Earnings Call: Q1 2019

May 2, 2019

Earnings release

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. 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 2, 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 Eric Bachelet, Chief Financial Officer of Stella Jones. Thank you for joining us for this discussion of the financial and operating results for the company's Q1 ended March 31, 2019. Our press release reporting Q1 results was published earlier this morning. It can also be found on our website at www.sellajones.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 1, 2019, the Company retrospectively adopted IFRS 16 leases, but has not restated comparatives for the 2018 reporting period. Please refer to the MD and A for further details. Let me now begin with a brief overview of the quarter. 1st 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 that benefited our overall margin. Total sales in the Q1 amounted to $440,700,000 up 10.5% over sales of $398,800,000 last year. Excluding acquisitions and the currency conversion effect, sales increased approximately $11,700,000 or 2.9%. Net income for the quarter was $29,500,000 or $0.43 per diluted share compared to $23,100,000 or $0.33 per diluted share last year. We also continue 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, Eric will discuss the financial performance of the company in greater detail. Looking at the Q1 results by product category, utility pole sales amounted to $170,500,000 up 11.5% from $153,000,000 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 Thai sales reached $161,400,000 versus $146,400,000 last year. Excluding the currency conversion effect, railway tie sales rose 4.5% driven by price increases. Residential lumber sales reached $57,600,000 up from $50,300,000 last year. Excluding the contribution from acquisitions and the currency conversion effect, sales decreased slightly by about $1,400,000 This variance was 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 $25,500,000 up from $20,800,000 a year ago. Excluding acquisitions and the currency conversion effect, sales were stable. Finally, logs and lumber sales stood at $25,700,000 versus $28,300,000 last year. Excluding acquisitions and the currency conversion effect, sales decreased by $2,900,000 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 wholesale. Eric will now provide further details about our Q1 results and financial position. Eric? Thank you, Brian. Gross profit amounted to $69,900,000 or 15.9 percent of sales in the Q1 2019 compared with $59,800,000 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 $63,800,000 or a margin of 14.5% versus $44,000,000 or a margin of 11% last year. The increase in EBITDA is explained by increased margins, the adoption of IFRS, which effectively subtracted $7,800,000 of right of use asset depreciation and $1,000,000 of financing expenses from cost of sales as well as a non cash mark to market gain of $4,400,000 on derivative commodity contract. As mentioned last quarter, a portion of this of the loss experienced in Q4 'twenty in '18 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 $8,800,000 from our Q1 2019 EBITDA to make it comparable. Operating income stood at $45,700,000 or 10.4 percent of sales in the Q1 compared to $35,500,000 or 8.9 percent of sales last year. Net income for the Q1 of 2019 was $29,500,000 or $0.43 per diluted share, up from $23,100,000 or $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 $60,800,000 in the Q1, up from $45,600,000 when compared with the same period last year. Cash flow provided by operating activities used $75,900,000 in liquidity versus a use of $64,600,000 last year. This variation is primarily explained by normal seasonal working capital requirement in anticipation of increase of demand during the peak periods, specifically the 2nd and the 3rd quarters. Our credit facilities were used to support this investment as well as purchases of property, plant and equipment for $8,200,000 and share buybacks for $5,800,000 As of March 31, 2019, our long term debt including the current portion was $601,700,000 versus $513,500,000 as at December 31, 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 $0.14 per common share payable on June 27, 2019 to shareholders of record at the close of business on June 6, 2019. I will now turn the call back to Brian for the outlook. Brian? Thank you, Eric. 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 Selajon. 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 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 and activity used to optimize procurement and which does not generate margin is closely tied to the price of lumber. Therefore, 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 2019 as compared to 2018 and it will include a planned expansion in Cameron, Wisconsin. As always, we will continue remain focused on optimizing our operations across the organization while diligently seeking market opportunities in all product categories. Eric and I will now be pleased to answer any questions you may have. Your first question comes from the line of Hamir Patel from CIBC. Please go ahead. Hi, good morning. Eric, could you clarify IFRS 16, you pointed to $8,800,000 impact in Q1. Could we assume a similar amount each quarter going forward, it's about $35,000,000 a year? Yes, I would agree with that, Hamir. It's a fair estimate for now. Okay, great. Thanks. That's helpful. And Brian, last quarter you said you were comfortable with consensus EBITDA for 2019. I think you said $290,000,000 plus or minus 5%. And I know that was pre IFRS. So, I guess the apples to apples number on that would be $325,000,000 So, 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 the 325 to 330 and I'd say we could probably tighten up the range a bit more in terms of maybe call it by plus or minus 10,000,000 dollars Okay. And does that I'm assuming that excludes any potential derivative non cash gains or losses? Yes, correct. Yes. And how much Any potential acquisitions or anything else just as we stand today. Right, okay. And how much did adverse weather weigh on the business in the Q1 and how much of that do you think you can make up in Q2? Tough to say specifically how much of 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 railcars. So it softened a bit but I'm not concerned a standpoint of making it up in the quarters ahead. Great. And I just wanted to ask on the fiber side in DC, 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? And then how long would that take for you to pass on for those coal products? It won't have that much of a headwind for us because the stumpage cost in relation to our what we harvest from our own cutting rights is not a large percentage overall. So 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. But again that's something that we get passed on to the end customer. Okay, great. That's all I had. I'll turn it over. Thanks. Thanks, Amit. Your next question comes from the line of Walter Spracklin from RBC. Please go ahead. Yes. Thanks very much. Good morning, everyone. Good afternoon, I should say. Good afternoon. So on your margin indication, Brian, you were saying that sales emergence 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 of the Thai division here in 2019? Good question Walter and 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 1 contracts and 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 are we're actually seeing it. So we're seeing prices outside of the Class 1s as well under contract and they go up as the light increases, but we have seen in the non Class 1 market some healthy increases in prices. So before it was your hopeful of the outside of the class one 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 1. 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, but that 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 Q4, we'll see that hopefully close. Okay. And how would you characterize the M and 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 and 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. So we have certain targets we're interested in and we wait for the right opportunity. So I would say it's not all that dissimilar than last year. We did do a couple of acquisitions early on last year in the first half of the year if you recall. So yes, 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. Your next question comes from the line of Mark Steuben from TD Securities. Please go ahead. Good afternoon. Good afternoon. I was wondering if you could talk about the outlook for organic growth in utility pools a little bit. You previously suggested that you could see high single digit organic growth this year. Is that still a reasonable expectation? Yes. At this point in time, I think we're still comfortable with that. And 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 and 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. And I guess my last question here is about the acquisition, How much do you know how much that's expected to you for big 2 earnings in the current year? It will be fairly minor this year. It was small acquisition and really what we're doing is getting the facility up and running to the level that we would like to see. So 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. And then so will all those earnings be in the residential lumber segment? Correct, yes. In regards to that acquisition you mean? Yes. Yes. There are no further questions at this time. Mr. Misanos, 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.