Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Stella-Jones' first quarter 2019 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 during 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, May 2nd, 2019. I will now turn the conference over to Brian McManus, President and CEO. Please go ahead, sir.
Thank you. Good afternoon, ladies and gentlemen. I'm here with Éric Vachon, Chief Financial Officer of Stella-Jones. Thank you for joining us for this discussion of the financial and operating results for the company's first quarter ended March 31st, 2019. Our press release reporting Q1 results was published earlier this morning. It can also be found on our website at www.stella-jones.com and on SEDAR. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Before we begin, I would also like to remind you that on January 1st, 2019, the company retrospectively adopted IFRS 16 leases but has not restated comparatives for the 2018 reporting period. Please refer to the MD&A for further details. Let me now begin with a brief overview of the quarter.
First quarter results demonstrated strong sales and profitability growth, which were primarily driven by the sales price and market demand increases in the utility pole and railway tie product categories. Our results also benefited from acquisitions completed last year, coupled with currency conversion effect. These factors were partially offset by lower lumber costs, which impacted sales in the residential lumber and logs and lumber product categories, but benefited our overall margins. Total sales in the first quarter amounted to CAD 440.7 million, up 10.5% over sales of CAD 398.8 million last year. Excluding acquisitions and the currency conversion effect, sales increased approximately CAD 11.7 million, or 2.9%. Net income for the quarter was CAD 29.5 million, or CAD 0.43 per diluted share, compared to CAD 23.1 million or CAD 0.33 per diluted share last year. We also continued to follow our strategy of continental expansion by completing one tuck-in acquisition in Ontario last month.
Shelburne Wood Protection further expands our network of residential lumber treating facilities in Canada. In a moment, Éric will discuss the financial performance of the company in greater detail. Looking at the first quarter results by product category, utility pole sales amounted to CAD 170.5 million, up 11.5% from CAD 153 million last year. Excluding the contribution from acquisitions and the currency conversion effect, sales grew 6.2%, primarily driven by increased sales prices, coupled with a healthy demand in the Southeast U.S. Railway tie sales reached CAD 161.4 million versus CAD 146.4 million last year. Excluding the currency conversion effect, railway tie sales rose 4.5%, driven by price increases. Residential lumber sales reached CAD 57.6 million, up from CAD 50.3 million last year. Excluding the contribution from acquisitions and the currency conversion effect, sales decreased slightly by about CAD 1.4 million.
This variance is primarily explained by lower demand due to unfavorable weather conditions in Eastern Canada, as well as reduced selling prices due to the lower lumber costs. industrial product sales amounted to CAD 25.5 million, up from CAD 20.8 million a year ago. Excluding acquisitions and the currency conversion effect, sales were stable. Finally, logs and lumber sales stood at CAD 25.7 million versus CAD 28.3 million last year. Excluding acquisitions and the currency conversion effect, sales decreased by CAD 2.9 million. This variance is a result of reduced selling prices due to less expensive lumber costs coupled with lower lumber transaction volume. These factors were partially offset by stronger log sales generated as part of the increased harvesting activities to procure raw material to support strong pole sales. Éric will now provide further details about our first quarter results and financial position. Éric?
Thank you, Brian. Gross profit amounted to CAD 69.9 million or 15.9% of sales in the first quarter of 2019, compared with CAD 59.8 million or 15% of sales last year. The increase is explained by greater sales volume and higher selling prices. These factors were partially offset by higher cost of untreated railway ties and certain untreated species of poles. EBITDA stood at CAD 63.8 million or a margin of 14.5% versus CAD 44 million or a margin of 11% last year. The increase in EBITDA is explained by increased margins, the adoption of IFRS, which effectively subtracted CAD 7.8 million of right-of-use asset depreciation and CAD 1 million of financing expenses from cost of sales, as well as a non-cash mark-to-market gain of CAD 4.4 million on derivative commodity contract.
As mentioned last quarter, a portion of the loss experienced in Q4 2018 for these commodity contracts was reversed in Q1 2019. With IFRS 16, it becomes difficult to compare our EBITDA to last year. As a general rule of thumb, you can subtract the reclass from cost of sales, in this case, CAD 8.8 million, from our Q1 2019 EBITDA to make it comparable. Operating income stood at CAD 45.7 million or 10.4% of sales in the first quarter, compared to CAD 35.5 million or 8.9% of sales last year. Net income for the first quarter of 2019 was CAD 29.5 million or CAD 0.43 per diluted share, up from CAD 23.1 million or CAD 0.33 per diluted share last year.
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 reached CAD 60.8 million in the first quarter, up from CAD 45.6 million when compared with the same period last year. Cash flow provided by operating activities used CAD 75.9 million in liquidity versus a use of CAD 64.6 million last year. This variation is primarily explained by normal seasonal working capital requirements in anticipation of increased demand during the peak periods, specifically the second and the third quarters. Our credit facilities were used to support this investment, as well as purchases of property, plant, and equipment for CAD 8.2 million and share buybacks for CAD 5.8 million. As of March 31st, 2019, our long-term debt, including the current portion, was CAD 601.7 million versus CAD 513.5 million as of December 31st, 2018.
The increase mainly reflects higher working capital requirements as per normal seasonal demand patterns, partially offset by the effect of local currency translation on U.S. dollar-denominated long-term debt. Finally, the board of directors of Stella-Jones yesterday declared a quarterly dividend of CAD 0.14 per common share, payable on June 27th, 2019, to shareholders of record at the close of business on June 6th, 2019. I will now turn the call back to Brian for the outlook. Brian?
Thank you, Éric. Our outlook has not changed since the last quarter. For 2019, based on current market conditions and assuming stable currencies and the current level of lumber prices, we expect higher year-over-year overall sales for Stella-Jones. This increase is driven by stronger pricing for railway ties and utility poles, as well as increased market reach for the residential lumber and the utility pole product categories. We also expect improved year-over-year margins across all product categories. Higher margins will be primarily driven by increased pricing and volume for railway ties, coupled with improved product mix for utility poles. More specifically, in the utility pole category, sales and margins for 2019 are expected to increase year-over-year, driven by both pricing and strong demand for replacement programs and increased project-based sales.
In the railway tie category, sales and margins for 2019 are expected to increase year-over-year, primarily driven by pricing. We believe that the increasing cost of untreated railway ties, combined with a tighter supply market, will lead to continued upward selling price adjustments for the quarters ahead. In the residential lumber product category, sales for 2019 are expected to be stable year-over-year, as higher demand and market reach are expected to be offset by lower selling prices to customers as a result of lower lumber costs. Finally, it is important to highlight that sales for the logs and lumber product category, an activity used to optimize procurement and which does not generate margin, is closely tied to the price of lumber.
A decrease in the price of lumber will lead to lower sales but higher overall margins when taken as a whole with other product categories, and vice versa. Finally, we plan on spending a similar level of capital expenditures in 2019 as compared to 2018, and it will include a planned expansion in Cameron, Wisconsin. As always, we will continue to remain focused on optimizing our operations across the organization while diligently seeking market opportunities in all product categories. Éric and I will now be pleased to answer any questions you may have.
Thank you. At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. If you are using a speakerphone, please lift your handset before pressing any keys. Your first question comes from the line of Hamir Patel from CIBC. Please go ahead.
Hi, good morning. Éric, could you clarify for IFRS 16, you pointed to CAD 8.8 million impact in Q1. Could we assume a similar amount each quarter going forward, so about CAD 35 million a year?
Yes, I would agree with that, Hamir. It's a fair estimate for now.
Okay, great. Thanks. That's helpful. Brian, last quarter you said you were comfortable with consensus EBITDA for 2019 of, I think you said CAD 290 million ±5%, and I know that was pre-IFRS, so I guess the apples-to-apples number on that would be CAD 325. Could you update us on what level of EBITDA you're targeting in 2019?
Well, you kind of answered your own question. I would say we're comfortable with sort of around CAD 325 million to CAD 330 million, I'd say we could probably tighten up the range a bit more in terms of maybe calling it by ±CAD 10 million.
Okay. I'm assuming that excludes any potential derivative non-cash gains or losses.
Yes, correct. Yeah.
Okay. How much
any potential acquisitions or anything else, just as we stand today.
Right. Okay. how much did adverse weather weigh on the business in the first quarter and how much of that do you think you can make up in Q2?
Tough to say specifically how much was from adverse weather. We can certainly pinpoint that it did affect sales, particularly on our residential lumber in the East and even on the railway ties, just in terms of movement of rail cars. it softened it a bit, but I'm not concerned from a standpoint of making it up in the quarters ahead.
Great. I just wanted to ask on the fiber side in B.C., several of the lumber companies are pointing to a large increase in stumpage coming in July. How much of a headwind would that be for you, how long would that take for you to pass on for those pole products?
It won't have that much of a headwind for us because the stumpage cost in relation to what we harvest from our own cutting rights is not a large percentage overall. It's not going to have a direct impact on us. In terms of the lumber pricing for residential, we'll see how that plays out and whether or not that's going to flow through to that. Again, that's something that would get passed on to the end customer.
Great. That's all I had. I'll turn it over. Thanks.
Thanks, again.
Your next question comes from the line of Walter Spracklin from RBC. Please go ahead.
Thanks very much. Good morning, everyone. Or good afternoon, I should say.
Good afternoon.
On your margin indication, Brian, you were saying that sales and margins in ties are going higher. It sounded like you had a little bit more conviction and visibility on that. I know margin enhancement has been something that has kind of been pushed off in prior quarters and even years. Can you talk a bit about what happened back then where the margins didn't come in where we were hoping, and then what gives you any increased conviction that you're going to see the margin enhancement in the tie division here in 2019?
Good question, Walter, really, I think it just revolves around the fact that in the previous periods, we kept thinking that as the inventories were getting lower, the finished goods inventory for the overall industry, that we were going to start to see pricing rise with it, particularly outside of our Class I contracts. It took a while to get there, but we're comfortable that we're seeing that now, that as inventories are low overall, that we're actually seeing it. We're seeing prices outside of the Class Is as well are under contract, and they go up as the white tie increases. We have seen in the non-Class I market some healthy increases in prices.
Before it was you were hopeful of the outside of the Class I market increase. Now you're seeing clear evidence of it, and that's giving you that higher level of conviction.
Exactly.
Okay. Got it.
Good summary of what I said.
On the acquisition front now, Brian, you mentioned last quarter that you were zeroing in on one. Did that not happen, or is it still kind of in the works? How would you characterize that?
We did complete a small one, which was on the residential side. We still have others in the pipeline that we're working on, and I would expect that before the end of the year, probably before fourth quarter, we'll see that hopefully close.
Okay. How would you characterize the M&A environment today versus kind of last year? Is there more supply out there? Have expectations changed in any direction there? If you were to describe the overall climate in terms of M&A, how would you put that out?
I would say similar. We remain quite disciplined in our approach as we always have over the years. We have certain targets we're interested in, and we wait for the right opportunity. I would say it's not all that dissimilar than last year, and we did do a couple of acquisitions early on last year in the first half of the year, if you recall. Yeah, no, I'm comfortable that it's similar. I wouldn't say there's any more or less opportunities, and I think the timing of when they happen will be depending on how long the deal takes to come to fruition.
Got it. Okay, that's all my questions. Thanks very much.
Great. Thanks, Walter.
If there are any additional questions at this time, please press star followed by the number one on your telephone keypad. Your next question comes from the line of Mark Stuebing from TD Securities. Please go ahead.
Good afternoon.
Good afternoon.
I was wondering if you could talk about the look for organic growth in utility poles a little bit. I think you previously suggested that you thought you could see high single-digit organic growth this year. Is that still a reasonable expectation?
Yeah, at this point in time, I think we're still comfortable with that.
Okay, great. Thanks. Then railway ties as well. You delivered 4.5% Q1 2019. Is that sustainable throughout the year in your view?
I think it's going to be driven primarily by pricing. I would say that's probably going to be in the range that we would expect to see going forward at this point in time.
Okay, great. Thanks. I guess my last question here is about the acquisition. Do you know how much that's expected to contribute to earnings in the current year?
It'll be fairly minor this year. It was a small acquisition, and really what we're doing is getting the facility up and running to the level that we would like to see. It probably won't become operational till later in Q2, as we're doing some changeovers of some things at the plant.
Okay, great. Thanks. Will all those earnings be in the residential lumber segment?
Correct, yes. In regards to the acquisition, you mean?
Yes.
Yes.
Okay, great. Thanks. That's it for me.
Thank you.
There are no further questions at this time. Mr. McManus, I turn the call back over to you for closing remarks.
Well, thank you everyone for joining us on this call, and we look forward to speaking with you again on our next quarterly call. Have a great day.
Thank you. This concludes today's conference call. You may now disconnect.