Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Stella-Jones Q2 2022 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, and instructions will be provided at that time for you to queue up. If anyone has any difficulties hearing the conference, please press star 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 today, Wednesday, August tenth, two thousand and twenty-two. I will now turn the conference over to Eric Vachon, President and CEO. Please go ahead, sir.
Good morning, everyone. I'm here with Silvana Travaglini, Chief Financial Officer of Stella-Jones. Thank you for joining us for the discussion of the financial and operating results for Stella-Jones, Stella-Jones' second quarter ended June thirtieth, two thousand and twenty-two. Our press release reporting Q2 results was published earlier this morning. Along with our MD&A, it can be found in the investor relations section of our website at www.stellajones.com, and it will be posted on SEDAR today as well. As a reminder, all figures expressed on today's call are in Canadian dollars unless otherwise stated. I will begin by providing a business update and overview of our quarter and will then turn the call over to Silvana to review our results in greater detail. I will then return with concluding remarks before opening the call to questions. I'm pleased to report that Stella-Jones delivered a robust above-market second quarter performance.
10% organic sales growth in our infrastructure-related product categories, better than anticipated results for residential lumber, as well as sequential EBITDA margin growth evidenced by strong cash flows generated this quarter's are all a testament to the strength of not only our business but our expert team. These results are attributable to our expansive network and their capabilities in terms of procurement and logistics. Our utility pole category continues to see overall growth, powered by both pricing and volume gains. We are expanding our capital investment program to increase capacity and support rising demand driven by ongoing deferred maintenance demand and broadband network development. In addition, we are leveraging the acquisitions of Cahaba, which are fully integrated into our fold and play a pivotal role in our continued growth, particularly considering current events.
Turning to railway ties, though volumes were affected by the lower maintenance programs of certain Class I operators, product demand remains steady. With price adjustments implemented in the first half of the year and more to come by the end of 2022, we are confident in our continued ability to push through higher input costs. The tightness we've observed in access to untreated ties is showing signs of stabilization and even recovery as certain regions have started to generate more volumes. Sustained demand for utility poles and railway ties, combined with contractual price adjustments, allow us to better navigate cost increases brought on by an inflationary climate while maintaining healthy margins. We work closely with our clients, who appreciate our ability to deliver on their needs while consistently providing quality and timely service.
The performances of our infrastructure-related product categories largely offset the anticipated pullback in residential lumber sales, which was eased by the higher-than-expected lumber market pricing and set the stage for a strong first half of the year than initially forecasted. Though Q2 started on a slower note, our team did an outstanding work in navigating a volatile market and delivered healthy results. We ultimately concluded the period with solid demand and on-target inventory position. Subsequent to quarter end, on July twenty-second, we acquired the specialty carrier and transportation business of Dinsmore Trucking. Dinsmore was a longstanding and trusted logistics partner of Stella-Jones' with a strong operational presence in Ontario and Alberta and extended reach across Canada and certain regions of the United States.
As sound logistics are fundamental to our business, securing these trucking, hauling, and delivery assets will help us better serve our network and clients through increased control and flexibility in our transportation, operations, and costs. I would like to thank the Dinsmore team for their partnership and welcome our new employees to the Stella-Jones family. With a healthy balance sheet, resilient margins, and cash flows, this quarter builds upon the momentum generated since the start of the year while continuing to deliver on our three-year strategic plan. With that, I will now turn the call over to Silvana for a more detailed view of our financial results.
Thank you, Eric, and good morning, everyone. This morning, we reported net income of CAD 94 million, or CAD 1.51 per share for the second quarter of 2022, compared to CAD 160 million or CAD 1.76 per share last year. During the quarter, Stella-Jones generated sales of CAD 907 million compared to CAD 903 million for the same period in 2021. Excluding the contribution from the acquisition of Cahaba Pressure and Cahaba Timber of CAD 15 million and the favorable effect from currency conversion, pressure-treated wood sales held steady compared to last year. However, factoring out the pullback in residential lumber sales compared to the exceptional growth last year, we observed that our infrastructure-related sales were up a robust 10%, as Eric pointed out.
Looking at the results by product category, sales of utility poles amounted to CAD 360 million in the second quarter this year, up from CAD 236 million last year. Excluding the Cahaba acquisition and the currency conversion effect, sales rose 23% led by selling price adjustments in response to cost increases and sustained strong maintenance and project-related demand. Railway tie sales reached CAD 250 million this year versus CAD 216 million last year. Sales decreased by 4% organically, mostly due to the reduced maintenance demand of certain Class I customers compared to last year. This decrease was partially offset by the continued selling price adjustments realized during the quarter to cover higher costs. Residential lumber sales totaled CAD 286 million, down from CAD 330 million last year.
Excluding the currency conversion effect, sales decreased 14% due to lower volume, largely stemming from a weather-related slow start to the season and lower pricing compared to last year's record high market price of lumber. Industrial product sales were CAD 38 million, up from CAD 36 million last year, largely due to higher pricing for projects related to railway bridges and crossings. Finally, log and lumber sales amounted to CAD 52 million versus CAD 85 million last year. The decrease stems from lower lumber trading activity compared to the same period last year. Turning to profitability, gross profit was CAD 173 million in the second quarter of 2022 versus CAD 197 million in the second quarter of last year.
As a percentage of sales, gross profit margin was 19.1% this year compared to 21.8% last year. The decrease in profitability mostly reflected the normalization of residential lumber's gross profit, which more than offset the pricing gains that yielded higher gross profit margin for utility poles and railway ties. Nonetheless, we did generate sequentially higher margins. At 19.1%, Q2's gross profit margin marked a significant improvement from 15.4% in the first quarter. Similarly, our EBITDA margin rose from 13.5% in the first quarter to 17% this quarter. While inflationary pressures impacted costs of all our product categories, a large part of Stella-Jones's infrastructure-related sales are contractual and include price adjustment mechanisms to cover cost increases, a core attribute of our business model.
Turning to cash flow, during the quarter, the company generated CAD 228 million of cash from operations, driven by the strong results and favorable movement in non-cash working capital components. Changes in non-cash working capital increased liquidity in the second quarter, primarily as a result of the seasonal decrease in inventory and increase in accounts payable and accrued liabilities. As of June 30, our financial position remains solid with CAD 228 million of liquidity available under our credit facilities. Long-term debt stood at CAD 820 million, with a net debt-to-EBITDA ratio of 2.7 times, primarily driven by the lower trailing twelve-month EBITDA. During the quarter, we repurchased close to 1.3 million shares under our normal course issuer bid program for a consideration of CAD 45 million.
Since initiating the program last November, Stella-Jones has repurchased more than 3 million shares out of an authorized maximum number of 5 million shares for a total consideration of CAD 160 million. Finally, the board of directors declared a quarterly dividend of CAD 0.20 per common share, payable on September 23, 2022 to shareholders of record at the close of business on September 6. I will turn the call back to Eric for concluding remarks.
Thank you, Silvana. We are proud of the performance we've seen in the first half of 2022. We are equally pleased with the initiatives put forward to further enhance our network. Stella-Jones is more than ever in a solid position to build on its strong fundamentals. The acquisition of Cahaba late last year gave us added manufacturing capabilities to meet strong demand, while the addition of the Dinsmore Trucking business is further enhancing our logistical capabilities. Internally, we are on track to invest approximately CAD 100 million of capital expenditures in 2022 to support growing demand from our infrastructure related customer base and to continue to upgrade our facilities. This includes the addition of new treating cylinders, wood drying capacity, and pole peeling yards. We are also proceeding with the conversion of certain facilities to ease the planned phase-out of pentachlorophenol and introduction of DCOI for utility pole treatment.
As we are at the midpoint of the year, I can report that these initiatives are proceeding on schedule and within budget. Stella-Jones is a leading manufacturer of pressure-treated wood products in North America. Our coast-to-coast footprint, second-to-none production, procurement and logistics capability, as well as solid customer and supplier relationships are key attributes that will contribute to our sustained growth. We welcome a steady demand flow from our business, mostly based on replacement and maintenance-driven requirements of critical infrastructure-related products. This in turn ensures we maintain a sound financial position which we can further invest in our operations, pursue strategic acquisitions to complete our product offering, and return capital to shareholders via dividends and share repurchases.
In summary, our strong progress this quarter reaffirms our confidence in our ability to meet the objectives set for 2022 and part of our three-year strategic plan. This concludes our prepared remarks, and we will now turn the call over for questions. Operator, please proceed.
Thank you, sir. Ladies and gentlemen, we will now begin the question answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. Please stand by for your first question. Your first question will come from Hamir Patel of CIBC World Markets. Please go ahead.
Hi, good morning.
Good morning.
Eric, we've seen some of the major composite decking producers point to large channel destocking over the next two quarters. Do you see any risks of that playing out as well in your res lumber business?
With regards to composite decking, as far as we're concerned, Stella-Jones, for our customer, the most part, we're holding that inventory. We're, you know, managing our supply chain with regards to how demand is evolving. Destocking from the network, I don't see that as a potential issue. If anything, you know, for the first six months of the year, composite sales volume wise has been very strong, higher year over year, very strong demand for that product. I'm not too concerned about that for the balance of the year.
Great. Thanks. That's helpful. Eric, in terms of the cost pass-throughs, have you now caught up with all the inflation that you've seen? You know, if not, what sort of maybe sequential uplift on price is remaining in poles and ties?
For railway ties, we've seen prices of untreated ties stabilize in the market somewhat in the last quarter. I would, you know, if this holds, I would suspect that we'd be done with certain with the fiber pass through, let's say by the end of the year, then there's some annual adjustments that are still to come, which are sometimes, you know, inflationary adjustments to cover labor costs. We're seeing pre-result cost increases, which are, you know, we're all in discussions to passing through the customer. You know, for railway ties, I think we'll be, you know, certainly we'll be done with the fiber adjusted probably by the end of the year and then maybe a bit more to come early into next year where other cost considerations we need to be discussed with our customers.
For utility poles, you know, we keep just having discussions with customers and increasing pricing. We've seen pricing gains, Q2 over Q1, and I suspect this will have some more opportunities for price adjustments in the next few, well, in the second half of the year. You sort of, you know, reset the clock and we'll start again discussing in 2023 with customers about, you know, certain cost increases we've seen in 2022. I would suspect that we could see more price adjustments in 2023 as well in the first half, as you know, inflationary costs keep putting pressure on labor, on freight and fiber costs.
Okay, great. Thanks. That's helpful. I'll get back in queue.
Thanks.
Your next question comes from Michael Tupholme of TD Securities. Please go ahead.
Thank you. Good morning.
Good morning, Mike.
Maybe to start, Eric, just hoping you could clarify a comment that was included in the press release and then also reiterated at the end of your prepared remarks. Specifically, you noted that based on the strong progress made in the first half of the year, you are confident that the company's efforts will contribute to the achievement of the objective you set for 2022. Just wonder if you can clarify what 2022 objective you're referring to there.
Well, if you recall, Michael, we had disclosed last year in Q3 that, you know, we would see sales individually comparable in 2022 compared to 2021. We obviously have internal goals which are sort of not disclosed, but we're well on our way with a strong start to the year in achieving those.
Okay. That annual guidance you had provided that you're no longer updating regularly, you're suggesting that but those numbers or the targets you'd originally set are well in hand at this point.
Correct.
Perfect. Thanks. Maybe secondly, just if you can provide a breakdown of the utility poles organic growth in the quarter in terms of volume versus price. Certainly it sounds like price was a major driver, but just looking for a bit of a breakdown there, please.
Yep. Yes, certainly so. Volumes were approximately 40% of. Well, first and foremost, if you exclude FX and the Cahaba acquisition, and then our MD&A provides some color there, then I would say, volumes would represent 40% of that growth and pricing would be 60%.
Okay. As we look out a little further, maybe, you know, beyond the second half and into next year, how do you feel about your ability to achieve the high single digit growth that you target sort of over a multi-year period in utility poles considering the very strong organic growth you've seen this year, which will make for a bit of a tough comp next year?
Right. Well, to your point, high single-digit is still what we'd see for next year. This year, a bit particular with, you know, all the price adjustments or inflationary pressures. But still remain confident on the high single-digit. You know, many customers are talking about further projects and expansion. Very recently, the Government of Ontario announced a CAD 4 billion broadband project to which utility poles will be a key component, and we are a key supplier in that market. You know, similar examples that are not publicly disclosed, we're having discussions alike with other customers. Feel good, quite comfortable about, you know, our projection in a three-year outlook with that high single-digit.
Okay. Great. Thanks, Eric. Just lastly, residential lumber. You talked about the slower start to the quarter. It sounds like it ended with solid demand. I guess I'm just wondering, of the 10% decline in organic growth year-over-year in the quarter, are you able to sort of compare what you were seeing early on in the quarter when you had those weather issues versus what you were seeing later on in the quarter? You know, I guess any outlook on sort of the second half just as far as demand trends.
Right. Well, look to your point, you know, April was a bit more difficult. When we say weather-related, it's really April had a little bit more, you know, slower start to spring. We then saw, you know, healthy demand from our customers and were able to also maintain adequate pricing, although markets have declined or general lumber markets have declined over that period. We were able to hold our pricing as we, you know, had built a better part of our program for the year. You know, the decline for the quarter is probably similar year-over-year, similar for pricing and volume if you want, because obviously last year's prices were, you know, not much higher than this year's.
You know, we're very happy with the quarter's volume. We concluded the quarter with optimal, I would say, inventory position. We're definitely well positioned to be able to continue to buy and follow the market trend, to be able to adjust our costs, to be able to support our customers. You know, to your second part of your question with regards to how we're seeing the second half of the year, you know, I would say so far volumes have been holding relatively well, definitely better than what we've seen last year. If you remember, last year was a bit depressed year, a depressed quarter as far as demand. We're definitely not seeing this trend this year.
Okay. That's great. Thanks so much, Eric. I'll get back in queue.
Your next question comes from Benoit Poirier of Desjardins Securities. Please go ahead.
Yeah. Good morning, Eric. Good morning, Silvana, and congratulations for the quarter. Yeah. Just to come back on the residential lumber seems to be doing better than expected. How should we be looking at the second half given the drop in the lumber price? Maybe if you could provide more color about the opportunities to replenish the inventory given the drop in lumber price. I know the build-in typically occurs in Q3, Q4. I'm just wondering whether you see some opportunities to increase the inventory at lower levels.
Yeah. Definitely, Benoit, my previous comment on optimal inventory, you know, signaled that, you know, we concluded Q2 with inventory levels that are definitely manageable, in terms of days of sales. We are definitely taking opportunities now, of course seizing the opportunity to, you know, procure lumber at the current market cost. Obviously, as you know, the trend drops, you know, you could expect, we could expect to see the retail market wanting to reduce their prices. We obviously need to participate in that. We need to follow the trend. At our own rhythm we will, you know, see and participate in the lower retail prices.
We're in a position now where, you know, margins should hold relatively well compared, if you remember, to last year where we ended the quarter with high inventories. We needed to do that extra effort to cycle inventory, which is definitely not the case this year.
Perfect. Talking about overall revenue for residential lumber, would it be fair to expect kind of flat or slightly up in the back half as opposed to the second half of 2021?
Well, compared to last year, Benoit, definitely we'd expect to be higher in residential lumber. Pricing is definitely, you know, would be, will be more favorable as it stands today. Obviously, as I just explained, our margin profile should hold historical levels if you want, simply because, you know, we're not having to deal with, I guess, an overstock of inventory.
Okay. That's great color. On the pricing side overall, you seem disciplined. Have you made any changes to your pricing strategy and maybe tried to shorten the lag impact that typically occurs with the movement in lumber price? Have you made any changes to your strategy?
You know, I'll tip my hat off to our procurement team that did an exceptional job in the first six months of 2022 in procuring and managing the inventory levels. Obviously, you know, we never wanna run out of inventory and the product mix for your customer, which we have not. Our service levels are extremely high. But we did very well in managing inventory levels and particularly not procuring at the very high prices. It gives us a bit of that opportunity to better manage our inventory. You know, lessons learned a bit from last year, but very disciplined approach. The team worked together, procurement, operations and sales to, you know, ensure that we, as I said, we supply customers all while not overextending ourselves with the volatility of the lumber market.
Okay. Talking about lumber, two senators in the U.S. have recently stated that they are interested in a new softwood lumber deal with Canada. Could this be a possible positive for Stella-Jones? Any thoughts, Eric, about the potential agreement on the softwood lumber?
Benoit, thanks for your question. You know, we don't move lumber cross-border. You know, our Canadian residential lumber category is, you know, essentially sourced and managed with Canadian resource in our Canadian facilities and the same in the U.S. You know, all these tariffs and for cross-border movements don't impact us.
Okay, thanks very much for the time.
Yes, pleasure, Benoit.
Ladies and gentlemen, once again, if you would like to ask a question, please press star one at this time. Your next question will come from Walter Spracklin of RBC Capital Markets. Please go ahead.
Hey, thanks for taking my question. This is James McGarragle. I'm on for Walter this morning. Congrats on the great quarter.
Good morning.
I hope everyone's keeping well.
Yes, we are. Thank you.
On the utility poles business and overall on the supply chain capacity. You know, I was listening in to your competitor's call last week, and they were highlighting some rail labor and trucking issues. You know, you just completed the trucking acquisition to help alleviate some of those issues, I assume. I'm just wondering how much capacity you have in your pole business to meet the really strong demand that's out there. Do you foresee any constraints either internally related to production capacity or externally related to labor or transportation going forward that would impact your ability to meet the demand that's out there?
Yeah, certainly. You know, with regard to procurement, the industry in general is seeing higher year-over-year demand. Obviously it puts more pressure on all the suppliers. It is a constant search for the fiber. You know, the relationships that we've established with different suppliers, our own network of procurement and pole peeling yards has given us that opportunity to be able to seize the higher demand, thus the volume increase that we've seen in our results. With regards to treating capacity, not an issue.
We have sufficient treating capacity currently and our, you know, announced CapEx program, if you want, of CAD 100 million dedicated for our utility pole division will cover over the next few years, as I said, you know, extra treating, extra drying, and capacity and also pole peeling capacity. Right now we're. I think we sort of foreseen. Obviously we've been, you know, a bit bullish on our expectations of volume growth, which is materializing. Our initiation of this CapEx plan is sort of probably right on point, to enable us to keep seizing that opportunity going forward. On the production and capacity side, no current constraint. As you know, as I said, we're on budget and on time with our schedule.
We should be able to have the capacity to meet our requirements going forward that will generate requirements from our customers. The last part of your question with regards to logistics, again, first and foremost, strong logistics team we have at Stella-Jones and great relationships with a lot of carriers. Logistics is a very big part of our business. You know, as you mentioned, we completed the Dinsmore acquisition in the month of July, which will essentially service Canada and a bit into the U.S. We also have a similar fleet and trucking business in the U.S., essentially focused in the Southeast U.S., so railway ties in that region and Southern Yellow Pine poles, which is great flexibility for us.
To your point, finding trucking services is, you know, a daily challenge. We're lucky we have strong relationships with different partners that service us. The fact that we run, I'll say a smaller fleet because it maybe services maybe total 5% of our needs. Like, this one would be 5% in Canada, and the one we have in the U.S. would probably service 5% of our hauling needs in the U.S. It gives us great flexibility to, you know, get deliveries on time when customers call us with emergency requirements. You know, gives us that chance to be that supplier that's always there for them seven days a week. It's been a lot of work, but you know, we're able to march through and deliver as our customers need the materials for their maintenance projects.
Okay. Appreciate it. That's good color. Another question on the railway tie business and kinda your outlook into 2023. So on one hand, you know, are you seeing the rails delaying any CapEx given how congested rail networks have been? You know, if so, do you expect that to drive potentially outsized growth into 2023? The other part of my question is there's been some issues with you know, accessing untreated ties. Do you see your business' scale as being advantageous versus smaller competitors and potentially driving some outsized growth versus what potentially the industry might be expecting into next year?
Right. Our industry always wait with anticipation the Railway Tie Association meeting that occurs in the fall, where Class I's formally communicate their maintenance programs for next year. Obviously, I have no secrets anywhere. Like everyone else, we're waiting to see. What we are seeing in general, Class I customers are maintaining their networks at, I would say, well, they're at historical levels, and they're trending upwards a bit. You know, I think that's what we're seeing right now when we talk about, you know, certain Class I's maintaining a bit less than in previous years. That being said, to your point, networks have been bogged down for the year.
There's been lots of traffic on the rail network in general, which is, you know, creating usage of the network and will eventually lead to some required maintenance. Now, will that come in 2023 or in 2024? I think it's, you know, it's somewhere in that 12-24-month window that we know we'll see that increase. I don't expect it to be like a big jump. I think it'll be just a gradual pickup. You know, I fully have great confidence in, you know, the engineering departments, you know, at the railroad companies in the matter of being able to monitor the network usage and being able to, you know, to run their networks in a safe manner. You know, I'm quite confident that for those reasons, you know, we will see the maintenance requirement increase, you know, in that window.
Okay, perfect. Just a quick follow-up, and then I'll turn the line over. You had on the utility poles you had mentioned high single-digit growth was gonna happen in 2023. That was on top of potentially 2022 growth that's gonna come in, you know, above the high single-digit range that you had guided to.
That is correct.
Good. Thank you very much. Congrats again on a good quarter.
My pleasure. Thank you.
Your next question comes from Michael Tupholme of TD Securities. Please go ahead.
Thanks. Yeah, I just wanna clarify or ask you a question about the margins. So it certainly sounds like in the quarter, the margins you generated. Maybe you just clarify. It sounds like this is a fairly sort of normalized level of margins or something unusual going on. I guess I'm just wondering, if we look forward, is this sort of level of margins, I know there's seasonality, but are you performing at kind of a normalized rate from a margin perspective, and is that sort of expectation able to carry on going forward here?
Well, obviously, the second quarter is typically our highest EBITDA margin quarter, and I think that's, you know, probably an indication of what we've seen so far this year. To your point, normalized compared to historical, you know, excluding last year results, which were a bit exceptional. You know, going forward, I would suspect that, you know, Q3 and Q4 would be more or less in line with what we've seen in previous years. You know, maybe slightly better as a percentage simply because of, you know, our pass-throughs in pricing, both on the railway side and the utility poles.
Okay. That's helpful. Thanks, sir.
There are no other questions from the phone lines. I would like to turn the conference back to Eric Vachon for closing remarks. Please go ahead, sir.
Well, thank you, Michelle, and thank you to everyone for joining us this morning, and have a great day.
Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everyone for the participation and ask you to please disconnect your lines.