Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to Stella-Jones' Q1 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 difficulties hearing the conference, please press star followed by zero for operator assistance at any time.
Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Thursday 7th May , 2020. I will now turn the conference over to Éric Vachon, President and CEO. Please go ahead, sir.
Good afternoon, ladies and gentlemen. I'm here with Silvana Travaglini, Chief Financial Officer of Stella-Jones. Thank you for joining us for this discussion on the financial results and operating results for Stella-Jones' first quarter ended 31st March , 2020. Our press release reporting Q1 results was published earlier this morning. It, along with our MD&A, can also be found on our website at www.stellajones.com and will be posted on SEDAR today as well.
Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. I will now begin with a brief overview of the first quarter. Today, we reported record first-quarter sales driven by strong growth across all product categories. Gross profit also grew as a result of higher sales, while EBITDA remained relatively unchanged compared to Q1 last year, as it was unfavorably impacted by diesel derivative losses.
Adjusting for these mark-to-market losses, EBITDA was CAD 70 million, reflecting a solid start to the year. Total sales increased 14% to CAD 503 million compared to CAD 441 million in the same period last year. Excluding the currency conversion effect, pressure-treated wood sales grew CAD 56 million or 13%, while sales for logs and lumber increased by CAD 3 million. Utility pole sales amounted to CAD 202 million, up from CAD 171 million generated in the first quarter of 2019.
Excluding the currency conversion effect, sales increased by a robust 17%, driven by both continued growth in replacement demand and improved pricing. Railway tie sales increased to CAD 172 million, up from CAD 162 million in the same period last year. Excluding the currency conversion effect, sales rose 6%, mainly due to higher sales mix.
Volumes remained stable as higher shipments to Class I customers were offset by lower volumes with the non-Class I customers, largely related to the timing of projects. Residential lumber sales reached CAD 71 million, up 25% from CAD 57 million generated last year, led by solid demand both in Canada and the U.S. Industrial product sales totaled CAD 29 million, up 16% from CAD 25 million recorded in the previous year's quarter.
This increase primarily stems from stronger railway bridge sales. Sales in logs and lumber, a product category used to optimize procurement, amounted to CAD 29 million, up CAD 26 million generated in Q1 2019. The increase is mainly due to higher North American lumber market prices for most of the first quarter compared to the same period last year, while volumes remained relatively unchanged. Silvana will now provide further details regarding our results and financial position before I conclude with our outlook for 2020.
Silvana?
Thank you, Éric, and good afternoon, everyone. Turning now to profitability. Driven by strong sales growth, gross profit increased 19% this quarter to CAD 83 million compared to gross profit of CAD 70 million in the first quarter of 2019. Despite the improvement in gross profit, EBITDA and operating income remained relatively unchanged compared to the same period last year at CAD 63 million and CAD 45 million, respectively, given a CAD 7 million mark-to-market loss recorded in the quarter for diesel derivative commodity contracts.
Excluding the impact of the mark-to-market diesel derivative commodity contract, EBITDA for the first quarter of 2020 was CAD 70 million, compared to CAD 60 million in Q1 of 2019, representing EBITDA margins of 13.9% and 13.6%, respectively. Net income for the first quarter was CAD 28 million or CAD 0.41 per share, compared to CAD 29 million or CAD 0.43 per share last year.
Adjusted for the diesel derivative contract losses, adjusted EPS increased to CAD 0.49 per share this quarter. Turning to liquidity and capital resources. Cash flow from operating activities before changes in non-cash working capital components and interest and income taxes paid was CAD 69 million in the first quarter. Together with an additional CAD 108 million of borrowings under our credit facilities, we used this liquidity to support the normal seasonal working capital requirements, largely in anticipation of increased demand during the peak period, specifically the second and third quarters.
Stella-Jones ended the first quarter in a healthy financial position with access to CAD 130 million in liquidity through a combination of cash on hand, syndicated credit facilities, and an undrawn demand loan facility. As at 31st March , 2020, Stella-Jones' long-term debt stood at CAD 766 million versus CAD 605 million three months earlier.
The increase mainly reflects higher working capital requirements as per normal seasonal demand patterns and the unfavorable currency translation effect of $54 million on U.S. dollar-denominated long-term debt. As a result, as of 31st March , 2020, the long-term debt to trailing 12-month EBITDA ratio was seasonally higher at 2.5 times. Yesterday, the board of directors of Stella-Jones declared a quarterly dividend of CAD 0.15 per common share, payable on 26th June , 2020, to shareholders of record at the close of business on 5th June . 2020 will be the 16th consecutive year of dividend increases. I will now turn the call back to Éric for the outlook. Éric?
Thank you, Silvana. While first quarter 2020 results were strong, the impact of the ongoing COVID-19 pandemic and the weaker economic conditions in North America on the demand of the company's core product categories remains uncertain. We have therefore updated our EBITDA guidance to reflect either no improvement or a slight decline in sales volume for utility pole, railway tie, and industrial products categories, and weaker demand for residential lumber compared to 2019. We now expect EBITDA to be in the range of CAD 300 million-CAD 325 million, down CAD 20 million from the previously disclosed range, and EBITDA margins to be lower versus 2019.
Our updated outlook is also based on a number of material assumptions, including the gradual lifting of government-imposed restrictions by the end of the second quarter, limited disruptions to our operations, no significant reduction in the demand for replacement maintenance programs of major railway and utility pole customers, limited impact on our cost of operations, and stability in the current US exchange rate.
Even as we adjusted our guidance, it remains in line with the CAD 313 million of EBITDA generated last year. While we remain in uncertain times, and that the impact of the current economic environment cannot be predicted, we believe that the resiliency of our business model and our solid balance sheet places us in a favorable position. We have the team, the products, the network, and the financial flexibility to continue with fortitude as the North American leader in the pressure-treated wood industry.
Our strategic vision focused on continental expansion remains intact, as we believe that the long-term fundamentals of each product category will remain strong. Our healthy position will allow us to continue to seek opportunities to further expand our presence in our core markets, both organically and through acquisitions to enhance shareholder value. This concludes our prepared remarks. We will now be pleased to answer any questions you may have.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from Hamir Patel of CIBC Capital Markets. Please go ahead, your line is open.
Hi, good afternoon.
Éric, good afternoon.
Could you comment on how your tie and pole volumes have fared in April, and have you seen any change in pricing for those two categories?
Hamir, I want to be cautious about giving April results as we're technically here to discuss Q1 results. If I refer back to our general outlook regarding if I took both of them individually, for railway ties, we've seen no major pullback from Class I customers, although we are seeing a bit of softness, thus, the reduction in volume that has been included in our EBITDA guidance.
With regards to utility poles, I guess the first thing that comes to mind really is the impact of the reduction of the price of oil. It has had an impact on any oil-driven projects or demand for utility poles that are related to those projects. Obviously, the current economic context and pandemic context has created a bit of softness of demand on projects that would require transmission and distribution poles.
Great. Thanks, Éric. That's helpful. Just turning to the res lumber business, quite a few R&R companies have pointed to very strong demand in the category. I'm just curious, given your exposure largely to Canada and I suspect Ontario and Quebec where lockdowns were more severe than the rest of North America. Have you seen your res lumber business regionally? Have you noticed some differences in April that you'd call out?
It's a great question. The government imposed restrictions, as you mentioned, on the construction business as well as on our customers, has created some challenges, I guess, for them to service their customers. I think the dealer network and the big boxes that we service have done an outstanding job trying to get product to the homeowners and to the renovators and the contractors. They've been able to do a great job in April, but we're now looking at the months of May and June, which are the two strongest months for us for decking and fencing. That's again, related back to our outlook. That's why we used a bit of softness or cautiousness in our volume.
It's difficult to predict how well our customers will be able to service the demand for the two peak months that are upcoming, knowing that there's some constraints around their ability to service clients.
Fair enough. Just a final one for me. Silvana, on the CapEx front, what would be bare bones maintenance CapEx for Stella?
The bare bones that we are estimating is CAD 20 million per year.
Okay, perfect. That's all I had. Thanks, guys.
Thank you, Hamir.
Your next question comes from the line of Walter Spracklin of RBC Capital Markets. Your line is open.
Yeah. Thanks very much. Good afternoon, everyone. Hope everyone is keeping safe and well. I guess my question comes back to CapEx budgets, starting with your railroad customers. I know that ties tend to be part of maintenance CapEx, and as a result, tend to have less variability. I know you've softened volume, but pretty much steady with last year in terms of your overall business activity. I know your competitors indicated at least one railroad is starting to cut their CapEx and perhaps if not cut tie purchases or deferring them. To what extent do you think a railroad can defer their capital investment in ties if they have to, and to what extent is your current volume reduction really a function of the reduction in growth ties as opposed to maintenance ties? Any color there would be very helpful. Thanks.
All right. Thank you, Walter. I'll try to answer the best I can. There was a lot in that question, and you can follow up if I don't hit all the topics you had there. Our volume right now, we're looking at maintenance, so let's call it no growth and all really to maintenance replacement. Most of our customers, to your point, on most of the Class Is have a CapEx budget that's set out for the year. The maintenance piece of it is typically a smaller part of it, and from what I understand, it's something that our customers like to execute throughout the year unless they really have to push it out. As you might have read, some Class I customers have actually stated that they would take the slowdown right now to increase some of their maintenance.
Try to answer, to think about your question with regards to how much can they push it out. They can certainly push it out, I assume, and I guess it would have an impact on their ability then to run certain volumes of trains or at certain speeds on their rail lines. Now most likely being a great opportunity to do some maintenance as they do have some downtime.
I guess in the same vein, a lot of companies across all sectors are looking at conserving cash. How would you answer that same kind of question with your utility customers? I guess safety is less of a driving factor of their motivation and one would argue that they have much more flexibility to defer any major reinvestment or maintenance CapEx on poles. How would you characterize your conversations so far to date with your customers on the utility pole side given everything going on with COVID-19? Thanks.
Our major customers that we have under contract, I would say during the month of April, have adjusted a bit internally their organization as we have. Some of them have slowed down slightly to adjust. Keep in mind that there's a lot of people working from home. It's kind of difficult to cut electricity to do maintenance, so they've been mindful of that. None of our customers have spoken right now about delaying CapEx. You're right that they could. They are in majority faced with aging infrastructure, and they're all mindful of executing that part of the maintenance. You do hit an important point is that utilities do service end customers that might have certain constraints on the cash right now, and so they might be a bit long.
Our utilities, our customers might want to preserve their own cash since their cash install might be slowed down, and that was part of a bit of a consideration when we looked at our volume to say, will some of the utilities sort of slow down slightly? we see that really as our assumption set really for the second quarter.
Okay. Appreciate the time. Hope everyone's keeping safe. Thank you.
Thank you, Walter.
Your next question comes from the line of Michael Tupholme from TD Securities. Your line is open.
Thank you. Good afternoon.
Hey, Michael.
Éric, first question just to clarify on the guidance of CAD 300-CAD 325 million of EBITDA. Does that include the unadjusted EBITDA of CAD 63 million from the first quarter in that number, or is it the adjusted number of CAD 70 million?
No, 63. I guess when we talk about it, we call it out, but we don't necessarily do adjusted EBITDA, so it's based off the CAD 63 million EBITDA. </edited_transcript
Okay. The derivative impact that you experienced in the first quarter related to the diesel contracts, I guess it's probably hard to call where oil prices go from here. At the same time, given that we're at pretty low levels, just directionally, is it fair to think about the situation for the rest of the year as a likely situation where if prices have risen off the lows and don't fall back down, we should not be seeing further mark-to-market losses in those contracts? Is that the right way to think about that?
Yeah, exactly. to your point, diesel prices have dropped significantly, and I think we've pretty much taken the biggest impact we could think of at this point in time.
In terms of the utility poles growth you experienced in Q1, your organic growth, very, very strong. Can you break that down in sort of approximate terms between how much of that was volume versus price? It sounds like both were a factor in terms of driving that growth.
Right. Yeah. As of the percentages, so obviously volume would've been a significant driver and pricing would come in second, call it a 60-40, 60 on volume and 40 on pricing.
Okay. when we look at the reduction in the EBITDA guidance that you announced, can you talk about which of your product categories would've been the greatest, had the greatest impact in terms of driving that reduction? It sounds like you're cautioning on volume, volumes kind of across all product categories. if it's possible to talk about, is there one or two that had a more significant impact in terms of driving the reduction in the EBITDA guidance you gave?
Right. The greatest volume decline, Michael, in scenarios that we're looking at both ends of that range are really with the residential lumber. As I mentioned earlier on a question, our customers have been challenged with different restrictions as far as being able to distribute. As you know, big box stores or hardware stores in Ontario were actually closed until not too long ago, and were only able to do curbside deliveries.
Although they've been doing everything they could possibly do to service their customers, there has been some challenges there. Construction has also been tied down in Quebec and Ontario, and there is some relief coming up. As we were going through our scenarios and potential volume adjustments, I guess residential lumber has the greatest exposure to volatility, I guess, in the volume that can be serviced to the demand.
Okay. I know you were asked about April demand and volumes earlier in the call. Just trying to get a sense, when you took the guidance down, you did give us some of your assumptions in terms of FX and other things, and you did talk about a gradual lifting of government restrictions by the end of the second quarter, so that's helpful.
As far as the reduction you took in the guidance, is that based on the kind of what you saw in April across the business in terms of any changes in demand, and you're sort of extrapolating that out over the rest of the quarter and maybe assuming it deteriorates a little further, or is this sort of all very prospective and you're just trying to take your best guess at what May and June are gonna look like?
The current pandemic and economic pullback, the pandemic hopefully will be short-lived. Economic pullback will most likely be a bit longer. As we took a look at all of our three product categories, we did a deeper dive through customer contracts and sort of tried to figure out if there were certain concerns or issues that could come to us in our sales.
That's truly how we went about it. We did use. Looking at, obviously, the future's quite unpredictable, so we had to make assumptions, and I guess if you want to pick a point in time, we did our forecast maybe 15 days ago, and then we worked with that set of numbers. It's based off of assumptions of what we were reading into the balance of the year at that point in time.
Sorry, based on conversations you'd had with your customers?
Well, conversations and our review of our customer base, exactly, and then trying to understand how demand could fluctuate in the current context.
Okay. That's helpful. Thanks. just lastly, as it relates to the outlook, there's no specific comment about any thoughts or changes in views on pricing. is it
Is it the case that your views on pricing and what that would have done and contributed for the business this year, are those unchanged or have you modified those in any way?
Well, two things actually. On the pricing front, and it's a good question. When we looked at our pricing for residential lumber, if you recall, at the end of the first quarter, there was a sharp decline in lumber prices in general markets. We used that assumption of that low pricing as being the standard for the balance of the year. We did at that point, using that assumption, assume that there could be some pricing pressures for the balance of the year.
Okay. Nothing on the ties and poles side in terms of updated assumptions there. </edited_transcript
Not on poles. We've had pricing gains last year, which obviously have slowed through into this year. The only item or thought I would add is on the railway tie side. We're seeing some more competitiveness on the non-Class I business at this point. There could be a bit of tightening there in the back half of the year.
Okay, great. That's helpful, Éric. Thank you.
The next question comes from the line of Mona Nazir of Laurentian Bank. Please go ahead, your line is open.
Good day, and thank you for taking my questions. Just firstly on the revised guidance, I'm just wondering what percentage is ultimately a sales reduction versus margin deterioration? Is there a heavier weighting on one of the sides or is it purely sales driven?
It's mostly volume, Mona. </edited_transcript
Okay.
It's mostly volume. You're right, there is a comment in there about a bit of margin erosion, and that's really driven by two things. One, what I just explained to Michael, Michael Tupholme about using an assumption of lower lumber prices in the market that could lead to certain price deterioration in the year and that we'll have to track. Also we're seeing some fiber cost increases on the utility pole side, which we had considered some increases in our original guidance, but the increases are a bit more than what we thought originally. Now we'll have to wait for the anniversary of the contracts if we want to be able to readjust the pricing. I just want to be clear on the margin side, there is a bit of that there, but the guidance is mostly influenced by volume.
Okay, that's very helpful. Not to belabor the point, but you just touched on having to reforecast and then reforecast and then re-reforecast in the current environment. When we're thinking about the guidance of CAD 300 million-CAD 325 million, and you touched on the residential side, and you haven't seen much decline on the tie side. It's for my own clarification, has there been some breathing room factored in, or is it just based on how things were sitting 15 days ago?
Well, the breathing room is really between the two extremes of the range, right? If our EBITDA for the year ends up at CAD 300 million, we'll have had significant headwind and the upper range, obviously we'll have not seen as many headwinds as you described. I guess the breathing room comes within the range.
Okay, that's great. just lastly from me, in the last call, you touched on your continued desire to grow via acquisitions. in the current context, we're seeing a lot of change. I'm just wondering if that still rings true or with guidance down, M&A is on hold or inversely if you could be opportunistic once this current COVID environment returns back to normal.
Right. Well, I think the guidance we provided today will lead and should guide everyone to the fact that we'll still be generating strong cash flows between now and the end of the year. The M&A projects that we had initiated, let's say earlier in the year in Q1, have been paused or slowed down simply because right now we can't travel. Due diligence is really restricted or face-to-face negotiations are obviously not happening. That being said, those projects we were working on are still very much alive and might be pushed out a quarter or two. There's still projects that we're looking at, and we do plan on utilizing our strong cash flow to be able to make better opportunity of available transactions. </edited_transcript
That's helpful. Thank you.
Thank you.
Again, to ask a question, you will need to press star one on your telephone keypad. Your next question comes from the line of Benoit Poirier of Desjardins. Your line is open.
Yeah. Good afternoon, Silvana. Good afternoon, Éric. Yeah, just to come back on the non-Class I railroads, you mentioned kind of a more competitive landscape these days, but are they taking advantage of the 45G infrastructure maintenance tax credit right now as a result?
Yes. Demand is healthy and we're definitely very active on the quoting front. What we've seen is, as we've been talking for the last two quarters, that we've been replenishing railway ties in our inventory to be able to drive, so has the entire industry. We're now seeing a lot of our competitors, the smaller treaters and the bigger players in our industry with inventory. Now wanting to, I guess, secure volume for the balance of the year, and perhaps the aggressiveness in quoting now comes from a bit more the fact there are uncertain times in current economic conditions. There's strong demand, but I guess the traders want to secure the volume for the balance of the year.
Okay, perfect. Okay. That's great color. When we look at residential lumber, I understand the potential softness that might come in your biggest months. On the other side, I was wondering if you believe that the pandemic might increase spending as more people stay at home this summer and look to invest in their backyard. Looking at pool sales, it seems that it's being up significantly year-over-year. I was wondering if it should, on the other side, provide a positive read-through for the residential lumber.
The demand from the homeowners is definitely there. Industry data on decking and fencing is showing strong demand for that raw material. It's definitely flowing through. We're being cautious in our approach, simply as we're coming into the two strongest months of the year. We're really hoping our customers can service all the demand to their customers with the constraints that's put on them right now. You're right. I'll say it differently. If tomorrow all the constraints are lifted and we're back in quote-unquote "normal business," I would say that there would be strong demand for residential lumber, and we would have good sales.
Okay, it's more a matter of logistic constraint as opposed to demand. Let's put it that way.
Yeah, of course. I mean
Okay
I referred to it earlier. Yeah, exactly.
Okay, perfect. Could you talk about the opportunity to enlarge your residential lumber sales through programs with non-big box customers? It seems that over the past month, you've received increased interest from non-big box customers. Are you still showing some momentum on that side?
Yeah. For the year, so we refer to those as the dealer networks or the non-big box, which is fine. We have secured volume for the year. Every year between the months of October and, let's say, late November, the volumes and the contracts get established between the hardware stores or hardware chains and the suppliers, in this case, would be us. We secured more volume in the dealer network for 2020 than we would have compared to 2019.
Okay, that's great. Is your guidance for CapEx CAD 45 million-CAD 50 million still valid?
Yeah. Well, Silvana has been doing a bit of work on that. Maybe Silvana, you want to give some color on that?
Yes. We maintain the guidance between the 45 and 55. There is maybe some reductions that we are seeing, but that's getting compensated by the FX. Overall, we're maintaining the guidance.
Okay. ERP system, would it be fair to say that the pandemic might have delayed this project a bit, or it's still running ongoing?
Well, the Webex and the Zoom of the world are very useful, and so far we've not delayed our timeline on the project. It's a fair question. There might come a point in time if we can't resume face-to-face meetings and exchange, there might be delays, but for now, we're holding our schedule.
Okay. Last one for me. When we look in terms of the working capital, I know there was a lot of inventory that was replenished back in Q4. Now that you expect volume to be a bit softer this year, how should we be thinking about the impact on the working cap, let's say, for the full year in terms of usage?
Yeah. Well, if we're talking specifically inventory, I would guide you maybe at around, let's say, a pull on cash about CAD 50 million, 50. I think it would be fair.
Okay. Perfect. Okay. Thank you very much for the time.
My pleasure, Benoit. Thank you.
There are no further questions at this time. I turn the call back over to the presenters.
Thank you for joining us on this 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 participating. You may now disconnect.