Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Stella-Jones' Q4 2020 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 difficulty 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 Wednesday, March 10th, 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 this discussion of the financial and operating results for Stella-Jones' fourth quarter and full year end December 31st, 2020. Our press release reporting Q4 results was published earlier this morning. It, along with our MD&A, can be found on our website at www.stella-jones.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. Our strong performance in 2020 is a testament to Stella-Jones' resilient business model, the strength of our team, and its ability to effectively adapt and deliver strong results for stakeholders, despite the many challenges faced throughout the year. I'm extremely proud of the unwavering personal commitment, determination, professionalism, and collaboration of our employees that they displayed throughout the year.
We concluded 2020 with record sales and profitability. Sales increased for the 20th consecutive year, while EBITDA rose 23% to CAD 385 million, and net income increased 29% to CAD 210 million. Increased profitability translated into record cash flow from operations, which allowed us to return CAD 100 million to our shareholders while continuing to invest in our network. In line with our capital allocation strategy, today we announced a 20% increase in our quarterly dividend and an increase to the numbers of shares that can be repurchased under the normal course issuer bid, demonstrating our confidence in Stella-Jones' strong cash flow generation and our commitment to deliver continued value to our shareholders. Let me begin with a brief overview of our fourth quarter results. Sales for the fourth quarter of 2020 amounted to CAD 533 million, up from sales of CAD 445 million for the same period in 2019.
Excluding the negative impact of currency conversion, pressure treated wood sales rose CAD 78 million or 19%. Utility pole sales amounted to CAD 201 million, up from CAD 195 million from the same period last year. Since the end of the first quarter, demand, particularly from Canadian customers, has been impacted by pandemic restrictions as certain utility companies have continued to limit maintenance activities in an effort to protect their maintenance crews. As a result, volumes have remained relatively stable quarter-over-quarter. Most of the 4% increase in sales quarter is attributable to healthier sales mix, which include the impact of the value-added fire-resistant wrapped pole sales. Railway tie sales grew CAD 147 million, up from CAD 140, CAD 134 million last year. In line with an improving industry demand trend compared to the same period last year, we realized sales growth of 11% quarter-over-quarter.
This was mainly driven by our flexibility to service Class I customers, leading to higher volumes and our ability to maintain solid non-Class I sales despite pricing headwinds. residential lumber sales reached CAD 117 million, almost double the CAD 61 million generated for the same period in 2019. The record high market price of lumber, and to a lesser extent, the continued strong demand from home improvement products, explain the significant sales increase this quarter. The higher market price of lumber is also a reason that sales of logs and lumber were up 45% compared to the same period last year to CAD 45 million. Silvana will now provide further details regarding results and financial positions before I conclude with our outlook. Silvana?
Thank you, Éric. Good morning, everyone. Turning to our profitability. Gross profit grew 21% to CAD 85 million compared to Q4 last year, while operating income was CAD 50 million compared to CAD 41 million in the fourth quarter of 2019. Similarly, EBITDA rose to CAD 70 million, up 19% compared to CAD 59 million in Q4 last year. The increase was primarily driven by higher sales prices for residential lumber, which exceeded the higher cost of lumber, as well as the improved sales mix for utility poles. Adjusting for other net losses, EBITDA for Q4 2020 and 2019 were CAD 73 million and CAD 60 million, representing EBITDA margins of 13.7% and 13.5%, respectively. Net income in the fourth quarter increased 21% to CAD 34 million, or CAD 0.52 per share, versus CAD 28 million, or CAD 0.41 per share last year. Let's turn to a brief overview of our full-year results. Sales in 2020 reached CAD 2.6 billion.
Excluding the positive impact of the currency conversion, pressure-treated wood sales rose CAD 309 million, or 15%, with both volume and pricing gains across the company's three core product categories. Driven by strong sales growth, EBITDA increased 23% to a record CAD 385 million, or a margin of 15.1%, up from the CAD 313 million, or a margin of 14.3% last year. losses of CAD 12 million, EBITDA in 2020 was CAD 397 million, representing a margin of 15.6%. Net income rose to CAD 210 million, or CAD 3.12 per share, versus net income of CAD 153 million, or CAD 2.37 per share last year. Turning to liquidity and capital resources. With our strong financial results this year, we generated CAD 402 million of cash flow from operating activities before changes in non-cash working capital components and interest and income taxes paid.
The anticipated increase in sales in 2021 resulted in an over CAD 120 million build in inventory this year. This largely explains the reduction in cash from operations to CAD 178 million. We deployed the cash generated to make capital expenditures of CAD 55 million and return capital to shareholders by paying dividends of CAD 40 million and buying back 1.3 million shares for a total of CAD 60 million. We concluded 2020 with long-term debt, including the current portion, of CAD 606 million, in line with last year. We maintain a strong financial position with a net debt to EBITDA ratio, which includes lease liabilities, of 1.9 x, and our available liquidity was CAD 190 million. Subsequent to year-end, the amount available under the demand loan facility was increased from $50 million $100 million U.S.
until June 30, 2021, providing the company with additional flexibility to invest in the inventory required to support the anticipated sales growth in 2021. Yesterday, the board of directors of Stella-Jones declared a quarterly dividend of CAD 0.18 per common share, representing an increase of 20% over the previous quarterly dividend, payable on April 24th, 2021 to shareholders of record at the close of business on April 5th. This represents the 17th consecutive year of dividend increase. Finally, on March 9th, the company received approval from the TSX to amend its normal course issuer bid in order to increase the maximum number of common shares that may be repurchased from 2.5 million- 3.5 million shares. The amendment will be effective on March 15th, 2021, and will continue until August 9th, 2021. I will now turn the call back to Eric for the outlook. Eric?
Thank you, Silvana. While the impact of the ongoing COVID-19 pandemic on the demand for the company's product is still uncertain, we expect year-over-year organic growth in sales and profitability for 2021. Based on our current outlook and various assumptions, we expect to generate EBITDA in the range of CAD 385 million-CAD 410 million. This guidance anticipates headwinds of approximately CAD 50 million in sales from the deterioration of the value of the U.S. dollar relative to the Canadian dollar. Excluding the currency conversion impact, we project sales growth in the low to mid-single digit range for 2021. Utility pole sales are expected to increase in the mid to high single digits range compared to 2020, as we project sustained growth in replacement demand, including an increase in the value-added fire-resistant wrapped pole sales.
For residential lumber, we are also forecasting mid to high single-digit growth compared to 2020. This is driven by the continued strong demand for home improvement projects, current estimates of higher pricing, as well as projected increase in market reach. The sales of railway ties and industrial product are projected to be relatively comparable to those generated in 2020. Please consult our MD&A for details of the economic and market assumptions used to prepare this guidance. Stella-Jones' strategic vision is focused on enhancing the company's presence in its core product categories while seeking other strategic opportunities that leverage the company's footprint, customer base, fiber sourcing, and other competitive strengths.
We intend to be active on the acquisition front, focus on innovation, continue to improve our operating efficiencies, and expand our capacity to sustain our profitability. Our priorities for 2021 include providing continued support to utility pole customers that will transition to an alternate preservative solution in preparation for the gradual phase-out of pentachlorophenol and a successful ERP implementation. As one of the leading providers of industrial treated wood products, our primary objective is to enhance the company's business resilience and generate consistent value for shareholders. This concludes our prepared remarks, and we will now be pleased to answer any questions you may have.
Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question will come from Walter Spracklin from RBC Capital Markets. Please go ahead. Your line is open.
Yeah. Thanks very much, operator. Good morning, everyone.
Good morning, Walter.
I'd like to start with the ties division. Obviously covering the rails, we know that congestion is very high right now. The railroads have limited ability to kind of take any track offline for upgrades. Understanding that ties is not something you can defer too long, but you're guiding to flat sales here. Do you think that that guidance is really a reflection of the railroad's lack of real incentive to do major maintenance this year? Could we see a lift in future years as things normalize and the railroads may come back with a little bit of an amped-up rail tie demand profile post-2021?
I think you're correct, Walter. The current year's maintenance programs have been announced last year, as you know, and I believe that the railroads will execute on that plan. From our view, they are at a minimum that they've done historically. To your point, I do believe that we could see an uptick for the Class I in future years. I think it's a fair assumption. With regards to the non-Class I business, we are seeing still a lot of activity in demand from different market participants. Obviously, the federal credits are supporting the financing of those projects. There's also what's referred to as CRISI grants, which also support in the same line, the short lines and the non-Class I business. I do think that that'll sustain demand going forward.
I think there's two aspects to what you're looking at, but I think your assumption is fair that we could see an upward trend in maintenance volumes in coming years.
Okay. My second question is really around the visibility behind your guidance on the revenue side. Can you touch on which segment do you feel you have the highest visibility, either due to the structure of the contracts or the indications you've had from customers? Where do you have the lowest visibility on a segment-by-segment line?
Certainly. Well, we just discussed the railway ties. 60% of our railway tie division revenues are Class I, which is supported by annual contracts. All our major customers have provided guidance. I would think that is the one where we feel the most comfortable with regards to the guidance going forward. Secondly, I would mention the utility pole product category, where again, we have contracts in place and ongoing discussions with engineering departments at the utilities, our customers, where we talk about the maintenance programs. That one comes in second, essentially because a little bit of caution with regards to COVID-19. I'm happy to see the cases down in North America and vaccines being deployed. We could think that this could trend back to normal maintenance activities. Third, I would say the residential lumber. There's obviously no annual contract, and it really depends on market demand.
We've been planning the 2021 season with our customers now for several months. They've all been indicating strong demand. We've confirmed also with several contractors in the market that demand will be strong for outdoor renovations in the coming year. Again, I guess that would be the one where obviously there's no contract, so firm it up. I have high faith in what our customers are telling us. As we're sort of deploying or selling inventory this year, we're sort of seeing that trend in demand continue as we've seen actually in December when the volumes were actually up year-over-year. We're seeing a continued trend on that front.
That makes a lot of sense. Okay. Really helpful there. Last question is on your free cash flow and capital allocation. It seems that acquisitions are, I know you remain interested, but activity level is fairly low. I would guess, correct me if I'm wrong, that perhaps sellers' target or multiples are elevated. You've ramped up your dividend now, you've amped up your buyback. Can you cover off what you could see as being your maximum payout ratio if there were no acquisition opportunities? How high could you see your payout ratio go?
Comparatively, how high would you see your leverage go if you were to start paying out an increasing amount of your cash flow in the form of either dividends or buyback?
Yeah. A lot of aspects in your question there. The leading indicator there to answer your question would be our leverage, right? We've guided the market on our capital allocation policy of leverage between 2 and 2.5. We are coming out of a very strong year. In 2020, we generated very strong cash flows. With the current guidance, we're very confident in our future cash flows as well. The strategy behind renewing the NCIB as well as increasing the dividend is to return value to shareholders and maintaining that leverage level. Normal state, I would say, we would lever in that range of the 2- 2.5. I'm fully confident that the discussions that we're currently having with targets on M&A will come to fruition at one point in the year, we intend on being active on the M&A front.
That's why we're struck that way with our capital allocation. The 2- 2.5 is really our steady state business, and we're ready to lever up, let's say, to 3x , which is well under our bank covenants to be able to do an acquisition, which is plenty to execute on what we have on the table right now.
Okay. That's very helpful. Appreciate your time, Éric.
My pleasure. Thank you, Walter.
Your next question comes from Hamir Patel from CIBC Capital Markets. Please go ahead. Your line is open.
Hi, good morning.
Good morning, Hamir.
For the mid to high single-digit growth expected in poles and res lumber this year, how much of that is volume?
Yeah, we don't really quantify it. We don't quantify it. There's many assumptions behind that. Obviously, the pricing depends on where the pricing of lumber is gonna go for the balance of the year, which currently our assumption is to maintain steady state. Then, we have confidence in the volume. Look, if you need to use an assumption, I would probably say 50/50. For the residential lumber and for utility poles, I would say something similar as well.
Fair enough. That's a helpful one. Eric, I wanted to ask you about on the pole side of the business, as electric vehicle kind of adoption increases over the coming decade, what kind of impact do you think that could have on pole demand? I'm just thinking as charging networks get built out and then also kind of connecting all the growth in renewables to the grid.
Any additional demand for electricity on the North American grid would play favorably with regards to demand just to support that network, may it be poles or different hardware items. I think it would be positive, most definitely. Our customers are not necessarily talking about that along those lines. I think that investments related to such a demand could be accelerated if governments decide to support it, to subsidize it to some extent, to favor electric vehicles. Otherwise, it will be like a market trend. To answer your question, I think it would be positive. It will be positive. It's just a question of the timing of the occurrence.
Sure enough. Just last question from me. Silvana, could you maybe highlight if there are any major capital projects in the budget for 2021?
No. In terms of the guidance of the CAD 50 million- CAD 60 million, we are expecting to be at the high end of the guidance for 2021, keeping in mind that included in that continues to be our ERP project. I would say, one of the more significant ones would be the ERP spend that we continue. As you know, we're still in the implementation of that project. Other projects were also, as Éric mentioned in his priorities, looking at getting our customers and converting some of our cylinders for different preservatives for our penta replacement. Those, I'd say, would be sort of the major CapEx.
Okay, great. Thanks, Silvana.
Thank you, Hamir.
Your next question comes from Benoit Poirier from Desjardins. Please go ahead. Your line is open.
Yeah. Good morning, Silvana, and good morning, AG.
Good morning, Benoit.
Yeah. Just with respect to the lumber inventory, obviously a great opportunity. You've been able to replenish the inventory over the last month. I was just wondering if you feel that you're having a competitive advantage versus peers to meet strong demand in 2021. Given all the investment made toward the inventory in the last two years, would you expect a reversal at some point? Is it more late 2021 or 2022?
Well, it's a very good question. Obviously the inventory volume that we replenished for residential lumber in the fourth quarter and as well in the first quarter of this year are at very higher prices compared to last year, right? If you follow the lumber markets. Today, roughly we're sitting at 2.5x the price we were one year ago. Obviously our investment in inventory is higher, and if the general lumber markets drop, we would see a decline in our inventories, let's say, at the end of this year or into 2022.
That being said, I think Stella-Jones' strong balance sheet and strong financials enable us to be able to invest in inventories at that cost, which, hard to say what our competitors' depth as far as debt can accommodate, but we definitely feel that we're in a strong position to be able to procure sufficient volumes to execute on our guidance and as well to support our customers' expectations as far as increased volumes.
Oh, okay. Would it be fair to expect kind of a positive inventory reversal as we go through a more normalized years, let's say, beyond 2021, Eric or Silvana?
There are two items at play there, right? One, to your point, if the prices, and I hate quoting numbers, but if your prices are declined, let's say, in the next 12, 18 months for lumber, again, yes, that would pull it down, but then there's also another effect of additional volume that we're gaining year-over-year and do plan on gaining. Last year in 2020, our teams did a spectacular job servicing our customers. The industry has acknowledged Stella-Jones' capability, and as a result, we've gained extra volume, extra market reach, if you want. That additional volume would carry on in the future. You have potentially two, not perfectly offsetting, but two different variables that could play against one another in the future.
Okay. That's great color. For residential lumber, as Canadians get vaccinated later, would you expect the residential lumber to hold better in Canada versus the U.S. as Americans might be looking to spend differently once vaccinated? Is there a big discrepancy between Canada and the U.S. on the residential side right now?
That's a difficult question for me to answer on the dynamics of how the populations will return to a new lifestyle or to their old lifestyles. It's kind of difficult to predict. What we're working off of is how we're working with our customers currently and what they're guiding. I'm quite confident that by mid-year we should see a good part of our gain realizations. If you remember April, May, June are our heaviest months for the sales of residential lumber. Remember also that the U.S. represents maybe 30% of our product category sales and Canada is 70%. To your assumption, if it's a bit later in Canada, I think it holds well to think that we should still have a strong H1 as our customers are indicating, and I think the whole year should be very healthy on the volume side.
Okay, last one for me. Just with respect to the storms we saw in Texas, just wondering if there was any benefits or maybe some disruption on the supply chain and whether it has created some pent-up demand for Stella-Jones going forward?
Yeah. The storms we saw in the U.S. Southeast, when I say storms, there was snow, there was ice storms, there was intense cold. Can't say there were events that required more poles or more railway ties, it's not necessarily a benefit. It would not translate into additional sales. That being said, the distribution networks were down in the U.S., in particular the rail networks. Car flow reduced to some extent. It took a while to get back moving. Our facilities themselves were actually shut down for one week as there was no power, no gas and so on. All to say, no significant impact, I would say, on the utility pole side. Railway ties, we'll see how quickly we can catch up. Is it gonna take the month of March or a bit early April to catch up?
The orders are there, so it's not a question of missed opportunities. It's a question of just having to live with the consequences of the disruption in the transportation network, if you want.
Okay. That's great. Thanks for the time.
Thank you, Benoit.
Your next question comes from Michael Tupholme from TD Securities. Please go ahead. Your line is open.
Thank you. Good morning.
Good morning, Mike.
Éric, on the outlook for 2021, can you talk about your margin expectations and specifically some of the moving pieces we should be thinking about when we look at 2021 versus 2020?
Well, the margin assumption will vary between the low end and the high end, but call it, we like to aspire that we would maintain a 15% EBITDA margin going forward. Items that could help improve that, if you want, or things to consider would definitely be with COVID-19 sort of phasing out, seeing a return to maintenance level from our utilities, which would also translate, I believe, into also increased sales of our fire-resistant wrapped poles. Obviously right now we're sort of in a positive trend, which makes me quite optimistic about the remainder of the year. Following that, railway ties, I think we're relatively stable with our demand. I don't see any significant swings in inventory cost for the balance of the year. For residential lumber, we need to keep on our radar how market prices will fluctuate going forward.
Obviously, if the market prices would drop, we would adjust pricing at our own cadence depending on how our average inventory cost would adjust. Still, those are things we need to keep in mind.
Okay. Just to be clear, when we're thinking about the EBITDA guidance range, and I guess all the margins, the guidance range you've given for 2021, are you assuming nothing in terms of the other losses line, which I guess there were some amounts that flowed through that in 2020? Is that nothing for 2021, the assumption?
That is correct. Yeah. That is correct.
Okay, perfect. Thanks. Just a question about moving to residential lumber, you're calling from mid to high single digit revenue growth in the current year here. Can you talk a little bit about how you see that playing out as we move through the year in terms of maybe half one versus half two? I think you sort of, a moment ago, alluded to an expectation of a reasonably strong half one, but just what is going into that full year expectation as it relates to kind of the first half versus second half?
No, definitely. Really, if I think of last year, there was a significant difference between H1 and H2 last year in pricing. Obviously, H1 was a very steady price, you could go back to the lumber graph and figure that part out. In the second half had very higher pricing, which would be closer to what we have today. We're still actually today a bit higher than the average of H2 for last year. I would definitely think that for H1, we would see volume and pricing being strong contributors to our growth. For H2 pricing, if the pricing is maintained, pricing would have less of an impact and then volume would play.
Our clients are starting to discuss H2. They're still foreseeing a healthy second half of 2021, which is encouraging. It's really to that level of expectations that we're actually procuring and preparing our season. Obviously, the peak being in Q2. Obviously, the summer months and early fall are also very active months if the weather permits.
Okay. You actually mentioned that clients are starting to talk about the second half. In the outlook for residential lumber that you've provided, are you factoring in some of that potential strength in the second half, or are you taking more of a conservative stance at this point?
It's really in our range from the bottom to the top. The top range would bring us to a very strong year in both halves of the year.
Okay. Got it. Just maybe a bit of a sort of bigger picture question as it relates to poles. You had very good organic growth again in 2020, and you're calling for further strength in 2021. I'm just wondering if you can sort of try to frame where we're at in terms of the replacement cycle, if I can call it that. There's been talk for some time about how there was under-investment in the North American infrastructure in the utility poles area. We've seen good growth for some time calling for further growth. Where do you think we're at in terms of addressing the need to replace the existing stock?
Our customers don't necessarily share their maintenance programs very long term. We do have a certain insight as to their intentions beyond the current year. We've always guided the mid-single digit growth for poles for a certain number of years ahead. I think we're still in the beginnings. If you compare it to hockey, we're still in the first period. I don't know how to better explain that as far as time frame, but I think there's still a lot of work to be done with our customers with regards to planning out more maintenance for several years to come.
Okay. No, that's helpful. Thank you. Then just lastly, Éric, you did briefly address sort of the prospect of M&A earlier in the call in the context of a broader question about capital allocation. I'm wondering if it's possible for you to provide any further insights into kind of how you're thinking about this year, the M&A pipeline, what you think could happen, et cetera.
Well, we intend to be active on the M&A front for 2021. Last time we had a discussion on the topic on our last call, I did indicate that we're talking to certain targets, and we continue to do so, same targets. Nothing has really changed. The discussions are all progressing at different paces. We, as a company, remain disciplined in the multiples we're going to pay. I would add to that is not a headwind in our discussions. Things are moving positively. That's about all I can say, really, Michael, on that front.
No, I appreciate that, Tim. Thanks very much. I'll turn it over.
Thank you.
As a reminder to ask a question please press star followed by the number one on your telephone keypad. Your next question comes from Mona Nazir from Laurentian Bank. Please go ahead. Your line is open.
Good morning. Congratulations on results.
Thank you, Mona.
Apologies if you had answered any of the questions. I'm just trying to juggle back and forth and take notes. Just on the residential side, I'm just wondering the mix of pricing versus volume. I think last quarter you had said it was two-third versus one-third. Did you provide what it was this quarter? If not, could you please do so?
For Q4, pricing was really set. I would say roughly 70% of the increase, because your question is with regards to Q4, correct?
Correct. Yeah.
Yes. About 70% would be related to pricing year-over-year.
70% pricing. Okay, that's very helpful. You had mentioned growth in market share gains on the residential side, just now in your commentary, offsetting a contractionary pricing environment in the future. I'm just wondering if you have started to see any market share gains as of yet, and I'm just thinking about your guidance for this segment, and it's a bit higher than perhaps The Home Depot, for example. I'm just wondering about the dynamics there.
Yeah. The industry sets its partnerships, if you want, in Q4 of every year. Right now we know our partners, and we have an indication for their volumes for 2021. To answer your question, so we do have relationships in place to be able to support our assumptions on volumes. As far as we can tell so far, the actual pull on their inventory is following expectations.
Okay. No, that's helpful. Just lastly, on acquisitions, I understand that you provided all the color in the last line of questioning, but just size-wise, the acquisition should be comparable to your prior acquisitions that you've done historically. Like CAD 30 million-CAD 70 million-ish in purchase price/revenue. Would that be correct?
That's a fair assumption, yes.
Okay, perfect. Just in regard to the verticals, is poles still the priority for you guys?
Definitely a lot of opportunity in that one. I guess priority is simply because there's more opportunities. If something would come in the railway type, for example, we know it would definitely be something we would take a look at. Yes, I would say the more opportunities are with the utility poles.
Okay. No, that's very helpful. Thank you. That's it for me.
Thank you, Mona.
We have no further questions in queue. I'd like to turn the call back over to Éric Vachon for closing remarks.
Thank you for joining us on today's call. We look forward to speaking with you again at our next quarterly call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.