Earnings Call: Q3 2018

Nov 2, 2018

Earnings release

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Stella Jones Q3 2018 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 Friday, November 2, 2018. I will now turn the conference over to Brian McManus, President and CEO. Please go ahead. Thank you. Good morning, ladies and gentlemen. I'm here with Eric Baciano, Chief Financial Officer of Stella Jones. Thank you for joining us for this discussion of the financial and operating results for the company's Q3 ended September 30, 2018. Our press release reporting Q3 results was published earlier this morning. It can also be found on our website at www.stella jellens.com and on SEDAR. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. I will begin with a brief overview of the quarter. 3rd quarter results demonstrated strong sales growth and continued improvement in operating margins on a sequential basis. Sales increased in all product categories driven by increased sales prices, market demand and acquisitions. While margins as a percentage of sales have improved when compared to previous 2018 quarters, the pace of improvement was mitigated by the timing of price adjustments for higher untreated railway tie costs as well as some higher residential lumber costs. Overall revenue amounts to $630,000,000 versus $517,600,000 in the same period last year. The contribution from acquisitions was $19,900,000 while the currency conversion effect had a positive impact of $12,900,000 on sales. Excluding these factors, sales increased $79,600,000 or 15.4 percent. Net income for the quarter was $45,800,000 or $0.66 per diluted share compared to $0.61 per diluted share a year ago. In a moment, Eric will discuss the financial performance of the company in greater detail. I will now address the 3rd quarter results by product category. Railway Thai sales reached $187,700,000 up from $160,800,000 for the same period last year. Excluding the currency conversion effect, sales increased $21,800,000 or 13.5 percent, primarily as a result of price increases as market conditions have improved in most regions. In addition, in the quarter, we completed the transition of a Class 1 railroad customer from a treating services only program to a full service black tie program. Turning to utility poles. Sales amounted to $200,600,000 up from $172,500,000 for the same period last year. Excluding the contribution from acquisitions and the currency conversion effect, sales increased by approximately 22 $900,000 or 13.3 percent. This growth was primarily driven by increased sales in the U. S. Southeast, projects related to transmission pools and healthy demand for replacement programs. In the residential lumber category, sales were $160,500,000 up from $125,800,000 for the same period last year. Excluding the contribution from acquisitions and the currency conversion effect, sales increased by approximately $18,000,000 or 14.3%. This favorable variance is primarily explained by higher selling prices as a result of higher lumber costs pass through to our customers. In the industrial product category, sales reached $32,400,000 up from $25,600,000 for the same period last year. Excluding the contribution from acquisition and the currency conversion effect, sales increased 7%, explained in most part by demand for rail related products. Finally, in our category of logs and lumber, revenue stood at $48,800,000 up from $32,900,000 in the same period last year. Excluding the contribution from acquisitions and the currency conversion effect, logs and lumber sales increased 45.9%. The significant variance reflects higher selling prices due to higher lumber costs coupled with increased harvesting activity related to procurement activities to support strong pole sales. Eric will now provide further details about our Q3 results. Eric? Thank you, Brian. Gross profit amounted to $94,000,000 or 14.9 percent of sales in the Q3 of 2018 compared with $83,600,000 or 16.1 percent of sales in the Q3 of 2017. While gross profit is up on an absolute dollar basis, it is down on a percentage of sales basis. This decrease is primarily explained by the increasing cost of untreated railway tie and certain untreated species of pools. In addition, the higher lumber costs, which are passed through in a timely manner to our customers via higher selling prices, have contributed to increased cost of sales, but have also put downward pressure on margins as a percentage of sales. These cost increases were also impacted by the effect of currency translation. As a result, EBITDA for the Q3 of 2018 stood at $76,700,000 or a margin of 12.2% versus $71,300,000 or a margin of 13.8% for the corresponding period last year. Similarly, operating income stood at $67,900,000 or 10.8 percent of sales compared to $63,100,000 or 12.2 percent of sales in the Q3 a year ago. As we mentioned last quarter, we continue to expect our margins in the second half of the year to be higher than in the first half. Net income for the Q3 of 2018 was $45,800,000 or $0.66 per diluted share, up from $42,000,000 or $0.61 per diluted share in the Q3 of 2017. Turning now 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 $79,500,000 for the Q3 of 2018 compared with $72,600,000 for the same period in 2017. However, given higher raw material costs in this year versus last year, we generated cash flow from operating activities of $91,300,000 in the Q3 of 2018 as compared to $175,500,000 for the same period last year. In the Q3, our cash was primarily used to deleverage, invest in CapEx of $11,200,000 and pay dividends of $8,300,000 Year to date, we have spent $38,000,000 on CapEx. As at September 30, 2018, our long term debt, including the current portion, was $499,000,000 versus $455,600,000 as of December 31, 2017. The increase mainly reflects higher working capital requirements, financing for acquisitions, higher capital expenditures as well as the currency converting effect. As a result, the total debt to EBITDA ratio was 2.1 versus 1.9 as of December 31, 2017. Finally, the Board of Directors of Stella Jones yesterday declared a quarterly dividend of $0.12 per common share payable on December 20, 2018 to shareholders of record at the close of business on December 3, 2018. I will now turn the call back to Brian for the outlook. Brian? Thank you, Eric. For 2018, based on current market conditions and assuming stable currencies, management expects higher year over year overall sales for Stella Jones, driven by pricing in most product categories as well as increased market reach for residential lumber and utility pool product categories. Operating margins are improving thus far in the second half of twenty eighteen when compared to the first half of the year. However, the progression of operating margins in the Q4 of 2018 will continue to be impacted by higher untreated railway tie cost until sale prices can be adjusted. The company plans on spending up to $45,000,000 on property, plants and equipment in 2018, driven by capacity enhancement projects, and we expect our overall effective tax rate to be approximately 27%. Let me discuss our outlook by product category. In the railway type product category, pricing started to improve in the Q3 of 2018, but related margin gains were partially offset by rapidly increasing cost of untreated railway ties due to the tightening of supply. This trend should continue in the Q4. Management expects that this raw material cost increase combined with a tighter market supply will lead to continued upward selling price adjustments for the quarters ahead. As a result, these pricing adjustments should have a positive effect on sales and margins in 2019. In utility pool product category, sales for the 1st 9 months of 2018 benefited from both pricing adjustments and strong demand. Management expects that this trend will be maintained for the remainder of the year. In 2019, we expect strong demand for replacement programs and increased project based sales. As a result, sales and margins are expected to improve year over year. In the residential lumber product category, for the 1st 9 months of the year, sales benefited from both market demand and increased pricing driven by higher wood cost. The effect of adjusting residential lumber selling prices as a result of higher wood cost had a slight downward impact on operating margins as a percentage of sales. It is important to note that management closely monitors variations in these commodity prices and adjust its procurement practices accordingly in order to maintain dollar margins on similar volume. For 2019, management expects continued strong demand for this product category. Finally, it's 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 fairly tied to the price of lumber. Therefore, an increase in the price of lumber will lead to higher sales, but lower overall margins when taken as a whole with other product categories and vice versa. For 2019, based on current market conditions and assuming stable currency, management expects higher year over year overall sales for Stellatone driven by pricing in some product categories as well as increased market reach for utility poles and residential lumber product categories. Operating margins are expected to improve over 2018, primarily driven by increased pricing for railway ties and higher volume and improved product mix for utility poles. Eric and I will now be pleased to answer any questions you may have. Your first question comes from the line of Walter Spracklin with RBC. Your line is open. Yes, thanks very much. Good morning, everyone. Good morning, Walter. Good morning. So I guess when we talk about your margin enhancement and certainly the indications that you're providing for 2019 seem encouraging. But I guess part of what you're seeing and you've alluded to that is a lot of pass through revenue coming in now. I know you talked a lot about 15% margin as kind of your aspirational margin. But wondering if under the current environment with the current, on the pricing that you're seeing, is the pass through that you're getting now going to lead to a lower kind of target margin even though understandably the absolute dollar amount isn't changing that you're eventually targeting, but how it's exhibited in your EBITDA margin might be. So should we look for kind of that kind of change in your EBITDA margin targets on a longer term basis? Actually excellent question, Walter, and you pretty much answered your own question is that that's exactly I think if we've learned something this year is when lumber pricing, particularly its effect on our residential lumber product category as well as our logs and lumber, when we see the rapid increase that we did this year and significant historically high pricing happening, it does compress our overall margin even though our dollar EBITDA has got the growth or certainly we were pleased where it ended up and kind of where we were anticipating it would. So we're a little nervous to target a specific percentage, but would rather say we know we're going to continue to improve operations. We certainly see price increases coming through on certain product categories where that will help our margins. So we expect good progression as we go into 2019. But your point on the 15% margin is something I think we're going to be a little cautious with just targeting a specific margin, but rather say, look, we are going to continue to see EBITDA dollar growth. And I think the way you put it is expressed it very well. Okay. And then moving on to your guidance for higher sales in your major product categories. Just looking at railway tides, for example, on organic growth, you made a pretty strong swing in the Q3. I mean, you were trending organically down, I guess, 2% or 3% and then up 13.5%. So it I know you're guiding to higher, but higher can be a pretty wide range. Is there do we assume that you kind of maintain this run rate into the 4th quarter and arguably into the first half of next year on easy compares before kind of normalizing down to some GDP plus growth rate. Is that a fair way to look at your railway type business? Yes, that's fair. I think we're going to see Q4, we expect we're going to see possibly similar or maybe a little bit less growth than what we saw in Q3. A lot of that is actually just driven by pricing and price adjustments that are happening. And I would be more comfortable talking to volume. I think we're going to see single digit volume growth as we go overall in 2019. But you're right, Q4, the comparable on size is going to be an easier comparable for us. So I would expect to see better growth in Q4 and possibly the 1st part of next year. Okay. And can you extend that at all into your overall all businesses together? Is there any kind of quarterly compare items you want to flag if some are easier or less than given the trend you're getting here in Q3 and how that plays into the first part of next year? Is your commentary on rail sorry, on railway ties similar to how you would point us to look at how you're going to kind of go through the 2019 period? For most product categories, yes. The only cautionary tale would perhaps be on the residential lumber as we started to see a rather sharp decline in pricing of the raw material. So while we expect volumes to hold or probably even increase as we continue to expand our market there, The lower pricing will eventually result in some softer pricing. But again, we're confident our dollar margins will hold. Your next question comes from the line of Mona Nazir with Laurentian Bank. Your line is open. Good morning and thank you for taking my questions. Good morning. Hi. So firstly, I just want to touch a little bit more on the margin side and that was good color just on being able to get back to the historical 15% or not really putting that out there and just seeing how it progresses. I'm just wondering though, if we look at the 12.2% versus the 13.8% last year, there's a number of components there, higher tie, higher pull, the mix of the business, greater logs and lumber and residential category, some black tie impact. I'm just wondering if you could provide some color on where the variance stemmed from. Was it equal on all of those impact items? Or was it higher in a certain area? It was certainly spread across all the ones the points you just brought up. I would say railway size would have been probably the largest of the impact, primarily related to the continued increased pricing on the raw material. And then also both the residential lumber and logs and lumber, I mean logs and lumber certainly had a big effect, up 45%, but since it's a product category with no margin on the overall EBITDA margin, it has a pretty big effect there. And so those would be the key categories, I would say, had the largest effect. Pulls in the quarter were probably on a year over year very similar or even maybe up a bit. Okay. That's helpful. And I believe in your commentary, you just stated that until the higher pricing can be put through on the tie side, we expect some continued margin compression. When do you expect those higher prices to be put through to the customers? Well, it's an ongoing basis. It's more when we will see a stabilization of the raw material price increases that we're facing. So that is something we're hoping we'll level off soon. I mean, we're starting to see certain areas where that is happening. Whether it's going to hold, we'll see. But it's really going to be related to that. At what point do we catch up to the historical increases that we faced. Okay. And then I know we've discussed the black tie model, some even dating back to 2013. But I'm wondering if you could walk me through the transition of that Class I customer. Is it essentially completed now? And if you could just discuss all of the related components that comprise a black tie model versus prior, I believe, there was a treated service only package or service offering? And it's just been coming up with a number of clients I thought I would ask. Sure. Well, the key difference is that we will be responsible for really right from the procurement all the way through to the final delivery to the client and hold the inventory. That's the key component of it is that we will be holding the white tie inventory while it's air seasoning for the clients as opposed to the TSO model where the white tie inventory would belong to the client and we would be providing a treating service for that client. So that's the biggest difference between the 2. And that's really the transition that's happened this year is that we've been building inventory for the clients on an untreated basis. And now as we start into Q4 and into next year, we will be delivering we'll be delivering the product that we've been inventorying for them for the past 6 to 9 months. Okay. That was very helpful. And then just lastly for me, in regard to M and A, with the reduction in leverage, would it be premature to suspect that a transaction could occur at any time? And are you seeing any increased competition for acquisitions? As you know, we're always active in looking for the right opportunities. We always have some that are in different stages. So I'll avoid answering your questions in regards to the exact timing on something. In terms of increased competition, we've always faced other competitors out there in the market from a standpoint of acquisitions. But I think our reputation of being fair with the sellers has helped us a lot. So we're still going to continue our disciplined approach in acquisitions. It's not going to change our approach. Thanks so much. Your next question comes from the line of Hamir Patel with CIBC Capital Markets. Your line is open. Hi, good morning. Good morning. Appreciate your comments around the EBITDA margins. So is there a way perhaps that maybe you could quantify what percent EBITDA dollar growth you might be targeting then in 2019 excluding any potential acquisitions? We could give a range. I think it's going to be low double digit at this point is where we'd be comfortable with in terms of percentage growth. Okay, great. That's actually really helpful. And just turning to the tie side, we've seen some mixed signals from some of the Class Is about their tie programs for 2019. So given your mix across the various Class Is, 19. So given your mix across the various Class Is, what sort of volume growth would you be expecting on the tie side in 2019? I think we're looking at probably low single digit volume growth on our side. You're absolutely right about the mixed signals. I prefer not to get into it by a client by client basis. But overall, we're comfortable that we will see some volume growth. Great. That's helpful. And maybe just a final one for me on the res lumber business. Could you quantify what was the volume growth in the quarter? And then given the slowdown we're seeing in the housing market, what sort of volume growth would you expect for next year? In terms of the quarter, it was essentially all pricing, Hamir, for Q3 in terms of the growth that happened there. Volume for next year, we're anticipating we're going to still see some growth, a lot to do with the strength of our major clients and also some expanded reach as we continue to benefit from the acquisition we did this year in Manitoba. Your next question comes from the line of Benoit Poirier with Desjardins Capital Markets. Just to come back on the railway ties, when we look at the industry, the overall inventory has improved a lot, translating into a lower inventory to sales ratio. So I was just wondering if you could talk a little bit about the strategy going forward and if you believe that bolt onization will come back at some point and could potentially impact margins or maybe it could translate into a higher purchasing of wood. So just if you could comment on the inventory situation. Thanks. Sure, Benoit. And to clarify, I know what you meant by better inventory. You mean that it's come down from the high levels that it was at. Exactly. It improved from a standpoint of we don't have too much of it now. But in terms of your question regarding vulcanizing of size, which really for those who may not be aware relates to essentially picking a green tie, one that has not had time to air season and putting into the cylinder and boil the water off under vacuum. That is, yes, very probable. We will have to be doing that in 2019 just given the overall industry levels of inventory. And I think to your point of inventory to sales ratio certainly bodes well for a better market overall for our industry. So we certainly hope to benefit from that. Okay, perfect. And when I look at utility poll, obviously, for the other segment, you mentioned great color about the pricing. But when I look at your comments for utility poll, 13% increase doesn't seem to be related much by pricing. Am I right? And could you maybe provide more color about the sustainability of the 13% growth given all the positive demand you see out there? Yes. There is pricing in there, Benoit. There's I would say a little less than half would have been related to pricing, the other being volume. But we're confident as we go into 2019, we're going to continue to see healthy growth on utility pull. Some of that will also come from pricing, but as well as the extended reach we talked about on some of the acquisitions we've done as well as some of the plant expansions that we'll benefit from. Okay. And related to residential lumber, obviously, the lumber prices is coming down. Volume, you're still confident about 2019. It seems that your customer is gaining some market share. Is there any specific area where gaining more market share? Would it be more Canada or U. S. At this point, Brian? I think we'll see the strength more on the Canadian side in 2019, although we do expect still some healthy demand in the Northwest as well for us, what we'll say in the U. S. And overall, I understand lumber costs are going down. Would you still be confident to show some growth or we could even anticipate some negative growth for residential lumber overall, but translating into better margin as the lumber costs go down? I agree with the second part of your question. It's a little early to answer the first part of your question. I think we're have to see what continues to happen as we go through the winter. But certainly, if lumber prices continue to stay down, then yes, just the effect on the pricing will soften up the sales growth. But your second point is very accurate that, that would result in similar margins just on lower sales, so higher percentage margins. Perfect. And just from a free cash flow standpoint, any particular things to highlight in terms of working capital going through the Q4 and Q1? I know typically from a seasonality standpoint, there is a drag as you're building up inventory, but given now the transition has been done with the Class I. So could you talk a little bit about Q4 and maybe Q1 from a working capital standpoint? Yes. I think on a year over year basis, we're going to be in a stronger cash generation position than we were last year at this point in time. You just have to look to our current working capital levels net working capital levels to see that there's still some cash that's going to get generated in the next little while. And to your point, we won't have the effect that we had last year of the transition of the Class 1. I see. So does it mean that working capital might even turn positive, let's say, in Q4? Or is this what we should conclude? Some of that's going to be dependent on our buying ability and really availability of railway ties and how quickly we get them into our system as well as some residential lumber purchasing. But I'm not going to say it's not possible. In fact, it might be I would say flat to better. Would you do with that, Eric? Yes. It will trend towards that for sure. Well, okay. For each Q4 and Q1, right, Brian? Correct. Wow. Which would still be very good. Okay, perfect. And assuming no M and A in 2019, where do you think your debt EBITDA could go down, assuming the free cash flow generation and still a very good improvement in EBITDA like you mentioned earlier? It would significantly come down. But I wouldn't don't hold your breath that there's not going to be any acquisitions happening through 2019. So I think we'll have some good places to deploy our capital. Okay, perfect. Thank you very much, Antlena. Thank you, Benny. Your next question comes from the line of Michael Kupholme with TD Securities. Your line is open. Thanks. Good morning. Brian, I was hoping to go back to just the dynamic between changes in untreated tie prices and finished tie prices. So can you talk a little bit more about how you see that unfolding? It sounds like you believe that the raw type prices are sort of leveling off here. Just want to confirm if that's what you're seeing and just kind of talk about that relative to what you think will happen with finished type prices and sort of how it progresses? Sure, Michael. And I think in my comment, there may have been a bit of hope attached to that as more than fact. So we have seen some hints that it may be leveling off. But my point being that the question was related to adjustments in our contracts and they're ongoing. But really, we only catch up once we see a leveling off of the actual white tie pricing. And so it's hard. I can't predict when that's going to happen. We're starting to see signs that it may start to level off, but I don't want to take a position on that just yet. Okay. It seems to me that maybe we were in a situation where the increases you were seeing on the untreated tie side were happening at a greater pace than you were able to pass them on. And I don't just mean from a timing lag perspective, but in fact the percentage changes were the finished tie increases was lagging. Was that the case? And I guess if so, is there an opportunity to see finished tie prices kind of rise at a faster pace than they have been even if untreated high prices continue to rise, but maybe not at the same rate? I think what we're going to and it really depends on the customer type, but I think there are opportunities that we're going to see just because of the tightening of the market that we'll start to go back to more historical pricing that we've realized for our railway size. It's the market dynamics have switched a bit from too much inventory out there to now we've got a much tighter market. Okay. And can you remind how frequently are you able to reset or readjust prices, finish tie prices with your customers? For most customers, it's on a quarterly basis. And sorry, for those that aren't quarterly, it's less frequently? Correct. It would be semi annually. Okay. And just in terms of inventory in the tire market, I know you touched on this a little bit, but do you think inventories have bottomed out? And can you maybe just comment a little bit on what's happening as far as competing demands for the same hardwood, both domestically and possibly anything that's going offshore? Hard to comment on whether it's bottomed out. I think really one of the biggest thing biggest issues that the industry is facing right now is really just the extremely wet weather we've had in a lot of key procurement areas throughout the past month. We've seen some improvements in certain areas. The competing markets for the products, some that were going offshore, has slowed down a bit, which is positive. We are seeing a fairly healthy demand from the matting business, which would be a competing product. It's really to do with just the supply, the log supply having to improve. And that we're certainly hoping is going to continue to improve in the months ahead. Okay. And then just shifting over to utility poles for a moment. It sounded like sort of roughly half of the growth you saw in the quarter was price related, a bit more than half from price and the balance from some of the various factors you mentioned. Just wondering of those other non price related factors you mentioned, so specifically higher sales in the U. S. Southeast, higher transmission pole sales and strong demand for replacement programs. Were any of those more influential than others? Or was it relatively balanced? It was pretty balanced actually across all three. Okay. All right. That's all for me. Thank you. Thanks, Mike. Your next question comes from the line of Leon Aghazarian with National Bank Financial. Your line is open. Hey, guys. Thanks for taking my question. Just a follow-up on a previous question. I mean, you did mention obviously in terms of on the ties for the price increases. So assuming the raw materials prices do stabilize, what length of time is required for you guys to finish kind of passing those price increases through or to catch up, I should say? Generally, by the end of a quarter, you'd be caught up. So call it you get call it 4 to 6 months max. Like once you see the prices stabilize and then that's when the length of that's the time that's required to finish passing through the entire Well, yes, just to run kind of run it through our inventory as well. Okay. That's good. Predominantly the growth in the quarter was on pricing. I mean, we did see lumber prices up dominantly the growth in the quarter was on pricing. I mean, we did see lumber prices up about 14%, so it kind of matches that as well. So now with the prices coming down, I think there was a couple of earlier questions on this, but with the prices coming down, could you please understand how the margins are actually going to be maintained there? Because my understanding is that if you're increasing prices, you are doing that as well to the customer. But once it comes off, does it still there? So I'm just trying to understand the dynamics of how you're able to support higher margins given that the fact there isn't that much volume growth there? The margins I was referring to is the dollar margins get maintained because the raw wood cost becomes essentially a pass through at some point. There's a number of factors involved in it, Leon, in terms of how it works with the client. But essentially, as the lumber prices were climbing, we're readjusting our pricing up. And then as it will start to slowly come down in the other direction. But I was referring to the dollar margin will maintain itself, so which will result in higher percentage margins for the product category. Okay. That's helpful. And then one final one for me, which is on the CapEx. I mean, we did I mean, in the previous call, you had mentioned the kind of the guidance between 30 to 40. It was increased to 45 or so. Just kind of wanted to know what some of those projects were and if we do expect that same similar kind of level into 2019 as well? Yes, actually, it will be that's what we're in some preliminary budget numbers right now, and we're expecting to be right around that 45 as well for 2019. Most of it or a large part of it related to some expansion plant expansions that we're going to be undergoing in 2019. And in terms of 'eighteen, really the projects for the most part were on budget. I would say it's just a couple of additional ones that we added during the year. And would they be more on the on which category would they be reflect? I would put them under actually the delta between what we were originally guiding to and where we're going to finish now, I would say about half were some, I don't want to say unplanned maintenance, but certainly needed maintenance and the other half was just really some efficiency improvements that we were doing. I'm sorry, is that on the tie side or the pull side? It was mixed throughout actually. Okay. And then the projects for 2019 relate as well to the mix or is there I'm just trying to see if there's one particular area where you're trying to add more capacity in a given area or is it just more kind of an all throughout the company kind of balanced CapEx project? To re answer the question you asked me before, I wanted to make clear that my answer was regarding the change, the delta, not the overall amount that was spent in 'eighteen. In regards to what's going to be spent in 2018 overall, a lot of the expansion is going to be for Okay. That's very helpful. Thanks guys. I'll turn it over. Okay? Thank you. Your next question comes from the line of Mark Neville with Scotiabank. Your line is open. Hey, good morning, guys. I Just want to make sure I'm understanding all the moving parts here on pricing and how you're managing it. But on the residential side, you're managing sort of to a dollar margin. But on the ties and pulls, are you still managing that to percentage? Well, ties and poles are and even residential lumber, you're always managing to the market in terms of weather from a pricing standpoint. But in the way the contracts would work on the railway side would be in a lot of ways similar to what you would see on the residential lumber side. You're passing through a cost of an increased tie price. So as tie prices were going up, your dollar margins are maintaining, you would see a bit of a narrowing of the percentage margin, but that is related to the contractual business. Then you have the offsetting effect of the non contract business where the tightening market generally results in just higher selling prices that are usually above the cost increases at the white time. Okay. So I understand that now. It's sort of okay. And just I guess it's again the residential you're again you're seeing some relief on the input ties. It sort of sounds like still some upward pressure just given the inventory situation, but maybe the worst is over. But on the poles, it just wasn't clear which direction your pricing your input cost was moving. It depends on the species of the utility pool. 1, we continue to have a bit of upward pressure on, but it's I would say it's actually leveled off and the effect of the softening lumber pricing will probably help us a bit there. And then on the other species, we've seen a holding steady. Okay. Okay. And again, pricing up half of the sales gain, so there's obviously still some margin improvements we had there by the sounds of it? Correct. Yes. Okay. And you did give a CapEx number for 2018. I don't know if you gave one for 2019. I didn't it if you did. Not at all for if you want to share on our I did. I said it's going to be very similar to what we have spent in 'eighteen based on the projects we have lined up. Okay. Thanks guys. Thank you. Your next question comes from the line of Justin Keywood with GMP Securities. Your line is open. Hi, thanks for taking my call. Just on the residential lumber, I know some commentary of market share gains. And I'm just wondering, is this with existing customers? Or were there any new customers gained in the quarter? It's primarily with existing customers. Okay. And then is there any update on U. S. Residential opportunity? Not at this point. No. Okay. And then just on the tax rate, I noticed the expectations are for 27% this year. Seems a little high just given the relief in the U. S. Just wondering if there's any other factors affecting that and if you have any type of forecast going into next year? Hey, Jeff. This is Eric. I would guide to the 27% for now. It's our visibility we have. Okay. That's it. Thanks for taking my questions. Pleasure. Your next question comes from the line of Michael Tupholme with TD Securities. Your line is open. Thanks. Brian, I just wanted to circle back. Did you say earlier in response to one of the questions that you expect to see low double digit percentage growth in dollars of EBITDA in 2019 over 2018? Correct. Okay. And sorry, go ahead. On the EBITDA, is what we're referring to. So what do you mean by raw EBITDA? Well, I mean EBITDA growth year over year, not the percentage growth from 2018 to 2019. In absolute dollars. In absolute dollars. Dollars will grow. Yes, assuming stable currencies. Right. Okay. So the reason I ask, just looking at expectations, I know there's a lot of moving pieces here and I would think it's prudent to be a little bit conservative, but looking at expectations, I think they're a little bit above that. And it seemed to me as though your outlook is generally unchanged from what it would have been sort of last quarter. Would that be fair to say? Yes, that'd be very fair. Okay. I mean, again, we went through a lot of things on the call here, but you're not calling out anything that's really dramatically different from in terms of the outlook from what you were seeing last quarter? No, not at all. Okay. Okay, thank you. Thanks. There are no further questions at this time. I'll turn the call back over to our presenters. 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. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.