Earnings Call: Q3 2020

Nov 5, 2020

Earnings release

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Stella Jones Third Quarter 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. 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 Thursday, November 5, 2020. I will now turn the conference over to Eric Vachon, President and CEO. Please go ahead, sir. Good morning, ladies and gentlemen. I'm here with Silvana Travalini, Chief Financial Officer of Stella Jones. Thank you for joining us for this discussion of the financial and operating results of Stella Jones' Q3 ended September 30, 2020. Our press release reporting Q3 results was published earlier this morning. It, along with our MD and A, can also be found on our website atwww.scalajones.com and will be posted on SEDAR today as well. In addition, I'd like to mention that yesterday we published our 2019 Environmental, Social and Governance Report. It has been posted on our website as well. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Let me start by thanking our employees who continue to work diligently every day to service our customers during these challenging times. Their unwavering dedication combined with the proven resiliency of our business has helped deliver another record performance this quarter with growth in sales, EBITDA and cash from operations. The continued growth demand across most of our product categories and the exceptional rise in the market price of lumber led to an 18% increase in sales and as a result EBITDA rose to a quarterly record of $132,000,000 EBITDA margin also rose to 17.8%, a 2.6% improvement compared to the same period last year. During the quarter, we generated strong cash from operations, allowing us to continue to invest in our network, return cash to shareholders and reduce our leverage. We ended the quarter in a very solid financial position with ample liquidity in order to continue to drive sustainable growth for our shareholders. Let me now turn to a brief overview of our Q3 results by product category. Utility pole sales amounted to $252,000,000 up from 2 $16,000,000 generated in the Q3 of 2019. The increase this quarter is primarily driven by project related volume as well as higher pricing. The pricing improvement stems from upward price adjustments in response to raw material cost increases and better product mix, which includes the impact of greater fire resistant wrap pole volumes. Railway tie sales amounted to $189,000,000 down from $193,000,000 in the same period last year. Excluding the currency conversion effect, sales decreased $6,000,000 largely due to lower volumes from Class 1 customers as some of these customers had accelerated their maintenance programs in the Q2. The decrease in Class 1 volumes was partially offset by continued strong non Class 1 demand, which is supported this year by the availability of dry railway tie inventory. Residential lumber sales totaled $220,000,000 up 39% from $158,000,000 generated last year. The significant increase in sales was driven by the sharp rise in the market price of lumber and the continued strong demand from home improvement products during COVID-nineteen pandemic. Industrial product sales amounted to $34,000,000 down 6% from $36,000,000 recorded in the previous year's quarter, primarily due to the timing of shipments of product for rail related bridge projects. The logs and lumber sales, a product category used to optimize procurement was $49,000,000 up from CAD28 1,000,000 last year. This significant growth is mainly due to the higher market price of lumber throughout the 3rd quarter. Silvana will now provide further details regarding our results and financial position before I conclude with our outlook. Silvana? Thank you, Eric, and good morning, everyone. Turning to profitability. Gross profit increased 34% to $147,000,000 compared to gross profit of $110,000,000 in the Q3 last year. Similarly, operating income and EBITDA increased 45% 38% to $113,000,000 $132,000,000 respectively. The significant increase in profitability was driven by the exceptional sales price increases for residential lumber, which exceeded the higher cost of lumber given the rising market price of lumber throughout the quarter, coupled with stronger residential lumber demand and improved pricing, product mix and volumes for utility poles. Net income rose 46% for the Q3 to $79,000,000 or $1.17 per share compared to $54,000,000 or $0.78 per share last year. Turning to liquidity and capital resources. Cash flow generated from operating activities totaled $148,000,000 in the 3rd quarter compared to $124,000,000 generated in the same period last year. The increase is mainly due to improved profitability offset in part by an increase in taxes paid following the deferral of tax installments to the Q3 as permitted by COVID-nineteen tax relief measures. We deployed the cash generated to reduce our long term debt by $102,000,000 return $25,000,000 of capital to our shareholders through dividends and share buybacks and invest $14,000,000 in our network. In the quarter, as part of our normal course issuer bid, we repurchased 334,653 common shares at an average price of $46.04 Consistent with previous quarters, the Board of Directors of Stella Jones yesterday declared a quarterly dividend of $0.15 per common share payable on December 17, 2020 to shareholders of record at the close of business on December 1. As of September 30, 2020, the net debt to trailing 12 months EBITDA ratio decreased to 1.4 times and we had access to over $300,000,000 in liquidity through a combination of cash on hand, syndicated credit facilities and an undrawn demand loan facility. I will now turn the call back to Erik for the outlook. Erik? Thank you, Silvana. We revised our earnings guidance for 2020 to reflect our stronger than expected 3rd quarter sales growth in residential lumber and utility poles. We now expect EBITDA for 2020 to be in the range of $365,000,000 to $375,000,000 up from the previously disclosed guidance of $320,000,000 to $345,000,000 We also expect the EBITDA margin in 2020 to be higher compared to 2019. This revised guidance assumes full year exchange rate of 1.35. Capital expenditures are expected to remain in the range of $45,000,000 to $55,000,000 in 2020. I would also like to add some color for 2021. While the impact of the ongoing COVID-nineteen pandemic on the demand for the company's product remains uncertain. Based on the company's current expectation and assuming stable currencies, management is forecasting healthy sales for 2021. Utility pole sales are expected to increase in the mid to high single digits compared to 2020, while railway tie sales and industrial product sales are projected to be relatively comparable to those generated in 2020. The demand for new construction and outdoor renovation projects is expected to be strong in 2021, which should continue to benefit sales in the company's residential lumber product category. While the current context has created some headwinds, our M and A pipeline is active and we continue to pursue North American acquisition targets that will strengthen our position in our core product categories. The company's strategic vision focused on network efficiencies and continental expansion remains intact. We believe that the long term fundamentals of each product category will stay strong. We are committed to delivering sustainable long term value to our shareholders and our healthy financial position allows us to take advantage of internal growth and acquisition opportunities as well as return capital to shareholders. This concludes our prepared remarks. We will now be pleased to answer any questions you may have. Your first question comes from Hamir Patel of CIBC Capital Markets. Your line is open. Hi, good morning. Good morning, Amir. I think logs and lumber was quite a bit higher than we expected. I know it's usually a very low margin category. But just given the sharp move in lumber in the quarter, was there a meaningful EBITDA contribution there this quarter? It's a very good question, Amir. So the price did increase because of the market prices. So you understand those dynamics. But we did realize a bit of margin in that product category this quarter. Nothing, I would say, material, but it did help the bottom line. Okay, great. Thanks, Eric. And your Q4 guide seems to be implying around $50,000,000 to $60,000,000 of EBITDA. I'm just curious what sort of year over year comps that might be building in for res lumber. It doesn't seem like your treated prices have yet come off with your largest retailer. So and all indications are volumes are likely still going to be up year over year. So what assumptions do you have there? Great. Well, a few items there to call out. I would say now that we've got October behind us, I do have a strong feeling that we'll end in the upper part of our guidance at this point. With regards to residential lumber, keep in mind, you're completely right that our sales prices to our customers in Canada will trend downwards at a slower pace than what we've seen in lumber market prices. However, we also have a good portion of our business in the U. S, which adjusts every week or on a regular basis to market prices. So that has a bit of that downturn effect. Also remember that although we do expect stronger volumes in the residential lumber for the Q4, it's not our highest quarter as far as volume goes. Couple of other things I'd like to point out is that although we'd had strong sales in our utility pole business in the 3rd quarter, As we say in our MD and A, it was generated by project related volumes, but also with the sales of more fire resistant utility poles. The maintenance piece of it was actually slightly down in the quarter, but it was offset by demand that was driven by West Coast wildfires and storm events. So we're still seeing a bit of spotty demand on the maintenance front in the Q3. It has gotten better than what we've seen in the Q2. But the uptick, I guess, in COVID cases that we've seen in the last month have still creates a bit of that cautious cautious approach. And last but not least, I just want to point out that we do expect higher year over year SG and A expenses in 2020 and essentially stemming from the fact that we're in the midst of our ERP implementation and we are incurring some one time costs as far as staffing and to be able to proper support the project transition. Okay, great. Thanks, Eric. And just a final question for me. For 2021, before any potential M and A, do you think total EBITDA next year could be in line or higher than the $365,000,000 to $375,000,000 range that you're guiding for this year? So I mean, I'd like to point out that actually next week, I'm meeting with the whole team at Stella Jones and C and A virtually as we're doing our budget planning for next year. It's a bit early to come up with that guidance, but I like the fact that you're thinking it could be similar or a bit higher. But I don't want to, at this point, jump into it. We'll be quantifying that a bit better in our when we've come up with our Q4 results. Fair enough. Thanks, Tarek. That's all I have. My pleasure, Hamir. Your next question comes from Walter Spracklin of RBC Capital Markets. Your line is open. Thank you very much, operator. Good morning, everyone. Good morning, Walter. So I was wondering if you could perhaps guide us a little bit on your visibility into residential lumber. I know you've kind of can you talk a bit about what your how far out do you see with a good degree of certainty how sales are coming. The reason I ask obviously is with the big boom that we've got in renovations and so forth in construction that where can you and at what point can you start to see that level off or come down on as we go through the pandemic? Is this a number of is it weeks? Is it months? Just curious to hear your thoughts on how much visibility you have in that segment. Certainly, Walter. So in talking with our major customers for that product category, they are indicating a strong year for next year volume wise. To be fully transparent, they actually look at it 6 months at a time and they're providing guidance that H1 next year would be stronger than H1 of 2020. So that being said, we're actually now adjusting our capacity and our workforce to be able to address that demand. But so our guidance really comes from discussions that we're having currently right now with our customers. But we're also in the process of, I guess, firming up the program for 2021. So there's lots of discussion going on with current customers and potential customers. I guess I would like to point out that our ability to service our customers in 2020 has gotten us a lot of credibility in our industry. And I would say that although Q3 was not an easy quarter, we had challenges with procurement, but we were able to supply our customers. And as a result, we have a feeling that with the current inquiries that we have an opportunity to increase our market presence. So that also would contribute to the volumes into next year. The pricing piece of it, obviously, as I discussed with the previous caller, will tend to drop compared to what we're seeing today, but it drops at a much lower rate. So it will enable us to sustain margins. That's great color. Moving over to ties, covering the railroads, we're keenly aware of a lot of congestion now spiking demand for transportation services in general. Generally, that doesn't allow for a lot of work to be done on maintenance repair understanding that this is a vital and an important part of safety. I know it can't be indefinitely deferred, but I'm wondering if in an average year where you might see some variance year to year in the amount of ties replaced in a given year, could we with the recent congestion and significant demand see it at the lower end for your customers given that congestion? So for the Class 1 customer, 2020 would, I would say, would be the low end as far as what we've seen in many of the recent years. A couple of weeks ago, at the Railway Thai Association conference, most of the class ones presented or provided in the indication for their 2021 maintenance in terms of volume. And it's pretty flat. It's comparable year over year. And that was part of how we deal our guidance for next year. That being said, I agree with you. Actually, what I I agree with you that there seems to be a pickup in traffic, which is typically a good thing. An increase in revenue over the midterm would indicate most likely a bigger appetite to increase maintenance programs. So that's how we're viewing it right now. That makes sense. Last question here, Eric. Looking at your shareholder return policy, obviously having a very strong year here this year, looking at another strong year next year, Does this change at all your capital allocation if you look at how you distribute free cash flow after your growth CapEx, when you look at buying back stock, dividend increases and potential M and A, judging by the pipeline you're seeing in the M and A side now, how would you expect free cash flow post CapEx to be divided up as you go into 2021? Well, obviously top of mind is the M and A. And I know we've it looks like we will not have an M and A in 2020, although we are working on a project right now and in discussions with a couple of other targets. That being said, it is top of mind. And when we say we want to expand our network and grow our North American presence, there's still opportunities for that and the opportunities are within reach. So that being said, it's always top of mind. To answer a bit better your questions, dividend is something that we discuss with the Board. The Board has a commitment of revisiting the dividend and have a continued approach in increasing it. I can't speak for them, but given the strong cash flows, I think my recommendation will be to increase it. We'd also like to provide our shareholders a bit of the benefit of the fact that we're buying back shares. So for the same absolute dollars of dividend, we should technically be able to provide a higher dividend per share since there's less shares. So that's the way we're viewing it. And last but not least, the NCIB. So we've reinitiated our program in last August, and we do intend to run it as a continuous program. So something that we don't want to do a fast sprint in the short term just to spike it up. I think we want to run it as a regular program and keep deploying capital that way. That makes sense. Appreciate the time as always. Thank you. My pleasure, Walter. Your next question comes from Mark Neville of Scotiabank. I guess my first question, it's just around the guidance. I guess I'm just trying to square Q4 to the 2020 outlook. I guess if my math is correct, the implied guidance for Q4 EBITDA is roughly flat year over year. Again, I would think residential is still up. So I think that would imply poles and ties are down. And you can correct me on that if I'm wrong. And then the 2021 outlook for poles suggests sort of mid- to high single digit growth. So it just seems a little again, I'm just trying to it seems a little counterintuitive or a little, but I'll try to square that. So if you can help me with that, I'd appreciate it. No, certainly. So for Q4, I mentioned earlier, so there's a few drivers there. I guess one of the items that could be unexpected is the fact that we'll be having higher SG and A expenses. So that does drive the percentage down. If you compare the percentage to 2019, I would argue that 2019 EBITDA margin as a percentage was much better than previous years. So I know we've been increasing pricing on poles and so on over the last 3 years to get better margins, but we're still comping against a strong year. Last but not least, there's a bit of the in our guidance, as I explained for the maintenance on utility poles, it's still uncertain the impact of COVID there. So we had a bit of a flattish approach there. With regards to 2021 guidance for poles, I believe was the last part of your question. We do expect to see more of the fire resistant poll volumes to increase. So that would be a good additional contribution if you want to our annual volumes. We do expect maintenance to with our customers to resume for regular maintenance programs and we still see some healthy demand there as we have for the last several years. And I would also argue that our market reach for utility poles is growing every year. We tend to be very competitive and be able to perform to win new customers over. So that would be a bit of the thought behind the guidance. Sure. And the mid- to high single digit for pools, that's volume? Or that includes pricing? That would be both. Yes. Sorry, it's yes, okay. Okay. And then I guess the fire resistant pulp volume, is that I mean to you, is that sort of more special project or is that sort of capture a portion of replacements as well? How should we think about that? So it no, it does it is part of the replacement. As we were looking at, I guess, your 3rd year of wildfires on the West Coast this year being the most significant one, It's not really a special project now. It's part of our customers' matrix when they look at what they want to order, when they look at the region where they're going to install new poles, one of the line of questioning is, is it an area that is subject to wildfires and should we put or not the fire resistant poles? So that's for those customers, but we're also gaining a lot of interest from other customers in North America for the same product. Okay. And I don't know if you can share, but like roughly speaking, like how much higher is the price point on that? No, you're completely right. We don't provide some indication. It is a value added product, obviously. And since it has it's more than a pull, obviously, there's the mesh that goes around it, there's the labor. So it's obviously a higher priced item. Okay. Maybe just one last one. Sorry, the G and A in the Q4, is that sort of a one time thing? Or is that like a structural increase? Or is it like catch up on comp? I'm just curious what that is. No. Well, there is a bit of catch up on comp, but we're seeing that in our Q3 year to date numbers as well. It's really more in line with the efforts that we need to put in to support our the implementation of our new ERP system. And you're completely right in that. So we could see a bit of that. We will see a bit of that into next year and then it will curtail. Okay. All right. Thanks for taking my questions. Appreciate it. Thank you. Your next question comes from Mona Nazir of Laurentian Bank. Your line is open. Good morning. Congratulations on the quarter. I'm just wondering if you could provide some greater insight into the residential strength, which continues to be significantly ahead of large home improvement players. If I was to break out the 39% growth between volume and pricing, how are those 2 kind of levers sitting currently sitting in Q3 or announced sitting currently? Yes. So to be clear, you're talking year to date for the 1st 9 months of 2020? Whatever clarity you could provide. Okay. I was referring more to yes, I was referring more to Q3, but if you want to give me the whole year to date, that's great. And I can give you both. So for the quarter, I would say 75% is pricing and 25% is related to volume. But for the 9 months of 2020, I would say a third of it is related to pricing and 2 third is related to volume. Okay. That's much appreciated. I'm grateful for the insight that you provided into the discussions that you're having with the customer on the residential side, Because when I'm thinking about residential growth, even anecdotally, to me not everyone is putting in new fences every year, even if work from home continues as there's some longevity to the products. You spoke about increasing your market presence. I'm just wondering, does that mean you're potentially moving more into the U. S. Or you're going to be keeping the kind of same footprint as you've had? So the interest in our product offering and remember that in the residential there is treated lumber as well as accessories, which is like composite decking and stair triggers and rail guard systems. So the interest in our product offering has significantly increased through the year as we've been getting a lot of calls from, I would call them, non current Stella Jones customers looking for pressure treated lumber this year. And obviously, we service the customers that had agreements with us for the 2020 program, but a lot of these potential partners are calling us up now as we're scheduling our 2021 programs and would like to become a partner with Stella Jones. That being said, there are current customers of which we don't have 100% of the demand, which we've serviced extremely well this year. Our customer satisfaction is very high. And therefore, we're also potentially looking at increasing our part of the program with them for next year. Okay, perfect. Thank you. And just lastly for me, we saw significant reduction in leverage on a sequential basis. I know M and A was on hold just given some uncertainty, we're now 8 months in from initial COVID shutdown. I'm just wondering if there's greater comfort surrounding financials of targets, the due diligence process. And I know that you mentioned M and A is the area that you want it's the first area where you want to put some capital towards. I'm just wondering if those targets have changed over the last, call it, year to date? Yes. So the targets have not changed. Although we're still living with the presence of COVID in North America and daily numbers either stable or tend to increase. We're I guess in general terms, I'd like to believe we start learning how to live with that in that context. So that's what's driving forward the business. It might be at a slower pace, but we're having regular exchanges with potential targets. So some due diligence is moving forward and it's taken its own course, but things are progressing. Did I answer it if I want to? Yes, that's perfect. Thank you. Your next question comes from Benoit Poirier of Desjardins Capital Markets. Your line is open. Good morning, Eric, and good morning, Susana, and congrats for the good quarter. With respect to the previous question, the 75%, 25%, I think you were referring to the mix between volume and pricing on the residential lumber, right? It's for the year, yes. So it was 25% for the 9 months, 25% no, sorry, that was for the quarter. I apologize. Yes, exactly. Let me say that over again. So for Q3, 25% was volume increase, 75% was pricing. But for the 9 months of the year, it's reversed if you want. It's 33% on pricing and 66% on volume. Okay. And now, Eric, I know you've been looking at growing your exposure to non big box customer. Now you have a better network to serve the better value. So I would just be curious about how the mix between big box and non big box customers has evolved? I like your definition of big box, right, because some bigger retailers consider themselves big boxes. But if we think about national banners, if you want, like significant players in the market, it's still a very strong mix. We do sell to certain buying groups and to smaller banners, but I would say it's very heavily weighted towards a select few national national banners. Okay. But did you see the same strength from the non big box retailer in the current market condition? Definitely. You're definitely right. Look, to be honest, we also we will deal directly like certain independent owners that owns 10 stores, we'll deal directly with because it's good volume if regionally makes sense where our plants are. And the strong demand has been across the border. Okay. And could you talk, Erik, a little bit about the market dynamics in U. S. Residential lumber and whether the strong performance you've been able to view in Canada, whether it could help you to better tap the U. S. Market eventually? Well, we're definitely seeing as in Canada, when I look at our U. S. Business, we're definitely seeing increased interest in our product offerings. The limitation there, I would say, is that we only have one facility in the U. S. That produces residential lumber in the Northwest. So and we've actually taken steps this year to increase the capacity at that facility to be able to produce more residential lumber. But to grow it significantly, we would need to add more production assets. Okay. And with respect to the sourcing of longer, could you talk a little bit about your ability to secure lumber for next year and also your ability to ramp up production? And maybe, Silvana, how we should be thinking about working capital changes going through Q4 and next year as you rebuild the inventory? All right. Thank you, Vanessa. I'll take the first part, and I'll let Sylvain answer the second part. So yes, it's a great question. As procurement has been a key in the last 6 months and it's the great relationship with our customers that has enabled us to properly read the market. We might have paused maybe a week in early April as far as procurement and a question like is there a market and how is this going to be driven. But we quickly got great market intelligence and we turned around and we never stopped buying lumber, which never got us out of the pecking order at the sawmill. So we've maintained our strong relationships throughout this through the pandemic with the sawmills as we've been consistently buying from them. And that has helped us actually through the Q3 to be able to procure lumber to be able to treat and sell to our customers. I'll be honest, if I could have procured more lumber, I would have sold more in the Q3. But that being said, it's been a great quarter. And going forward, the relationship we've built and been able sustain in the last month is carrying forward. So on that front, I don't see significant issues to be able to procure sufficient lumber. Again, that goes back to the partnership we have with our customers because as we're trying to build inventory for 2021, there's a mix there of higher priced lumber and lower priced lumber. So as we're averaging down, our customers are working with us as well, which is greatly appreciated. With regards to capacity, we've increased our ability to treat more at 3 of the facilities in Ontario, which has been greatly helpful. And we're currently structuring workforce to be able to add some production shifts through the whole of 2021 to ensure supply to our customers. I'll let Sylvana talk about working capital. Yes. So for the Q4, Benoit, we're still expecting an inventory build of about $15,000,000 This is to support both the growth that we're expecting in residential lumber and in utilities. It might be a little bit more limited depending on how the lumber demand continues to be. We saw it fairly strong in October. So the build might be a little bit more limited for residential lumber. But overall, we're still forecasting about $50,000,000 This is for the inventory build. Just always keep in mind that our working capital in Q4 is also highly impacted by the drop in AR. As you know, we do collect a lot of the higher sales of Q3 and while we have much lower Q4 sales. Okay, okay. That's great. And when you look at the fire retardant revenue related to the fire retardant mesh technology? And where do you see that market or opportunity evolving in the next 5 years? So Benoit, it's I was going to say it's hard to quantify, but I actually want to say I don't want to quantify because we don't disclose that level of detail. Needless to say, there is interest. It's a proven product now. Some of the poles that were installed earlier in 2020 actually were subject to the wildfires. I can report that they're actually very well performed in an actual situation, which is unfortunate. But we do have the proof and the testament that the product works. So it's I guess it's not a gadget that we're selling and that it's going to go away in 2 years. I think it's here to stay. It's something that's proven. It works very well. So it will grow over time. So this quarter, we're starting to introduce it in our discussion because you'll be hearing more about it. Perhaps you could ask me that question next quarter. I might be able to quantify a bit better as right now I have a sense of what we can do with this product next year. But as I said, we have our budget meetings next week and I'll have I'll be able to button down a number a bit more tightly. Okay. That's great color. Thanks for the time and congrats again. Thank you, Benoit. Your next question comes from Michael Tupholme of TD Securities. Your line is open. Thanks. Good morning. Good morning, Mike. Eric, I don't know if you covered this already, but the breakdown of utility pools growth in the Q3 between volume and price, was that already provided? And if not, can you provide that? No, it wasn't asked. And it's about fifty-fifty, 50% pricing and 50% volume. Okay, great. Thank you. And then, you had mentioned that the maintenance demand piece has been somewhat sluggish. I gather this is still sort of due to COVID and a reluctance to have holding back, I guess, a little bit in terms of some of the crews. Is that what's driving that sluggish demand? Yes, exactly. And that was, as I explained earlier, was offset by demand that was prompted by replacement or should I say now reconstruction demand for that was generated after the wildfires and the storms in the Southeast U. S. Okay. And so the sluggishness on the maintenance side, if I can give that turn again, does that create a pent up demand type of dynamic whereby you think there's some catch up to occur? Or is it simply once the crews are able to get back out and they ramp back up, it just sort of carries on at a more normal pace? Well, first, I think there's a lot of willingness from our customers to start doing some maintenance because it's part of their planning, it's part of their budget and they need to execute it. So we're definitely seeing willingness to sustain that activity. Every year, we forecast some growth in volumes. Could that be a bit higher because of pent up demand or some of our customers wanting to get the work done within their budget or their fiscal year? That could be. But nonetheless, if our customers' objective is to reduce the average year's average age of the poles, We'll get to it eventually. So if it's not catching up next year, it might catch up over 24 months, but that means we'll get done. So I'm not concerned that volume demand is not going away. Okay. And then similar to my first question, which was about the split between volume and price on the in the Q3 for poles, When we look at your outlook for 2021 and you're talking about mid to high single digit type of growth for poles, Can you provide some indication as to how that would be broken down between volume versus price? Yes, we don't I don't have that detail right now as I have high level guidance for what we believe is going to be our results next year. But it's really in the next 2 weeks where we're going to do the deeper dive and have that mix. But I would tend to say that there is going to be volume in there and there is going to be pricing as we keep seeing fiber cost increases. So that will play in the mix as well. And then obviously, there'll be a healthier mix, I would say, next year for the fire resistant wrap holes. Okay. On the comment about higher SG and A, to be clear, is that being driven exclusively by the ERP costs? Or is there anything else driving that? Well, year over year, it's largely the ERP. Obviously, we do have a profit share program as we're having a successful year, that those provisions will obviously be adjusted get adjusted. But percentage wise, it just fit into the historical. So I would say it's largely driven by the ERP. Okay. So and then on that those ERP costs, is there any way to provide a bit of context around the magnitude of those costs on a quarterly basis? How long they last? And have we are did we already start to see those in the Q3 such that when we get into next year and we're looking backwards, they'll already be in there for sort of half the year and it's just really the other half that we're comping against a tougher comp or just trying to kind of put all this into perspective? No, no, certainly. So we did start seeing some of that in the Q3 of this year. I would indicate that you'll be seeing actually something a bit stronger as far as expenses in the Q4. So it would definitely be higher than what we've seen in Q3. The Q4 levels, I would say, would hold throughout of next year and then get curtailed at the end of next year or I would say early 2022. So and it really comes back to extra headcount that we need to support activities as we're freeing up employees to do the project, costs that we cannot capitalize on the project because the accounting policy do not allow us to do so. So it's driven by those type of expenses. Okay. And I haven't had a chance to maybe look through everything in as much detail as I'd like. But is this quantified in your disclosure documents? And if not, can you provide some sense for order of magnitude for on a quarterly basis? No, we don't quantify that necessarily, Mike. And I guess we'd be addressing that when we come out with our quantified guidance for 2021 next quarter. Okay. Even just how much the ERP is per quarter? I mean the extra cost that you don't have that, but you can't provide that at this point? Thinking could be, call it, dollars 2,000,000 to $3,000,000 per quarter. Okay. That's helpful. Thanks. And then I guess just lastly, and it relates to all of that higher level though, if you look at the margins for 2021, for 2020, you've suggested you expect to be able to have comparable margins year over year. But if we look out to 2021, I guess you've got this little bit of this headwind here from these ERP costs. It sounds like you feel confident in your ability to hold the margins in on residential lumber even if pricing comes off. Just any I don't know, is there any I know you're in your budgeting process, but any preliminary thoughts on margin performance next year relative to this year considering these ERP headwinds? Yes. Well, first, Michael, our guidance for margin for this year is to be stronger than 2019. So because year to date, we're sitting at 15.6 percent. Then I'm sure you'll be doing the math, but I'm sure you'll end up most likely in the high 14% for this year. I would suspect 2021 to be similar. A couple of factors. I do think we'll be able to sustain margins on residential lumber as we're dropping, I guess potentially dropping our pricing next year as a step function and it will be in line with our costs. Although there will be additional expenses that's in the SG and A, we will not have those these expenses we incurred this year related to the diesel hedges because we don't adjust for EBITDA. So those will be adjusting. So I do believe that we could end up with similar margins next year. Okay. I appreciate that. And sorry, Eric, I didn't realize you had changed your guidance to higher. That's okay. Not a problem. I misspoke there. Apologize. Not at all. That's all for me. Thanks. Thank you, Michael. Your next question comes from Maxim Sytchev of National Bank Financial. Your line is open. Hi, Eric, Silvana. Good morning. How are you? Good morning. Yourself? Good, good. I just was wondering if it's possible to provide a clarification on if you can quantify the EBITDA impact due to the gains on sale of inventory in the lumber business? I mean, obviously, there is a lot of volatility from a pricing perspective. Yes. So we don't detail margins and EBITDA, but I don't know when you joined the call, but for the quarter, we did guide that it was 25% or margin gain was 25% related to volume and 75% related to pricing. Yes, yes, yes. I heard that. Yes, thank you. That's very helpful. Thank you very much. And then in terms of circling back to M and A, I was wondering if you could quantify some of the potential targets that you guys are looking at and maybe verticals of the most interest? I mean, I understand, obviously, it's a fluid dynamic, but any color you might provide there, if it's possible? Yes. Well, it's The targets we're looking at, I'll say, are range between and it's a wide range, I would say, between $30,000,000 and the $90,000,000 kind of range. And obviously different sizes of customer of potential targets there. But as long as we haven't negotiated a transaction, it's difficult to pinpoint. Right. Okay. No, that's helpful. And any appetite on the resi side? Or you're really looking at sort of the ties and retail side of things? I'm sorry, residential lumber. I think as I said, as we're adjusting capacity in Canada, we're I think we're very well served with our network of plants. In the U. S, it's really a function of being able to get customer contracts, if I could, for lack of a better word, I know they're not multiyear contracts, but they're contracts Building new capacity would just add, I would say, a 3rd player. I think there are 2 significant players in the U. S. Market. If we want to position ourselves as a 3rd player, we'd be creating a lot of pricing pressures in that market. So I think it's to your point, it's most likely related to M and A. Then the next question that comes to that is to the U. S. Market is residential lumber business is really a commodity driven business with a margin profile that is more similar to building materials, I guess, on the EBITDA and multiple side, which is not really what we've been able to achieve right now with our current residential footprint. So it's a big question because there's lots of thought process that needs to go behind that and understand what the impact would be on our multiples going forward for such a transaction. For sure. Okay, excellent. I just want to double check and great color. Thank you very much. Thank you very much. There are no further questions at this time. I'll turn the call back over to the presenters. Thank you for joining us on this call today. We look forward to speaking with you again at the next quarterly call. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.