Good afternoon and thank you for standing by. Welcome to the Stella-Jones first quarter 2023 earnings call. At this time, all participants are in listen-only mode. Following the presentation, we will hold a question and answer session. To queue up for the questions by phone, please press star one. A moderator will contact you. If anyone has any difficulties hearing the currents, please press star one for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Wednesday, May 10th, 2023. Please note that comments made on today's call may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties. Actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR.
These documents are also available in the investor relations section of Stella-Jones' website at www.stella-jones.com. We have also prepared a corresponding presentation which we encourage you to follow along with during this call. I now pass the call over to Eric Vachon, President and Chief Executive Officer of Stella-Jones. Eric?
Good afternoon, everyone, thank you for joining us today. I'm here with Silvana Travaglini, our Senior Vice President and Chief Financial Officer of Stella-Jones. Earlier this morning, we issued our press release reporting the results of our first quarter of 2023. Along with our MD&A, it can be found in the investor relations section of our website at www.stella-jones.com, as well as on SEDAR. As a reminder, all figures expressed on today's call are in Canadian dollars unless otherwise stated. The positive momentum we generated from our record year in 2022 has carried into 2023. Our first quarter results were excellent, featuring strong sales and increase in EBITDA, which has outpaced sales growth. Our great start to the year reflects our growth plan in action.
During the quarter, we successfully secured fiber supply, enhanced production capacity at our plants, invested in the network upgrades to further increase pole production. All of these initiatives speaks to our unwavering focus on continuity and quality of customer service, maintaining our North American leadership position in the markets we serve. Let's turn to the performance of our product categories for the quarter. Our utility poles product category significantly outperformed during the quarter. Sales grew organically by 29% and also benefited from the contribution of our timely acquisition in 2022 of the treating assets of Texas Electric Cooperatives or TEC. The strong growth in this product category is a testament to our pole procurement team, which once again continued to leverage their long-standing industry relationships to meet growing customer demand while establishing the foundation to access new procurement areas.
Sales of railway ties were also up, increasing organically by 5%. We were encouraged to see signs of continued increase rail, railway tie availability in the first quarter of this year. At the current rate of procurement, we expect untreated tie inventories to be replenished by mid-year with optimal dry inventory levels being reached in the second half of 2023. This will reduce the number of Boultonizing charges and open opportunities to respond to customer demand, which is being driven by steady railroad maintenance and ongoing infrastructure spend. Industrial products, sales continued to benefit from higher demand. Our industrial product category perfectly complements our rail and utility offerings. Sales for residential lumber pulled back in this quarter in line with our expectations. Before I turn the call over to Silvana, I want to provide an update on ESG.
As many of you know, health and safety is a priority at Stella-Jones. We strive to create a safe and healthy workplace that promotes responsibility and mutual respect. We are in the final phase of rolling out the SHIELDS program across North America. SHIELDS stands for Safety Health Improvement Leading Our Decisions, and is an integrated environmental health and safety management system. These systems allow us to more accurately track and assess progress of our health and safety metrics to maintain our company-wide commitment to the safety and well-being of our people. At the start of this year, we reinforced our commitment to health and safety with the launch of a new employee-focused, educational and informative campaign called Safety Matters Because You Matter. We believe that our most valuable asset is the people that walk into our facilities and offices each day.
We all must play a role in owning health and safety and ensuring everyone performs successfully in their work environment and returns home safely at the end of the day. With that, I will turn it over to Silvana to provide a more detailed overview of our first quarter financial results. Silvana?
Thank you, Eric. Good afternoon, everyone. As Eric mentioned, we began the quarter on a very positive note, which is reflected in our strong financial results. Net income in the first quarter was CAD 60 million, up 30% compared to net income of CAD 46 million last year. This translated into earnings per share of CAD 1.03 compared to CAD 0.73 in the same period in 2022. We generated total sales of CAD 710 million compared to CAD 651 million last year. The increase was driven by an 18% organic sales growth of our infrastructure related businesses. Sales this quarter also benefited from the contribution of the pole treating assets acquired from TEC late in 2022, and the positive effect of currency conversion.
This growth in sales was partly offset by the anticipated pullback of residential lumber sales. Utility pole sales rose to $362 million, up from $254 million from the same period last year. Excluding the currency conversion effect and the contribution from the acquisition of TEC assets, utility pole sales increased by $73 million or 29%, almost entirely driven by higher pricing. Sales volume gains were limited this quarter by our current production capacity. Downtime related to the ongoing capital projects largely offset the increase in our treating capacity stemming from the installation of upsize cylinders. Sales from our utility pole product category accounted for more than half of total sales for the first quarter. Sales of railway ties grew to $195 million versus $175 million in the corresponding period last year.
Excluding the currency conversion effect, sales of railway ties increased by CAD 9 million or 5%, all attributable to favorable sales price adjustments to cover higher costs. Volumes for non-Class I customers were lower due to the reduced level of treated ties inventory following the limited fiber supply availability in 2022. The steady maintenance demand for railway ties enabled this product category to account for 27% of total sales for the quarter. Residential lumber sales were down compared to the same period last year, which as Eric mentioned, were in line with our expectations. The decrease was attributable to lower volumes and pricing compared to the stronger demand and the rise in the market price of lumber in the same quarter last year. Sales in residential lumber accounted for 13% of total sales during the quarter. Turning now to profitability.
Led by the strong organic sales growth, particularly for utility poles, our EBITDA increased to CAD 120 million in the first quarter of 2023, up 36% compared to CAD 88 million in the first quarter last year. We saw notable strength in our EBITDA margin, growing 340 basis points to 16.9% in the first quarter from 13.5% last year. The increase was largely due to the margin expansion of the company's infrastructure related product categories, particularly stemming from favorable price adjustments realized for utility poles and railway ties, as well as the impact of a better product mix. The relative proportion of utility poles in the first quarter amounted to over 50%. During the quarter, we continued to actively invest in our inventory position.
We invested CAD 138 million in inventories to build our position to support the continued strong demand for poles and to replenish our untreated ties inventory, given the market availability. Inventories are a significant component of working capital, and the turnover is relatively low. We consider this an investment in our ability to provide service to our customers and meet their demand. During the quarter, we also used our liquidity to maintain the quality of assets and expand our pole production capacity, including acquiring the pole peeling and drying assets of Industries Poles and Pilings, as well as return capital to shareholders. Yesterday, our board of director announced a dividend of CAD 0.23 per share, and during the quarter, we repurchased over 600 million shares for a total of CAD 30 million.
Since the beginning of the current NCIB program in late 2022, we have repurchased over 1 million shares for CAD 50 million. As a result of our buyback programs, we had almost 4.5 million fewer average shares outstanding this quarter compared to last year's Q1. We ended the year with a net debt to EBITDA ratio of 2.8 times, which is within our expectations due to our typical working capital requirements in the first quarter of each year. We hold a strong financial position and are able to finance our business plans, meet working capital requirements, and maintain our assets through our cash flow generation and available credit facilities.
In summary, financial performance to begin the year has positioned us well to remain on track to achieve future growth and value for our shareholders. With that, I will now pass it on to Eric for his concluding remarks. Eric?
Thank you, Silvana. Our established track record of achieving robust results, delivering return to shareholders, and maintaining a solid financial position has continued into 2023. We attribute these achievements to our proven and resilient business model, as well as our ability to supply the growing demand for our products in the marketplace. We are well-positioned to meet or exceed the targets laid out in our three-year plan. From a sales perspective, we continue to benefit from strong demand on the utility pole side. Building on the growth trend for 2023, utility poles 2024 sales are now projected to grow at a compound annual rate of 20% from 2022, and the company also expects the EBITDA margin to exceed its 15% target by 100 basis points.
We also continue to enjoy steady growth in our railway tie product category, driven by stable partnerships and maintenance programs by our customers. The forecast for utility pole growth CapEx stood between $90 million and $100 million. Since the beginning of 2022, we have committed to equipment purchases and spent $49 million. So far, we have successfully changed three treating cylinders and increased our Douglas fir network treating capacity by 15%. We will also benefit from the production of two new Southern Yellow Pine pole peeling and drying facilities starting mid-year. We have returned $273 million of capital to shareholders since 2022. We are on track to achieve the target we outlined in our three-year plan of between $500 million and $600 million.
We have started 2023 on the right foot. We will continue to build on our achievement to support future growth of our infrastructure-related product categories and continue to return capital to shareholders. Before I conclude this call, I would like to acknowledge all of our employees across North America. They are the reason behind the great brand and reputation we have built. Our customer can rely on us for quality products, customer care, and meeting deadlines. All of those traits are because of our dedicated employee base. Thank you for all of your efforts. I also want to extend a special thank you to those who attended our annual meeting of shareholders earlier today, both in person and virtually. We are grateful for your ongoing support and trust in our business and look forward to seeing you again next year. This concludes our prepared remarks.
Thank you for your time today, and I will now open up the lines for questions.
Thank you, Eric. The line is now open for questions. I would like to remind you that if you are on the phone and wish to ask a question, please press star one. Our first question is from Walter Spracklin from RBC Capital Markets. Please go ahead, Mr. Spracklin.
Good afternoon, everyone. Congratulations on a great quarter here. Eric, I guess starting with you on poles. It's a pretty high run rate, 20% now out to 2024 on a CAGR basis. I guess maybe you can give a little color. I apologize, I was only connected in later in the call, a little later in the call, but, you know, the main drivers of that, is this kind of a fast and furious situation or higher for longer? Is it? You know, I don't think it's gonna drop off from 20 down to five in 2025. Is this something that kinda stays at a heady clip for many years based on what you're seeing?
Or do you see a lot of upfront here and then it indeed falling off, quicker, in, after a few years?
Thank you, Walter. You know, if you recall, last year, we had a great year in organic growth, 20%+. In March, when we disclosed our Q4 results, we provided more, you know, insight for this year's, you know, stating that we would see in 2023 similar growth to the prior year. Obviously, us seeing a CAGR of 20% over, let's say, the whole year of 2023 and 2024 would suggest something that's a bit front-loaded, obviously, you know, since we would be in the 20-ish this year. We've seen great growth, you know, in the last two years, you know, on the pricing side and the volume side.
I do see, you know, going beyond continued maintenance from our customers and continued maintenance and that, you know, is our beliefs that are supported by our growth CapEx initiatives. As I mentioned a few minutes ago, we've got two pole peeling yards that are coming online mid-year, which will offer us, you know, more fiber in our network, and we do plan on seizing, you know, more opportunities in the market. To your point or to your question, will it be 20% every year for the next five years? I wouldn't think so. We'll provide more insight at our Investor Day on May 25th.
you know, I could confidently say that, you know, the levels that we're seeing now will be sustained through time for a number of years at the very least.
That's fantastic. The 100 basis point improvement in margin, would you say, Eric, that's a function of pricing or kinda scale with higher volumes or would it be a bit of both? I'm trying to ascertain whether this is something that we can put in our models now longer term as is 16 the new 15? Or is this something that you think may be just a temporary benefit you're receiving, and maybe 15 is still the better number to use longer term?
The short answer is our recommendation would be the 16. You know, we will see, we have seen in the first quarter, you know, improved pricing, and we'll continue to see that throughout the year. We believe that will be sustained over time. There's also a product mix, if you want, in the sense that obviously our fast-growing product category is utility poles, so their weight in the mix of products is heavier, therefore, enabling us to reach better EBITDA margins.
Last question for me is now that the CP deal is done, KCS is now part of the new CPKC and given CP's historical, decision to kinda outsource tie treatment versus KCS' focus on doing it in-house, can you size that for us? Just, you know, not whether you're gonna get it or not, but from your understanding of what KCS does in-house, how would that be what percent of your overall tie volume would that be if, you know, on just a rough basis to get a sense of upside if you were to get that contract?
Walter, you know, we know the team at that treating facility in Louisiana well. As I stated before, you know, we do have interactions with them for bridge timbers and some very small volume of railway ties. You know, it would be a low percentage of our total business, you know. If I have to size those annual sales, you know, from outside, not having the privilege to any information, I would say it's, you know, call it $30 million-$35 million in annual sales if we were to be supplying them, and obviously I'm sort of, it's not an educated guess.
Sure.
It's our appreciation of what that could be.
Yeah. That's great. Okay. That's all my questions. Really appreciate the time, and, again, congratulations on a great quarter.
Thank you, Walter.
Thank you. Our following question is from Gabriel Nicholson from CIBC Capital Markets. Please go ahead, Mr. Nicholson.
Hey. Hi. Hope you all are doing well, and yeah, once again, congrats on the quarter. You mentioned that you were capacity constrained in poles, and this is kind of building off of Walter's first question. How much additional volume growth do you think you could have realized if you had the capacity? Do you think that the two new pole additions would cover that unmet demand?
It's a great question. Thank you. Our constraint right now is not on the treating capacity, it's on the procurement capability. Even then, when I say procurement, it's really more on the drying capability on the Southern Yellow Pine. It's a, it's a wood species that you need to kiln dry, and right now we're putting in new pole building yards, and each of those yards has kiln capacity. We're definitely gonna leverage that up, and everything we'll be able to produce out of those facilities will be sold, you know, will be sold going forward. We have no doubt of that. We have discussions with customers on their needs and, you know, we're adjusting our offerings to them and they're adjusting their maintenance schedules based on our long-term commitments to them.
I feel very optimistic about our ability to be able to start seeing volume growth in the coming quarters.
Okay. Yeah. Great. Thanks. Also on poles, the high teens growth, your pole guidance is embedding for 2024. How much is price versus volume?
I would say it's heavily weighted towards the price but, you know, call it 30/70, let's say, on. 70 being the pricing.
Okay, great. Thank you. I'll leave it there.
Thank you very much.
Thank you. Our following question is from Michael Kypreos from Desjardins Securities. Please go ahead, Mr. Kypreos.
Thanks. Congratulations on the great quarter. Maybe just on the Canadian federal budget that was released since you last reported, 4 Q results that included a 15% investment tax credit for crown corporations like Hydro-Québec and some positive comments on electrical grid expansion and demand in Canada. Is there maybe anything that specifically caught your eye and could be a driver for utility poles moving forward?
Well, obviously, we're always happy when we hear different governments or Canada and the U.S., you know, put in place programs to help utilities or companies invest in their, in their infrastructure. Obviously, yes, you know, our utilities are well in tune or our customers are well in tune with those programs. Our forecast doesn't, you know, when we talk about potential growth, does not scope in those infrastructure initiatives. It sometimes takes a while to start seeing them. You know, if I think about our the U.S. infrastructure bill, I can't say we've seen much of that to date, maybe a bit on the rail tie side.
These programs take a while to get to market, so they're not scoped into our views in future sales and future demand for us. Obviously, all of this would be just, you know, over and above and obviously great news for us.
Thanks. That's very helpful. Maybe just on residential lumber, I know, seasonality played a factor in the first quarter, but looking forward, do you still have confidence in $600 million-$650 million in sales for the year? Maybe are there any changes or tone in commentary that you could share from your discussions with, your retail partners on the customer demand so far this spring? Thank you very much.
Yeah. No. No, no change in views on that on our part. I think we were wise in establishing, you know, this base of expectation in sales. You know, I think it's something that, as a company, we can recreate year over year confidently and, you know, if then there's favorable R&R trends, if there's, you know, different dynamics, lumber prices impacting this business, you know, I think it would be just offsite for us on that point on. We remain confident with that $6-$650.
Thank you.
My pleasure.
Thank you. Our following question is from Michael Tupholme from TD Securities. Please go ahead, Mr. Tupholme.
Yeah. Thank you, good afternoon.
Hey, Mike.
Eric. Just a question on the 16% margin. I understand that that's the number we should be focused on for 2024 and beyond. Is that, is that also what we should be thinking about for this year? I mean, obviously, you had a strong start to the year, is that the 2023 number as well?
16% would be our guidance going forward. You know, if I could maybe clarify, our Q1 result, the 16.9% is a very strong number, but obviously, we don't have a full year mix of products, right? The other products, such as residential lumber, have a stronger presence in our product mix in Q2 and Q3. You know, I do expect to average down during the course of the year, but using 16% would be my recommendation or our guidance presently for coming years.
Okay. That's helpful. Thank you. Yeah, sorry, just to... I think this maybe overlaps a little bit with one of the last questions, but just in terms of the demand, the market demand you're seeing in the utility poles area now, I realize in Q1, it was primarily price or almost all price that drove the organic growth. It does sound like from your comments, there is strong market demand, and it's just a function of being able to, you know, to meet that demand and hence the investments you're making in capacity, and drying and whatnot.
Is this really just heightened replacement activity and I guess the benefits of the Firewrap, and there's really nothing contributing at this point at all in terms of any sort of EV-related infrastructure initiatives or broadband initiatives and things of that nature?
There is some of that in the mix of the demand we're seeing. You know, a good example is the, you know, the Ontario broadband program. There's a $4 billion program over. It was over four years now. We're a bit into it right now, but obviously, that spend will increase demand for products that we're. That's a public example I could point to. There are other similar examples across, you know, different provinces and states in North America. EV is a growing point of discussion with our customers. I think utilities realize that there's gonna be increased demand from the network. Obviously, as maintenance is being planned out, all of these factors are now taken into account, right? 'Cause you're replacing a pole.
It has, you know, more hardware and more line loads than it had 50 years ago, and there'll probably be increased demand going forward, you know, with AC, with electric vehicles. Our customers are discussing about it and are planning accordingly. Obviously, all of that, it's hard to say how much dollars would go to one of these. It's now part of the new mix and demand our customers are designing line and designing their maintenance programs. This general approach is driving the volume for a great-greater number of products from our part.
Okay. No, that's helpful and makes sense. I guess, not to belabor the point, but it just sounded like earlier on you were suggesting you haven't really built that into the sort of the 20% CAGR number you would put out there for the poles business. Is that, is that correct? Notwithstanding the fact that there's things happening in that area, that that's not really a driver of your 20% number?
All of that is in. What's not in is government infrastructure bills, for example. The previous question was about the federal budget that came out a few weeks ago and had special acknowledgments of reserves for, you know, particular infra pro-programs, you know. I don't know what's gonna come out of it, so we can't speculate, so that's not in there. Definitely, everything our utilities are talking about to increase their network, that is definitely scoped in our 20% CAGR.
Got it. Okay. Just shifting over to the ties business, 5% organic growth in the quarter. How do you see that trending over the balance of the year? Because if I'm not mistaken, originally, you were thinking maybe a little lower than that. Just curious about how to think about the rest of the year here.
I would see the pricing fees decline slightly throughout the quarters. We've been increasing sales prices to our customers every quarter of last year. Obviously, you know, we're coming into the year in Q1, you know, with four quarters of price increases as we're lapping ourselves, you would see that pricing effect reduce over time. With my comment on increasing dry inventory, I think we would have the opportunity to sell a bit more volume in the back half of the year. Still think that, you know, low single digit, maybe a bit lower than the 5% somewhere, you know, in there is where we'll end up the year.
Okay. Raw tie availability has that improved now?
It has. I mean, sorry, the last two months of Q4, so November to December was great. The four can actually talk to April now. The first four quarters of this year, supply has been coming in at a very healthy rate. We will be at optimum inventory levels by mid-year. Obviously the inventory we procure in, you know, December, January, February will be dry by, call it September. Somewhere in H2, we will have more dry inventory, therefore we'll be air-seasoning less and have an opportunity to treat more tires and, you know, take advantage of some bidding opportunities in the market.
Okay, perfect. Thank you. Just lastly, I also had some issues earlier with the call, so I don't know if I missed this or not, but the industry acquisition, that's called out in the release, is there any revenue associated with that, or is that more just in order to enhance your production capacity?
No. There's no revenues. It's to enhance production, and optimize, you know, optimize the cost profile of our product and optimize production.
Okay. That's one of the things that you were pointing to in terms of, seeing enhanced, ability to meet market and sort of overcoming quarters here?
Correct.
Okay. Okay, thank you.
Thankyou, Mike.
We have no further question in line. Thankyou .
Well, thank you, operator, and thank you everyone for joining us today. We hope you can listen in to our Investor Day on May 25th in Toronto. Details for virtual attendance will be posted on our website as we get closer to the date.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may disconnect your lines.