Earnings Call: Q4 2020

Mar 10, 2021

Earnings release

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 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 10, 2021. I will now turn the conference over to Eric Fachon, President and CEO. Please go ahead. Good morning, ladies and gentlemen. I'm here with Silvana Travaline, Chief Financial Officer of Stella Jones. Thank you for joining us for this discussion of the financial and operating results for Stella Jones' Q4 and full year end December 31, 2020. Our press release reporting Q4 results was published earlier this morning. It along with our MD and A Can 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. 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% $385,000,000 and net income increased 29% to $210,000,000 Increased profitability translated into record cash flow from operations, which allowed us to return $100,000,000 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 Q4 results. Sales for the Q4 of 2020 Amounted to $533,000,000 up from sales of $445,000,000 for the same period in 2019. Excluding the negative impact of currency conversion, pressure treated wood sales rose $78,000,000 or 19%. Utility pole sales amounted to $201,000,000 up from $195,000,000 from the same period last year. Since the end of the Q1, 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 includes the impact of the value added fire resistant wrap hole sales. Railway tie sales grew $147,000,000 up from $134,000,000 last year. In line with an improving Street 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 1 customers, leading to higher volumes and our ability to maintain Solid non Class I sales despite pricing headwinds. Residential lumber sales reached $117,000,000 Almost double the $61,000,000 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 explains 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 $45,000,000 Sylvainna will now provide further details regarding results and financial positions before I conclude with our outlook. Silvana? Thank you, Eric, and good morning, everyone. Turning to our profitability. Gross profit grew 21 percent to $85,000,000 compared to Q4 last year, While operating income was $50,000,000 compared to $41,000,000 in the Q4 of 2019. Similarly, EBITDA rose to $70,000,000 up 19% compared to $59,000,000 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 2019 We're $73,000,000 $60,000,000 representing EBITDA margins of 13.7% and 13.5%, respectively. Net income in the 4th quarter increased 21% to $34,000,000 or $0.52 per share versus $28,000,000 or $0.41 per share last year. Let's turn to a brief overview of our full year results. Sales in 2020 reached $2,600,000,000 Excluding the positive impact of the currency conversion, pressure treated with sales rose $309,000,000 or 15% With both volume and pricing gains across the company's 3 core product categories. Driven by strong sales growth, EBITDA increased 23 percent to a record $385,000,000 or a margin of 15.1 percent, up from the $313,000,000 or a margin of 14.3 percent last year. Net losses of $12,000,000 EBITDA in 2020 was $397,000,000 representing a margin of 15.6 percent. Net income rose to $210,000,000 Turning to liquidity and capital resources. With our strong financial results this year, we generated $402,000,000 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 100 $20,000,000 build in inventory this year. This largely explains the reduction in cash from operations to $178,000,000 We deployed the cash generated to make capital expenditures of $55,000,000 and returned capital to shareholders By paying dividends of $40,000,000 and buying back 1,300,000 shares for a total of $60,000,000 We concluded 2020 with long term debt, including the current portion of $606,000,000 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 times And our available liquidity was $190,000,000 Subsequent to year end, The amount available under the demand loan facility was increased from $50,000,000 to $100,000,000 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 $0.18 to shareholders of record at the close of business on April 5. This represents the 17th consecutive year of dividend increase. Finally, on March 9, 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 2,500,000 to 3,500,000 shares. The amendment will be effective on March 15, 2021, and will continue until August 9, 2021. I will now turn the call back to Eric for the outlook. Eric? Thank you, Solana. While the impact of the ongoing COVID-nineteen 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 $385,000,000 to $410,000,000 This guidance anticipates headwinds of approximately $50,000,000 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 digit range Compared to 2020, as we project sustained growth in replacement demand, including an increase in the value added fire resistant wrap pole sales. For residential lumber, we are also forecasting mid to high single digit growth compared to 2020 And this is driven by the continued strong demand for home improvement projects, current estimates of higher pricing as well as projected increase in market The sales of railway ties and industrial product are projected to be relatively comparable to those generated in 2020. Please consult our MD and 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 We intend to be active on the acquisition front, focus on innovation, continue to improve our operating efficiencies and expand our capacity to 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 pentachorophenol 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 Your First question will come from Walter Spracklin from RBC Capital Markets. Please go ahead. Your line is open. Yes. Thanks very much, operator. Good morning, everyone. Good morning, Walter. So 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 are is not something you can defer too long, but you're guiding 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. And 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 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. So to your point, I do believe that we could See an uptick with the Class Is in future years. So 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 Christie grants, which also supports In the same line, the short lines and the non Class I business. So I do think that will sustain demand going forward. So I think there's 2 aspects to what you're looking at, but I think your assumption is fair that we could see An upward trend in mix volumes in coming years. Okay. My second question is really around the visibility behind your guidance On the revenue side, can you touch on a few of the 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 and where do you have the lowest visibility Kind of on a segment by segment line. Certainly. Well, we just discussed the railway ties. 60% of our Railway Tide division revenues are Class 1, which is supported by annual contracts And all our major customers have provided guidance. So 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 pulp product category where Again, we have contracts in place and ongoing discussions with engineering departments at our At the utilities, our customers, we talk about the maintenance programs. That one comes in second, Essentially because of a little bit of caution with regards to COVID, I'm happy to see the cases down in North America and vaccines being deployed. So we could think that This could trend back to normal maintenance activities. And 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. But Again, I guess that would be the one where obviously there's no contract to firm it up. So, but I have high faith in what our customers are telling us. And 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 capital allocate or free cash flow and capital allocation. It seems that Acquisitions are a little 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? And 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? Yes. So 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 under our Capital allocation policy of leverage between $2,000,000 $2,500,000 We are coming out of a very strong year in 2020. We generated Very strong cash flows and with the current guidance we're very confident in our future cash flows as well. So the strategy behind Renewing the NCIB as well as increasing the dividend is to return value to shareholders and maintaining that leverage level. So normal state, I would say, we would lever in that range of the 2% to 2.5%. I'm Fully confident that discussions that we're currently having with targets on M and A We'll come to fruition at what point in the year. We intend on being active on the M and A front. And that's why we're struck that way with our capital allocation. So the 2 different points is really Our steady state business and we're ready to lever off the table 3 times, which is well under our bank companies to be able to do an acquisition, which plenty to execute on what we have on the table right now. Okay. That's very helpful. Appreciate your time, Eric. My pleasure. Thank you, Walter. Your next question comes from hir Patel from CIBC Capital Markets. Please go ahead. Your line is open. Hi, good morning. Good morning, Hugh. For the mid to high single digit growth expected in poles and res lumber this year, how much of that is volume? So for the yes, We don't really quantify it. And there's lots we don't quantify. There's many assumptions behind it. Obviously, The pricing depends on where the pricing of lumber is going to go for the balance of the year, which currently our assumption is to maintain steady state. And then we have confidence in the volume. Look, if you need to use an assumption, I would probably say fifty-fifty and for the residential lumber And for utility poles, I would say something similar as well. Fair enough. That's helpful. And 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 The North American grid would play favorably with regards to demand just to support that network, maybe poles or different hardware items. So I think it would be positive more 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. So 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. And just last question for me. Sylvanna, could you maybe highlight if there are any major capital Projects in the budget for 2021? No. In terms of the guidance of the $50,000,000 to $60,000,000 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 projects. So I would say one of the more significant ones would be the ERP We continue as you know we're still in the implementation of that project. Other projects were also As Eric will mention in his priorities looking at the getting our customers and converting some of our cylinders for different Preservatives for our Penta replacement. So those I would say would be sort of the major CapEx. Your next question comes from Benoit Poitier from Desjardins. Please go ahead. Your line is open. Yes. Good morning, Susana, and good morning, Eric. Good morning, Benoit. Yes. Just with respect to the lumber inventory, obviously, Shmiti, 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 Spears, to meet strong demand in 2021. And given all the investment made toward the inventory in the last 2 years, Would you expect a reversal at some point? And is it more late 2021 or 2022? Well, it's a very good question. So obviously, the inventory volumes that we replenished for residential lumber in the Q4 and as well Q1 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 a year ago. So 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 2020 That being said, I think Stella Jones' strong balance sheet and strong financials enable us to be able to invest Inventories at that cost, which hard to say what our competitors' That's as far as that 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. Okay. And would it be fair to That kind of positive inventory reversal as we go through a more normalized years, let's say, Beyond 2021, Edith or Sylvanas? So there are 2 items at play there, right? So One to your point, if the prices and I hate quoting numbers, but if your prices are Decline, let's say, in the next 12, 18 months for lumber. Again, yes, that will pull it down. But then there's also another effect of Additional volume that we're gaining year over year and new plan on gaining as last year 2020, our team did a spectacular job Servicing our customers, the industry has acknowledged Stella Jones' capability and as a result, we've gained extra volumes, extra market reach if you want. So That additional volume would carry on in the future. So you have potentially 2 off not particularly offsetting, but 2 different A variable that could play against one another in the future. Okay. That's great color. And 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 lifestyle, it's Difficult to predict. What we're working off of is how we're working with our customers currently and what they're guiding. So I'm quite confident that by mid year, we should be By mid year, we should see a good part of our gain realizations. If you remember, May June 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 70%. So 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 be very healthy on the volume side. Okay. And 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 So the storms we saw in the U. S. Southeast, so When I say storms, there was snow, there was ice storms, there was intense cold. Can't say there were Events that require more poles or more railway ties, so 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 a week as there was no Power, no gas and so on. So, but I'll just say, no significant impact I would sell on the utility Slide, railway tie is we'll see how quickly we can catch up. Is it going to take the month of March or a bit early April to catch But 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 disruption in the transportation network, if you want. Okay. That's great. Thanks for the time. Your next question comes from Michael Tupholmes from TD Securities. Please go ahead. Your line is open. Thank you. Good morning. Good morning, Mike. Eric, 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? So the well, the margin assumption will vary between the low end and the high end, but call it, we like to aspire that we will maintain a 15% EBITDA margin going forward and items that could help improve that if you want to think that to consider We'd definitely be with COVID-nineteen 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 wrap holes. Obviously, right now, we're sort of in a positive trend, which Makes me quite optimistic about the remainder of the year. Following that, I guess, railway ties, I think we're relatively Stable with our demand. I don't see any significant swings in inventory cost And then 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 we know would adjust, But still those are things we need to keep in mind. Okay. And then just to be clear, when we're thinking about the EBITDA Guidance range and then 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 20 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 1 versus half 2? And I think you sort of I'm going to go 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. So 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 and you could go back to the lumber graph and figure that part out. But then in the second half, have very higher pricing, which With the closer to what we have today, we're still actually today a bit higher than the average of H2 for last year. So I would definitely think that for H1, we would see volume and pricing being strong contributors to our growth. And then 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 and they're still foreseeing a healthy second half of twenty twenty one, Which is encouraging and it's really to that level of expectation that we're actually procuring and preparing our season, obviously, the peak being in Q2, but obviously, the summer months and early fall are also very active months if the weather permits. Okay. But have you actually so you 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, are you taking more of a conservative stance at this point? It's really in our range, right, from the bottom to the top. I mean, the top range would bring us to a very strong year in both half of the year. Okay, got it. And then just maybe a bit of a sort of bigger picture question as it relates So 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. I mean, there's been talk for some time about how there was underinvestment in the North American American Infrastructure and Utility Polls area. We've seen good growth for some time calling for further growth. But Where do you think we're at in terms of addressing the need to replace the existing stock? So 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 1st 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. That's helpful. Thank you. And then just lastly, Eric, you did Briefly address sort of the prospect of M and A earlier in the call in the context of a broader question about capital allocation. But 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 and A pipeline, what you think could happen, etcetera. Right, well, so we intend to be active on the M and A front for 2021. Last time we had a discussion on the topic on our last call, it 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 ready to where we're going to pay, but I would add to that, that are That is not a headwind in our discussions. Things are moving positively. And that's what all I can say really, Michael, on that front. Our next question comes from Mona Nazir from Laurentian Bank. Please go ahead. Your line is open. Good morning and congratulations on results. Thank you, Mona. Apologies if you had answered any of the I'm just trying to juggle back and forth in details. But just on the residential side, I'm just wondering the mix of pricing versus volume. I think last quarter you had said it was 2 thirds versus 1 third. Could you provide what it was this quarter? And if not, could you please do so? So for Q4, Pricing was released at roughly 70% of the increase because your question is with regards to Q4, correct? Correct, yes. Yes, about 70% would be related to pricing year over year. 70% pricing. Okay, that's very helpful. And then you had mentioned growth in market share gains on the residential side just now in your commentary offsetting the 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 higher a bit higher than perhaps Home Depot, for example. I'm just wondering about the dynamics there. Yes. So the industry It sets its partnerships, if you want, in Q4 of every year. So right now, We know our partners and we have an indication for their volumes for 2021. So to answer your question, so We do have relationships in place to be able to support our assumptions on volumes. And as far as we can tell so far, The actual pull on their inventory is following expectations. Okay. That's helpful. And just lastly on acquisitions, I understand that you provided all the color in the last line of questioning. But Just size wise, it should be the acquisition should be comparable to your prior acquisitions that you've done historically. So like $30,000,000 to $70,000,000 ish in purchase pricerevenue. Would that be correct? That's a fair assumption, yes. Okay, perfect. And just in regard to the verticals, is pole still kind of the priority for you guys? Definitely a lot of opportunity in that one. I guess priority is simply because there's more But if something would come in the rail 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 Eric Bachand for closing remarks. Thank you for joining us on today's call. We look forward to speaking with you again at our next