cost of inventory. I would say a third of our guidance decline is related to margin compression. The sharp decline on pricing, obviously market prices have dropped over 60%, and we're not dropping our sales prices by that magnitude. We are conceding some prices to customer, but the fact that we need to average down our cost of inventory, that'll take a while for us to be able to average down the cost, and therefore, there'll be some margin compression.
Okay. That's great color. My second question is on your go-forward strategy, and I know you touched on it there in your closing, in your prepared remarks. Really what you've had here is a multi-quarter, best described as a windfall, that has cleaned up your balance sheet. Silvana pointing to 1.7x that EBITDA, CAD 400 million in available liquidity. You've used a portion of that to buy back some stock and prime your balance sheet. I guess my question from here, and I know you mentioned acquisitions, but those have been kind of lower on the activity level there. Are you armed now with this new windfall and the balance sheet it's created?
Can you go into the market now and become more aggressive with acquisitions, even if they're at a little bit of a higher price, given some of the opportunities that are out there for growing your business? Or is there just not many opportunities there? If not, what are you looking at in terms of capital return strategy? Are you looking at significantly increasing your payout ratio, or are you amping up your buyback? Curious to hear your thoughts longer term in terms of that strategy.
Thank you, Walter Spracklin. I'll answer the M&A part first, and you can follow up with the second part. I guess it's a bit more on capital allocation. On the M&A front, I'm happy to report we're still discussing with the same companies that we were last quarter. We're progressing in our process. I can't say much more than that, obviously, because otherwise I'd be announcing a deal, which I'm not. Things are progressing well and we're moving positively towards being able to complete a transaction in the short period of time ahead of us. That being said, our debt leverage has been excellent for several quarters.
We're definitely well positioned to be able to make an acquisition, and it's not really about the pricing for the deal, but more about the process to get to being able to conclude a deal. With regards to capital allocation, with the clarification we provided last year, I think we're going to keep being mindful of the free cash flow we generate. I think we have ample availability in our facility to be able to execute on M&A, but also to be able to continue to return to shareholders in the form of dividends or share buybacks.
Okay. Appreciate the time. Thank you very much, Éric.
Your next question comes from the line of Hamir Patel with CIBC Capital Markets. Please go ahead.
Hi. Good morning.
Good morning, Hamir.
Éric, what sort of annual volume change is embedded in the res lumber sales guide of up 15%-20%?
Yes. 30% of volume in the second half. In the second half, in our guidance, if you want, there's 30% of volume decline year-over-year.
What was the volume change in the first half of the year?
Well, it was.
Year to date, about 15%-20%.
Up.
It was up.
Yeah.
Up. Okay. Then down 30% in the back half. Okay. Then, as you look out to 2022, who knows where lumber prices go, but from a volume standpoint, what are you hearing from your key customers? Are they expecting volumes to be up year-over-year next year in 2022?
Key customers have not started discussing 2022 yet. I guess maybe the best way to look at it, and you touched a bit on it, I think, if we start pre-pandemic, so 2019 as a starting point, and to that, I guess you need to factor two things. One, and you just mentioned it, is where is the price of lumber going to settle? You see futures as well as I do around it. Call it a CAD 700 mark for next year. Compare that to our 2019, let's say, call it baseline. I think the other thing we need to consider is the strong relationships we've developed in the last 18 months in the market with customers and new customers, and that would be sort of added volume to that baseline if you want.
I can't quantify right now what it looks like, but that's how we're sort of thinking about 2022.
Fair enough. That's helpful. Just turning to the railway tie business, if I look at the untreated tie prices, it looks like some of those benchmarks are up low single digits since the end of Q2 and almost up double digits year-over-year. Are you seeing that inflation on the raw material side? Can you just remind us how the pass-throughs work in that category?
Yeah. We're observing exactly that. There is less availability of hardwood logs in the market right now. Well, there's less availability of hardwood logs, but the sawmills are also being offered a lot of money to cut pallet stock. That's sort of prompting our industry to raise prices to the sawmills to encourage them to cut more railway ties. You're completely right. We're seeing that situation occur. Consequence for that is obviously, and we've had this discussion before, we will see our average cost of inventory increase slowly as we procure month-over-month. We'll have the opportunity to just execute clauses in our Class I contracts if you want, and adjust the pricing accordingly. There might be a little lag before we can adjust with the Class I customers. With regards to quoting to the non-Class I, that's really quoting exercise.
Every month, as we're seeing our cost of material increase, we will adjust our quotes to the market. It could take another quarter to four, five months, let's say, to be able to fully scope in the cost of that fiber cost.
Great. Thanks, Éric. That's all I have.
My pleasure. Thank you.
Your next question comes from one of Michael Tupholme with TD Securities. Please go ahead.
Thank you. Good morning.
Good morning, Michael.
Maybe just a housekeeping question to start. You've given us updated guidance, not only for EBITDA, obviously, but in terms of sales guidance and some details around the product categories. The new sales guidance, it's clear that that's organic growth guidance, low to high teens for the year. I'm just wondering, when you provide all of the product category sales guidance, is that also all on an organic basis?
Yes, it is.
Okay, perfect. Next question relates to your margins. You've indicated that you expect full year 2021 EBITDA margins to be comparable to 2020's level. That was about 15.1% last year. Obviously, margins have had some uplift as a result of strong residential lumber markets since the start of the pandemic in early 2020. I'm wondering, though, Éric, if you can talk about what you see as a sustainable normalized annual EBITDA margin for Stella-Jones business as we look forward. In other words, just trying to understand how we should think about a sustainable margin and then how that compares to this approximately 15% level you're guiding to for this year and that you did last year.
Michael, I would guide to that 15%. I think it's something that we can achieve where other parts of our business are still growing, right? utility poles have had the high single-digit growth now for a couple of years. We've gotten some efficiencies in our facilities. Even though we're seeing some normalizing in the residential lumber product category, I guess it'll resume to its historical margins. All in all, when you consider the whole of the company going forward into 2022, I think the 15% mark would be the margin to think about.
Okay. Also fair to say, even beyond 2022 as well?
Oh, correct. Yes. Definitely.
Okay, perfect. The growth you did in the poles business in the quarter, strong at 13%. I guess two questions. Number one, are you able to break down where that growth came from? You've indicated qualitatively some of the drivers. I'm just wondering how important or how much weight each of those carry. Things like improved maintenance demand and the higher pricing and mix. That'd be question one. Number two would be, you've maintained your organic growth guidance for that product category in the high single-digit range. You did 13%, though, in the second quarter. What is it-- I think you're running kind of high single digits on a year-to-date basis, but that sort of implies maybe a bit of a slowdown from Q2, and I realize high single digit's very good.
What would be the drivers of a sort of slowdown from this 13% rate you did in the second quarter?
Maybe a bit of color on the first half of this year, H1. For the year, when you combine both quarters, we're about a 9% growth. That growth stemmed, call it 30% from volume and 70% from pricing. That's how that was comprised. I think if you take a look at our whole year guide, it'll go to the 50/50, 50% on pricing, 50% on volume. We did slightly adjust. I don't know if you noticed, we went from mid to high single digits to talking in our outlook about only high single digits. I think it would be aligned a bit with the 9% we've achieved in H1.
Okay. I will leave it there. Thank you very much.
Thank you, Michael.
Your next question comes from the line of Benoit Poirier with Desjardins Securities. Please go ahead.
Yeah. Good morning, Éric. Good morning, Silvana.
Good morning, Benoit.
Yeah. Just to come back on the residential lumber, could you maybe provide some color about the overall inventory levels of treated wood in Stella-Jones, but also at your customer level and how it could influence demand for 2022?
Great question, Benoit. As I highlighted previously, demand in the second quarter was a bit less than what we expected. We did finish Q2 with a bit higher levels of treated inventory than we would in normal years. You're completely right in, I guess, what you're thinking is that we do have a bit more inventory on the books than we usually have, and that's why we're sort of guiding to the fact that we'll have a bit of margin compression until we can average down our costs. We've adjusted our procurement starting back in June. We've adjusted our procurement practices to be able to reduce our inventories. We're also working with our customers. Our customers don't typically hold a lot of inventory. We sort of hold it for them.
We're sort of working jointly here, looking at pricing or well, we don't dictate the pricing, but they actually are looking at strategies to make sure that they have pricing that's attractive for the end consumer, bring them into the stores, and this will help us move inventory. I referred to in the past to a partnership with our customers, and this is where the partnership is being leveraged. Obviously, market prices of lumber have dropped 60%, and we have not dropped our sales prices that much. We're working collectively with our customers to be able to move that inventory.
To answer the second part of your question, with the volumes of sales we're still forecasting for the balance of the year, I strongly believe that we'll be able to reduce our inventory level, average down our cost before the end of the year, and be ready, reset for a good 2022 season.
Okay. Would it be fair that the implied guidance assumes that the inventory level would finish more at the normalized level at the end of the year, Éric?
Yep, that is correct.
Okay. Perfect. Just in terms of working cap, how should we be thinking in terms of working capital consumption or release for the second half, given the dynamics with lumber price?
Yeah, certainly. I'll let Silvana answer that. She spent some time looking into that. We were anticipating the question.
Yeah. Well, for the year, we would expect the change in working capital to be flat or contribute slightly. Definitely for the second half, we would expect a contribution. The main reason for that is that the typical build and inventory that we usually see in the last quarter of the year to support our sales goals of the following year are expected to be offset by, as Éric just mentioned, the depletion of this higher level of residential inventory. Also impacting it is also railway ties. As mentioned also by Éric, the tighter availability of fiber might also, we won't have as much of a build because of that also for railway ties.
Okay. That's great. When you say flat to slight contribution, would you say positive or negative slight contribution, Silvana?
A slight positive contribution for the year.
For the year. Perfect. Okay. That's great. Just for utility pole, you already mentioned a good color about volume and pricing, but I was curious to know if you're seeing a further acceleration of maintenance work in second half or the recent resurgence of the pandemic could slow things down again?
The portion of your question on pandemic is really difficult to predict right now. We're not seeing any signs of demand slowing down. I'd probably say the order book now sort of reflects a good part of the balance of the year. I can't answer necessarily clearly on pandemic because that's really a bit of a wild card. Right now we're definitely not seeing that, Benoit. Maybe remind me the first part of your question.
Oh, no.
Orders on volume, right?
Yeah, exactly. That's perfect. Okay. Thank you very much for the time.
Thank you, Benoit.
Your next question comes from the line of Troy Sun with Laurentian Bank Securities. Please go ahead.
Good morning.
Good morning, Troy.
Éric, I'm just wondering if you can make a comment on the fire-resistant poles product there, just given all the natural disasters we've seen. Can you maybe just speak to the potential growth for that category as well as the just a general competitive landscape there and how your products are differentiated versus competitors there.
It's a great question. We definitely believe that wood products is the best solution for this type of infrastructure. We've proven over different engineering tests and lab tests that under intense fire conditions, wood still outperforms steel and concrete, and the addition of the fire retardant mesh actually made it that much better. A pole has been subject to simulated wildfires, and actually poles that have been observed in the field, having gone through the past years through the wildfire conditions, actually perform exceptionally well. If you think about the environmental footprint, our products are definitely way ahead of substitute products. With regards to pricing, it's still a better product. We're more competitive on the pricing for our customers, and it delivers the same value, and we all know that a pole on average will last them 65 years.
I think it's a great opportunity that we've developed. With regards to the potential, you're acquiring. Right now we're seeing a 5%-10% of the total product categories growth being shifted towards the product, right? It's not new demand. It's our customers electing to say, "Well, I want a pole that's wrapped now instead of a pole that's not wrapped." Potentially, could that attract new customers to Stella-Jones because we have this offering? Yes. The 5%-10% is what we're guiding right now.
Okay, great. That's super helpful. That's it for me. Thank you.
Thank you.
Your next question comes from the line of Maxim Sytchev with National Bank Financial. Please go ahead.
Hi. Good morning.
Good morning, Maxim.
Éric, just was wondering, obviously as we are hoping for the Biden Plan to actually come through in the U.S., was curious, now that you had a chance to take a look at this, if there's any potential positive spillover effect in terms of your kind of end markets based on your understanding right now?
In general, the answer to your question is yes, I think there will be a positive impact to the infrastructure bill. What we've observed in the past, any types of grant or stimulus money for infrastructure usually is welcomed by the rail industry, for example, and the rail industry will take advantage of it. We see it this year, for example, we have grants that are given by different infrastructure bodies at the government level in the U.S. There's also the federal tax credit, the 45G credit, which is also supporting infrastructure maintenance for short lines. We're seeing the positive effect of that on general demand. I think it will be the same with the infrastructure bill going forward. I think it will sustain healthy demand.
I'm talking a bit about the railway ties business now, but I think it's also true for utility poles, as utility poles were targeted in a few areas of the bill version that I read anyhow.
All right. Is it too early to potentially quantify? I mean, could it add one or two points of growth, assuming it goes through in its kind of existing form?
Yeah. It is a bit difficult to quantify at this point, Maxim. Maybe we could pick up this question at the next quarter call when we'll have a better idea of how our customers are thinking about it. Right now, I guess our customers are getting their mindset around what does that mean for them, how they can leverage this. It's a bit difficult to see how it's going to transpire and which part of our customer demand. Unfortunately, difficult to quantify, but I would think that it would be a positive addition to what we're currently guiding.
Right. Okay. Then you made a comment around increased market penetration on the resi side. Do you mind maybe discussing in greater detail in terms of what that could actually enable you to do in a down market on the resi side? I guess any benefits from greater market share and how that can lead to improved margin or something like that you can quantify.
Definitely throughout the last, I guess 18 months, we had cycles of tightening inventory, availability of inventory, availability of different sizes and dimensions. We could talk about fence boards and decking, and our team has been very strong in executing and making sure we have a proper product mix and offering. That has attracted some customers to the Stella-Jones product offering. If we compare additional volumes, could it represent between 5%-6% additional in volume, more or less? I think that's what I'm thinking about at this point.
Okay. That's super helpful. Just last one on the resi. I mean, obviously lots of news flow around fires and things like that. Are you seeing some of your clients are kind of rethinking their de-stocking dynamic because pricing started to move up a little bit off of the lows? What's actually kind of happening as we speak on the ground, if it's possible?
The distribution in the industry is quite different. At this point, I'm not talking about my customers or the Stella-Jones customers directly, but we understand that certain retailers have a high level of inventory at this higher cost. If it's not at the retail level, it's in the supply chain. I think it'll take a while for that to cycle out. I think it will help to some extent or prevent too quick of a drop in market prices as no one wants to write off inventory or have to sell it off at a loss. I think it needs to take its time to work through, and that's why we're guiding when we think about our own situation and how our customers are working with us.
We're saying that we're confident that in the next six months, we'll be able to reduce our inventory, buy new inventory at lower prices, and average down. Is that helpful?
Yeah. Then actually, if we can come back for a second to cost of goods sold on the resi, which obviously, impacting the margin profile. Do you anticipate this to be roughly kind of split even in between Q3, Q4, or how should we think about it? Is it really kind of lumpy in Q3 and then sort of the tail end in Q4, just so that we can calibrate the Excel?
Yeah. I think it's going to trend with the volumes, right? Typically Q4, the winter months and renovation is not, well, depending on parts of the country, I guess, but it's not a great season for renovation. I would think that the margin compression would come more in Q3 just as it trends with the volumes.
Okay, super helpful. That's it for me. Thank you so much.
Thank you, Maxim.
Again, if you'd like to ask a question, press star one on the telephone keypad. Your next question comes from the line of Michael Tupholme with TD Securities. Please go ahead.
Yeah, thanks. Just a couple of follow-ups. First off, Éric, sorry I missed a little bit about what you were just commenting on in respect of one of Maxim's questions with respect to market share gains. The 5%-6% of additional volume, is that what you've already achieved as a result of this additional business through share gains, or is that what you expect to achieve given the additional business you've picked up?
Obviously it always depends on your basis of comparison. I would say that's what we've achieved so far. We have ongoing discussions with other potential new customers that are still on the fence deciding who's gonna be their supplier for next year, but we feel good about the fact that certain customers might decide to include us in their supplier base.
Okay. Just in terms of understanding that growth is relative to what? Relative to where you would've been pre-pandemic, or is that just what you've achieved in 2021 versus 2020?
Yeah. I think it goes back to the explanation I was giving. If you think about 2019, where we had a certain footprint of customers, the last 18 months has added gotten that much more volume to us. I think that would be the best way to think about it.
Okay, perfect. I appreciate the comment earlier, I think it was toward the beginning of the Q&A, in terms of your volume expectations for residential lumber in the second half, saying you're thinking volumes, I think, down 30% year-over-year in half two 2021. Similar to what we were just talking about there, can you put the volumes you would expect to do in half two 2021 in residential lumber relative to a 2019 base level? Where would that leave you compared to 2019's second half?
It would be about a drop of, I'd say 20%. We need to do the math, Michael, to be honest and calculate it. Thinking about it, I think somewhere around the 20% would be fair.
Okay. The kind of activity levels we're seeing or expect to see in the second half of this year are actually below pre-pandemic levels.
Correct. They are.
Okay.
Yeah. That's the assumption we're using in the guidance. Yes.
I know we're getting a little bit specific here, but that's inclusive of the 5%- 6% pickup that you've already realized? The market is actually down like 25% versus second half 2019, and then you got back 5% or 6% from the share gains?
I guess total market, it would still be 20% overall. If we're reflective of the entire market, I would say yes. It's just a question of what proportion of the market Stella-Jones is getting versus the competition.
Okay. Separate topic. Thanks for earlier for some of the commentary around progression on the M&A discussions. That's helpful. Going back to last quarter's call, there was some talk of undertaking a bit of a sort of a special initiative whereby you were looking at whether or not there was an opportunity to add an additional adjacent product category in sort of a new but adjacent area. Is there any update on that front?
No update on that front. Michael, if I remember, I was answering a question of someone inquiring about could there be a fourth product category, or what are your thoughts on it? It's something that we keep discussing at the board level and considering. I guess the message is, we're not closing the door to any new opportunities, but there's certain criteria for us to consider in acquisition, and obviously it needs to be a good fit with our business. We need to be accretive, good multiples. It also needs to make sense with Stella-Jones' skill set. I guess maybe that's a bit of the decision I'd like to bring to that discussion point.
Okay. Yeah. Certainly I didn't expect that you had concluded that process and determined one way or the other or settled on something. Fair to say then that evaluating that potential still is an ongoing process.
Yeah. Correct. Yes.
Okay. Then just lastly, thank you, Silvana, for the commentary around working capital changes in non-cash working capital for this year. Maybe this is not a great assumption. Assuming we have sort of pricing in residential lumber, sort of holding at these kinds of levels or something around here. If we look out to 2022 in terms of changes in non-cash working capital, what would be the right way to think about that for your business on a full year basis, assuming, again, kind of no major volatility in commodity prices at this point?
Yeah. If we assume, like you mentioned, certain stability in the pricing and no significant swings, we would assume the usual build that we need at the end of the year, which we usually say approximately about a CAD 50 million build, depending on the sales growth that is anticipated for the following year.
Okay. That's helpful. Thank you.
Thank you, Michael.
Your next question comes on the line of Benoit Poirier with Desjardins. Please go ahead.
Yeah. With respect to your M&A remarks, you kind of mentioned innovation, Éric. I was wondering if you could provide more color about what are you looking for in terms of innovation, whether it's specific to a segment or it could be something else.
Well, Benoit, I don't think it's time to do the deep dive on that topic because we're looking at a lot of opportunity. Safe to say, what's close at heart is anything that would be wood treating, obviously, because we're the experts. We understand that very well. Anything that would be adjacent to those industries. Other than that, I don't want to start a discussion on specific segments or opportunities.
Okay. That's great color. Last one for me, could you maybe provide an update on the ERP implementation and the current CapEx forecast, whether it's still CAD 50 million-CAD 60 million for the year?
CapEx, yes, CAD 50 million-CAD 60 million. It will be at the top end of that as far as our last estimates show. With regards to the ERP project, we have successfully run now for several months three pilot plants. We have launched the first wave this week in our residential lumber-- sorry, in our railway tie division. Things are going well on that front as well. I guess lessons learned for us is that we're seeing how demanding it is to prepare a wave and to be able to structure and be successful at doing it. I expect the deployment of our solution to extend beyond 2022. We're working on our schedule, but it's really the deployment at this point because the solution has been built and we've proven it is functioning successfully. All in all, it's going very well and it's a great success.
That's it. Thank you very much.
Thank you, Benoit.
There are no further questions at this time. I will turn the call back over to Éric for closing remarks.
Thank you, Julie. Thank you everyone for joining us on this call. We look forward to speaking with you again at our next quarterly call. Thank you.
This concludes this conference call. You may now disconnect.