Stella-Jones Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 7 speakers on the call.

Operator

Good morning, and thank you for standing by. Welcome to the Stella Jones Second 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 questions by phone, please press star 1.

Operator

A moderator will contact you. I would like to remind everyone that this conference call is being recorded on Wednesday, August 9, 2023. Please note that comments made on today's call may contain forward looking information, and this information, by its nature, is subject to risk and uncertainties. Actual results may differ materially from views expressed today. For further information on these risks and uncertainties.

Operator

Please consult the company's relevant filings on SEDAR. These documents are also available in the Investor to 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 during this call. I'll now pass the call over to Eric Vachon, President and Chief Executive Officer of Stella Jones. Eric?

Speaker 1

Thank you, Shirley. Good morning, everyone, and thank you for joining us today. Only. With me on today's call is Saldanha Travalini, Senior Vice President and Chief Financial Officer of Stella Jones. Earlier this morning, we issued a press release reporting our results for the Q2 of 2023.

Speaker 1

Along with our MD and A, only mode. 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. I'm pleased with our financial and operating results in the Q2, which reflected the upward momentum only mode. It provides a good start to our 2023 to 2025 outlook, which was updated at our inaugural Investor Day in May.

Speaker 1

We delivered strong second quarter results only fueled by ongoing organic growth, all while setting the stage for the accelerating demand across North America, particularly for utility poles. Only. We did this not only through continuous investments in our network, but also by pursuing acquisitions that support our growth and help us ensure we deliver predictable consistency and quality in serving our customers. Only. The company has recently made notable additions to its network.

Speaker 1

In the quarter, we acquired the Southern Yellow Pine pole peeling and drying assets of the Balfour Pole Company for a consideration of US15 $1,000,000 Located in Georgia, Balfour's operations are situated in an area where we have established an established presence, and this acquisition will help drive cost and operational efficiencies for our utility pole business. In July, we acquired the wood utility pole manufacturing business of Baldwin Pole and Piling for US48 $1,000,000. Baldwin is a storied business with a record of producing quality SYP poll products for its local utility customers. Its Alabama and Mississippi facilities expand our capacity to supply growing demand while optimizing the overall efficiency of our network, which now counts 45 trading facilities in North America. I would like to welcome the 80 new employees from Balfour and Baldwin who joined the Stella Jones team in the last few weeks.

Speaker 1

Only. Accretive acquisitions such as Balfour, Baldwin and Industries completed earlier this year remain a key area of growth potential for our business as we continue to seek opportunities that complement our network. We are also pleased to highlight of commissioning of our pole peeling facility in Durette, Mississippi, which opened on June 1 and is now fully operational. Only. You can see the significant footprint of the facility on the current slide of the accompanying presentation.

Speaker 1

Only. As we scale up to better cater to expected demand acceleration, this facility strategically located in the South over the next few years. We will help maximize our treating capacity in this area. In the second half of the year, only. The 2nd pole peeling facility in the Southeast region will be commissioned and we will begin work on the planned capacity expansion to increase our Douglasford network, all in line with our growth CapEx plan.

Speaker 1

Through a combination of strategic capital investments, on acquisitions and ongoing organic growth, we have built a strong infrastructure product business. Our customers recognize the quality of our work, ability to adjust to their needs and the strong distribution capabilities we offer. We work in collaboration with our customers to best understand their requirements, and over time, we have expanded and innovated our product offerings accordingly. As our customers' needs evolve, only. We have a few strategic partners that can support their projects and assure product readiness when and where they need it, which we proudly deliver.

Speaker 1

Only. Now let's turn to the business dynamics of each of our key product categories. Our utility pole product category and continue its course of strong performance. Market demand remained robust. All while sales volumes were lower in the quarter, we continue to project and work to serve as the accelerated demand growth for utilities.

Speaker 1

As we turn our focus to customers' long term projects and to agreements structured to support growth, we are adapting to best meet the rising demand into the future. Only. With our expansive network, vast resources and enhancing production capacity, we have the mechanisms in place to support on the expected volume growth ahead of us. Railway tie sales were also up in the 2nd quarter, benefiting from continued price increases passed on to only. Inventory constraints shifted our focus to fulfilling long term commitments, and we are pleased to see on the continued trend of dry tie inventory growing stronger month over month.

Speaker 1

We are confident that the current level of untreated tie will allow us to not only continue to honor our long term commitments, but also service the strong non Class 1 market demand in the upcoming quarters. Only. Lastly, for residential lumber, we saw healthy demand in Q2, which reflected our ability to supply product consistently to big box retailers and maintain a loyal customer base. Halfway through 2023, our residential lumber product category is and performing in alignment with our guidance for annual results. With that, I will now turn it over to Silvana to provide a more detailed overview of our Q2 financial results.

Speaker 1

Silvana?

Speaker 2

Thank you, Eric, and good morning, everyone. As Eric stated in his remarks, We've had a great start to 2023 with continued strong financial results in the 2nd quarter. Only. Sales in Q2 increased to $972,000,000 up from $907,000,000 last year. Only.

Speaker 2

The increase was driven by a 10% organic sales growth of our infrastructure related businesses, largely explained by pricing gains over the call for utility poles, railway ties and industrial products. This increase was mitigated in part by lower residential lumber sales and lower volumes for utility poles and railway costs. Sales in the quarter also benefited from the contribution of the of coal treating assets acquired from Texas Electro Cooperative in November last year and the positive effect of currency conversion. Only. Utility pole sales increased to $388,000,000 in the 2nd quarter compared to $316,000,000 for the same period last over the next year, largely explained by the organic sales growth of 13% and the contribution from the TEC acquisition.

Speaker 2

Only. The organic growth was driven by higher pricing as sales volumes were down quarter over quarter due to the impact of extreme weather events on our California customers' maintenance activity as well as delayed timing of shipments. We expect the deferred volumes in Q2 to contribute to more sales in the second half of the year. Sales of railway ties rose to $238,000,000 compared to $215,000,000 last year. Organically, sales were up $13,000,000 or 6%, all attributable to favorable pricing.

Speaker 2

While Class 1 volumes were up this quarter, overall volumes were down as we did not have enough Residential lumber sales of $271,000,000 decreased by $15,000,000 compared to the same period last year. Due to sales were impacted by the lower market price of lumber and the resulting decrease in sales price versus the Q2 of 2022. Only. A large part of this decrease was, however, mitigated by the solid sales volumes in the quarter. So far this year, sales are in line with our only.

Speaker 2

Moving now to profitability. Our EBITDA increased to CAD175 1,000,000 in the on the same quarter, up 14% compared to $154,000,000 in the Q2 of 2022, over the course of the year, outpacing the 7% sales growth. This increase was attributable to the expanded margins of our infrastructure related product categories, largely on account of price increases realized for utility pulp. Led by the only. With strong utility post sales growth and resulting improvement in product mix, our EBITDA margin increased to 18% from 17% in Q2 last year.

Speaker 2

Following a strong start across our product of categories. We now expect the EBITDA margin for 2023 to exceed our 16% objective. Net income in the Q2 was $100,000,000 up 6% compared to last year, while earnings per share also benefited from the company's ongoing share repurchase program and was up 14% versus the same period in 2022 to $1.72 per share. Only. During the quarter, we used the cash generated from operations of $127,000,000 to invest in our network and expand our utility pole production capacity, which included the acquisition of Balfour's pole peeling and drying assets.

Speaker 2

Also continue to return capital to shareholders in line with our commitments. So far this year, the company has returned of $87,000,000 to shareholders through dividends of $27,000,000 and share repurchases of $60,000,000 only. Since the beginning of the current buyback program in late 2022, we have repurchased 1,500,000 shares for $80,000,000 During the quarter, we continued to build the utility poles inventories to support the strong demand, but it was more than offset by the seasonal decrease in residential lumber inventory. As for the untreated railway inventory, it was largely replenished by the end of the first quarter. As we head into the second half of twenty twenty three, We have a healthy inventory position that will allow us to service our customers and meet their evolving needs for our products.

Speaker 2

Only. At quarter end, we had $292,000,000 available under our credit facilities and maintained a solid financial position with a net debt to EBITDA ratio of 2.6 times. Through our consistent cash flow generation and available credit facilities, only. We can maintain our assets, meet working capital requirements and finance our business plans. Only.

Speaker 2

Yesterday, our Board of Directors announced a dividend of $0.23 per common share payable on September 25, 2023, only to shareholders of record at the close of business on September 5. In conclusion, only. With that, I will now turn it back to Erik for his closing remarks.

Speaker 1

Thank you, Silvana. Only. As we look to the second half of twenty twenty three, we believe we are well positioned for future success to capitalize on additional opportunities. Only. The 3 acquisitions we concluded to date in 2023 have allowed us to secure fiber supply ahead of expected demand and continue to enhance production and operational efficiency.

Speaker 1

These acquisitions not only help us remain in line with our goals to augment capacity to keep pace with the demand growth for our utility pole product category, only, but they also enable us to leverage existing assets within our network. During our Investor Day, we noted several growth catalysts that will allow us to achieve our financial targets and create long term shareholder value. For utility poles, Ongoing maintenance, broadband expansion and new power generation sources continue to be significant growth catalysts. On the railway tie side, increased volumes, favorable pricing dynamics and product innovations are key growth drivers. Only.

Speaker 1

Finally, product expansion, sourcing and procurement as well as favorable macro trends will help drive the residential lumber product category going forward. Only. We are off to a great start and look forward to the second half of the year as we set ourselves up nicely to execute on our updated 3 year growth plan. Only. Through this revised guidance, we endeavor to increase sales to over $3,600,000,000 by 2025, on, maintain EBITDA margins of 16% and return more than $500,000,000 to shareholders, while maintaining a leverage ratio of between 2 on

Speaker 2

the call at

Speaker 1

2.5 times. In closing, our established record of success to date can be attributed to our team of outstanding employees across North America. Only. Our customers can rely on us for quality products, certainty of supply and timely service, only, and that is because of our employees who possess the agility, resourcefulness and dedication to deliver the very best every day. Thank you for your time today.

Speaker 1

And I will now open up the lines for questions.

Operator

Thank you, Erik. The line is now open for questions. I would like to remind you that Our first question is from James McGarrigle, RBC Capital Markets.

Speaker 3

Hey, Eric. Hey, Savannah. Congrats on a great quarter and thanks for taking my question.

Speaker 1

Thank you, James. Good morning.

Speaker 3

Yes. So my question is on the U. S. Infrastructure bill. I know copper last week and some of the U.

Speaker 3

S. Steel Producers during earnings, they made some commentary that they're starting to see the funds planned and they're expecting some of that money to be spent kind of early 2024. And I know your guidance is it doesn't include any of that on U. S. Infrastructure spending, because it's kind of hard to quantify and to be certain under the timing.

Speaker 3

But it seems like a lot has changed since your Investor Day. So can you talk to any of the conversations you're having with regards to U. S. Infrastructure spending only. And any additional color that you guys can give us that's happened since the Investor Day would be appreciated.

Speaker 3

Only.

Speaker 1

Yes, certainly. Thank you, James. Well, the fund allocation is certainly getting organized. It's very early for us to be able to even speak to it presently. I do think we'll eventually We will benefit from the allocation of those funds.

Speaker 1

But right now, nothing significant on the horizon as far as I can tell. Although dynamics and infrastructure remain strong and our customers are very active in planning projects. And obviously, all of this is sort of intertwined, But I can't say I have a very important update on that front.

Speaker 3

And then we're going back to the infrastructure spending. I think a lot of focus has been on what's going to happen on the utility pole side, but there's a lot of money being allocated for rail infrastructure as well. And I know a lot of your company's investments have been on the pull side, but what's your capacity A lot of that infrastructure spending work to flow through on the rail side to kind of step up high production given some of The constraints that you were highlighting.

Speaker 1

That's a great question. The key only. In answering this question, it starts with the inventories. And obviously, having dry inventory enabled us to have more throughput at our facilities. As Silvana explained, we are in a healthy inventory situation overall.

Speaker 1

We now need the proportion of that inventory to increase in the proportion of the inventory to drive the increase over time, and I think we'll be there in the next few months. So that positions us very well for any I'm not concerned about the capacity aspect of things. It's really having access to the resource, the fiber and having the proper dry inventory to be able to respond promptly to these to the inquiries. And I think we've done a lot of work in the last 8 months in the railway tie division to prepare for good demand in 2024 and our conversation today leads to think that it will be a good year next year and we're well positioned for that.

Speaker 3

And then my last question here before I turn it over. Only. I know there's been some headwinds in your negotiations with the rails to pass on some of those Some of that recent raw material costs on the railway tie side, how have those conversations been evolving? I know Your peer was in a similar boat. I think they actually said that they would exit the industry if they weren't able to pass those price Increases on them.

Speaker 3

I'm not sure how serious they were about that, but that was something I think that they said on the call. So only. Have you noticed any change in the dynamic, with your negotiations with the rails? And over kind of what period of time do you think you'll be able to pass on some of those raw material price increases on the Thai side to kind of work on the margins on that side of the business.

Speaker 1

Right. Well, with so as you know, 60% of more or less or 70% actually of the business is related to Class 1s. We have long term contracts and we work within the mechanisms of the contracts we have for price increases. We've been adding pricing or increasing pricing quarter over quarter now for several quarters, more than a year, I would almost say like 8 at least 8 quarters' worth of increases. So we keep pushing forward.

Speaker 1

We as a company, we stand our ground. Obviously, we were in business to generate margin and have returns on our working capital investments, and we keep pushing for pricing. Actually in all product categories, that's what we're in business for. But we're moving ahead and pushing forward on that front.

Speaker 3

Thank you very much and congrats guys. Thank

Operator

you. Our following question is from Benoit aporier Desjardins Securities. Please go ahead.

Speaker 1

Only. I can't hear you well, Benoit.

Speaker 4

No. Okay. One time, can now, is it better? Only. Yes.

Speaker 4

Yes, sorry. Okay. Congrats, Eric and Silvana, for the strong start of the year. First question, when we look at the utility pole, you achieved 13% organic growth. And you point out the delayed timing of shipments and the deferred maintenance of utilities in California.

Speaker 4

But Do you still feel comfortable with the 20% target for the year? Only. Okay. Okay. And one of your Poland Infrastructure peers in the industry came out and spoke about near term softness in the telco market as we are seeing CapEx spending more aligned to historical trends.

Speaker 4

Is it more specific to other type of pull? Or do you still

Speaker 1

So not really seeing that. So it's the same poles because they usually share the networks. It's the same type of pole that utilities would be using. We have telcos in the mix of our customers. We haven't necessarily heard much on that front.

Speaker 1

Actually Heard a few telcos come to us and talk about potential broadband projects in the future actually. I almost say it's a bit of the opposite of what over the course of the year, but we haven't seen any softness, Benoit. And honestly, if there were a bit of softness in the mix of all the demand we have on the utility side, I don't We'd be even talking about it today.

Speaker 4

Okay. With respect to the Canadian wildfires, could you maybe provide some color about on how it impacts your operation in the quarters and any changes in the procurement or inventory management? And only. Do you see an opportunity to sell the fire retardant mesh product in Canada following the worst wild of ours in the country that we've seen.

Speaker 1

That's a good question. So I guess 2 parts to your question. The first one is, We've been fortunate, the areas in which the fires or the area that the fires have impacted Did not touch our key procurement areas. So I can't say that for utility poles were impacted, and our suppliers for residential lumber either they seem to be moving along and be able to supply us the required products. As As far as the fire retardant or the so lots more to fire retardant product, but I would expect to see some interest from Canadian Utilities over time because you're right, it does raise some concerns.

Speaker 1

Now also bear in mind that areas where the fire is impacted are in the wilderness and there's not always road and utility poles in those areas, but it does bring back to mind or to the thought process about the importance to have a very strong and resilient network.

Speaker 4

Okay. And with respect to the EBITDA margin, Obviously, strong start, 18% in Q1, higher than expected. And Silvana, you mentioned that you feel comfortable to over 16% for the year. So I was wondering if you could provide some granularity about what or could be achieved beyond 16% and whether you could achieve the 17%, 18% level As part of your strategic plan or it's just a 1 year strong performance?

Speaker 2

So we're definitely confident, like we said, that this year will be above 16% given the strong start and really came from all of the product categories, obviously, utility poles being the most notable one, but good contribution above what we expected on both the railway ties and residential lumber. That being said, beyond this year, we the objective to maintain the 16% difficult for us at this point in time to project anything beyond that comfortable that we'll be able to maintain and we produce that 16% in the next 2 years of our guidance, but would not venture out to say at this point to or beyond that for 2024 2025.

Speaker 4

Okay. Thank you very much and congrats. Only.

Operator

Thank you. Our following question is from Michael Tupholme, TD Securities. Please go ahead. Only.

Speaker 5

Thank you. Good morning.

Speaker 1

Good morning, Mike.

Speaker 5

On the utility poles side, can you provide a little bit more detail on on the delayed timing of shipments and the deferral of maintenance by utilities in California just to help us understand what sort of an impact that had on that Utility pools category organic growth in the quarter, just sort of frame how impactful this was?

Speaker 1

Well, the well, first off, let's start with our California customers. There were a series of heavy rainfall in the California region, which led to significant flooding and then landslide and mudslides, and we all saw that on the news. So that has sort of pushed out in time the maintenance the The utilities in California have been focusing on restoring some powers and taking care of the infrastructure, but the upgrades That were planned this year has sort of been pushed out to, I guess, delayed to the second half and into next year at this point. So that is that dynamic. Only.

Speaker 1

With regards to the lay of shipments, it's just a question. It's the timing of When the customer wants to take the orders, so we have the orders, we have a healthy order book. It's a question of when the customer is actually going to want to take those orders. The good news there is that our procurement and production functions have been performing extremely well and holding to plan and being able to So I guess it led to a small build of inventory at the end of the quarter, but it's all going to sort of only.

Speaker 5

Okay. I mean, I guess a different way to try to ask the question, if possible, is just only. The EBIT 13 percent organic growth in utility pools in the quarter, had you not had those issues you just spoke about and had things shipped as planned, Can you tell us what organic growth would have looked like?

Speaker 1

Yes, I think it would have been closer to the 20% we've been guiding, Mike.

Speaker 5

Only. And as you overcome these issues, is this a situation where You recover those volumes plus due, which you would have otherwise done in the second half? Or do some of this stuff just kind of get shifted to the right?

Speaker 1

I think it's a combination. Some of it will get shifted right and some of it might be a pickup. We're expecting a good quarter in Q3. As I mentioned we have some inventory to ship. All we needed is the green light and some railcars or trucks to move them.

Speaker 1

But then some of them will shift it, right? Like, for example, the California maintenance, I don't think those utilities will catch up The H1 volume that they fell short of. I mean, we don't manage quarter to quarter, right? It's Continuing of our customers having projects and moving along and we're supporting them and we feel pretty good about what's coming ahead of us for future quarters.

Speaker 5

Only. That's helpful. Thank you. As far as the 2 acquisitions you announced, can you talk about how much annual revenue capacity those 2 acquisitions only. And what as we think about that, I mean, what does that theoretically mean organic growth could be with the benefit of that additional capacity.

Speaker 5

Because I think that was one of the consumers looking at a little further, but in 2025, one of the constraints to delivering higher revenue growth had been a comment on sort of capacity. So this in part Addresses that issue, not necessarily in 2025, but just trying to get a sense for how much this adds.

Speaker 1

Right. So the Balfour and Baldwin acquisition are different in the sense that Balfour is a pole peeling and drying facility. So they're actually providing the fiber for our network. So they don't have a treatment capacity. So it's more for securing fiber, increasing actually the security of fiber for us and also efficiencies within our network.

Speaker 1

So that will Show up more at the margin level if you want. The Baldone acquisition is, I guess, truly a wood treating facility that has peeling, drawing and treating capacity ahead of customer list, if you want. So we didn't disclose the sales, but if you look at our If you look at our history, our sales price usually lined up more or less about one time sales. So I think you can use that as a guidance. The Baldwin acquisition does have some upside potential on volume.

Speaker 1

So I think It is a very key acquisition for us because it comes with a customer list, a book of business. It was very accretive, but we think we'd be able to move more volume in the next 12 months through that facility helping us service better our customers and potentially new customers.

Speaker 5

Okay. That's helpful. Thank you. And then on the margin, so suggesting that this year you could do better than the about it the same way you previously were or could some of the outperformance on the margin that you saw in the first half, are you expecting that to continue on in the second half relative to prior

Speaker 1

So look, the starting point, I guess, I'll go back to Silvana's comment earlier. So we saw Very good margin performance in all three product categories in the first half of the year, better than, I guess, our initial guidance, if I think this will flow through in better part for the year. Obviously, our utility pulp product category is leading the group there with healthy pricing and obviously good performance on the margin. Now let's also keep in mind a few things. One is Our second quarter is usually our highest EBITDA margin quarter simply because all three product categories or in peak season.

Speaker 1

So could it sort of tail down or slow down a bit in the next quarters? Yes. But I think right now with the performance we've seen in the first the year, it's quite clear that we'll be exceeding that 16%. The guidance we provided was to maintain 16% in each of the 3 years of our guidance. And I think I'm very pleased with the performance so far.

Speaker 1

I think it's clear to us now that we'll be achieving this and maintaining it or of release this now for the year, which is great. And once we reset again next year, we'll obviously shoot to start off maintaining the 16%. And If our team can bring us more, I'll be happy to celebrate that with the team.

Speaker 5

All right. Thank you. I will get back in the queue.

Speaker 1

Thank you.

Operator

Thank you. Our following question is from Roman Seninche, National Bank Financial. Please go ahead.

Speaker 6

Good morning, Eric and Sylvana, and congratulations on the quarter.

Speaker 1

Thank you, Roman. Good morning.

Speaker 6

Good morning. I know you touched a bit on the railway ties earlier, only. But I was wondering if you could comment a little bit more on the level of volumes you'd expect to see over the next year or so. I know over over the last number of years, the overall volumes in North America have come down from the $20 plus 1,000,000 mark. And just want to get a sense of how you see that developing over the next couple of years?

Speaker 6

Thank you.

Speaker 1

Well, thanks for the question. I guess, I always refer to the industry itself. The Railway Thai Association data shows that the last 25 years, The average volume sold by the industry is around 19,000,000 tons. In the last couple of years, we've been slightly under that average. However, I do believe that we'll be working towards that average, let's say, as early as next year, if not slightly higher than that.

Speaker 1

So and obviously, being one of the leading suppliers in North America, we would benefit from that increase in particular related to our long term contracts with Class 1 customers. That being said, we're also seeing healthy demand in the non Class 1 or the commercial market. And again, as we build our dry inventory, we'll be addressing more of that market in the coming quarters, so that maybe the back half of the or the end of this year, but certainly into next year is when I express future quarters, I'm not limiting it to 2023.

Speaker 6

Thank you so much. That's very helpful. And I just had a second question around the through your guidance for the next couple of years. And I was wondering whether that guidance already imputes acquisitions explicitly or if it's purely organic? Only.

Speaker 1

It was purely organic. So acquisitions were not included in that guidance nor was the impact of infrastructure programs by governments in Canada or the U. S. Simply because it's always hard to predict and predict the timing of acquisition and predict The allocation of funds from government, so all of that is not within our guidance. Perfect.

Speaker 6

Thank you so much and congratulations again.

Speaker 1

Thank you. It's our pleasure.

Operator

Thank you. Our following question is from Benoit Poirier, Desjardins Securities. Please go ahead.

Speaker 4

Yes. So just to come back on railway ties, you were able to achieve on 6% organic growth in Q2. Just wondering whether it's sustainable going through the second half and maybe if you could provide the

Speaker 1

It's actually a good question, Varun, because Our customers have a maintenance program, and it's not necessarily spread out evenly throughout the year. So if I take a look at the 1st 6 months of the year, The increase we've been seeing is driven by pricing and offset by some lower volume as We did not have enough dry inventory to sell into the commercial market. Going forward, as I look into the back half of the year, my understanding is that some Class 1s will be slowing down their maintenance programs that They've done the maintenance work they wanted for this summer. So I do see some maybe a bit more of volume adjustment downwards from for a couple of Class 1s, Which would probably bring us back to our low single digits, right? So obviously, under the 6 and Hard to pinpoint that number right now, but definitely call it low single digit.

Speaker 4

That's great. And when you look at your Comments made on non Class 1 railroad that you'll be able to better serve those clients towards the back half of the year, twenty twenty four. Is it fair to expect the margin profile to go upward for railway ties as you're able to increase your mix toward those non class

Speaker 1

Yes, it should definitely. Obviously, the spot market is what do we quote, on the pricing. We're obviously competing other I guess other suppliers, but typically it's easier to Our cost profile and recoup, I guess, our cost because there's no contracts as we're bidding we're We're actually bidding for what we think we should be getting for the time. So that is definitely a better margin business for now.

Speaker 4

Okay. And for residential lumber, You mentioned still healthy demand at the big box store. Recently, we saw an increase in lumber prices. But Would it be fair to think that it could be a tailwind going forward that this was not taken into account in your outlook?

Speaker 1

If price increases would maintain, yes, eventually it would be a tailwind. Internally, we tracked it 2 by 6, and it did increase at, let's say, the end of June, early July and sort of tempered off and actually dropped ever so slightly at the back half of July. But to your answer to your question, yes, if prices would increase because of pressures of wildfires and dynamics of the life, Yes, we would probably see a bit of a tailwind on our sales price.

Speaker 4

Okay. And last one for me, just for the Penta phase out deadline in October 2023 in Canada. Any update on the DCOI approval by the government?

Speaker 1

So we're not the applicants for the label of the COI, right, our supplier is. So we're not of privilege to all the conversations. So there's no firm timelines that have been communicated. I do believe that the Federal agency is working diligently at reviewing the files. And from our side, we have adjusted and are ready to go going forward after October 4, ready to supply our customers with alternate preservatives and alternate solutions as best we can until

Operator

Thank you. Our following question is from Michael Tupholme, TD Securities. Please go ahead.

Speaker 5

Thanks. So just On the pricing front, this has been a key driver to the sales growth you've seen for some time now in both poles and ties. Can you talk about the extent to which you're still seeing new pricing increases put through at present? Or is all of the benefit you're getting now reflective of past pricing increases and an easier year over year comp.

Speaker 1

I would say we're pretty much there, Mike. For utility poles, I don't expect as we look at our pricing here standing in midyear, I don't think we'd see Much more price increases for the balance of the year. Obviously, as we hit next year contract renewals, we'll be adjusting again. But I don't believe we'll see much pricing impact, additional to what we've seen so far. And on railway ties, it might inch up here, there on the railway untreated tie costs have more or less stabilized in the market.

Speaker 1

So I think we're pretty much caught up there.

Speaker 5

Only. Okay. And so when should we see you actually lapping, the easier comps such that the pricing tailwind won't be showing up as a benefit, assuming no further increases of any material degree from here.

Speaker 1

For Real Retize, it would be next year, probably Q2 next year, we'd be lapping rate. It would be comparable if the dynamics Yes. I would say the second half of next year, but I would expect that small inflationary costs creep into on labor costs and overhead and so on. Those are part of the renegotiations we have on an annual basis with our customers when we adjust. So it might keep increasing that at not to the rate of 20% that we know we've seen last year.

Speaker 1

This year, obviously, we were There were different dynamics, but I could see small adjustments going into the future. But I guess if you want to look at the good point where we would lap, I would say H2 next year. Only. Okay. And

Speaker 5

then maybe just a follow-up to Benoit's question about railway ties outlook in the second half. So you said with The possibility of some certain Class 1 is pulling back on maintenance a little bit. They've completed their maintenance. We could see organic growth drop down a little bit from where it's been the last couple of quarters. I guess I'm just trying to understand how the possibility of a step up in non Class 1 volumes.

Speaker 5

Does that not act as somewhat of an offset? Or is it just not material enough in the context of of whatever kind of a pullback in the Class 1 volumes you see.

Speaker 1

So there could be a bit of an offset In fact, there's a few things, I guess, and I hope everyone's still listening because one thing we don't know is some Class 1s, although they say, oh, my maintenance is done, for example, at the end of September, It's not clear if they're going to buy somewhere, we call it pre buy, but buy some inventory in October, November to distributing the network to start maintenance in Q1. So right now, we have no clear signs of that. So if so either we go down that route to service those customers or we will start servicing the non Class 1 market, but it would not be enough in Q4 to offset that volume. But it would be like a positive momentum like, you'll have dry inventory, you'll sell in Q4, it'll grow into Q1, next year and it will build momentum to I guess to catch up some volume downturns we had in the last year.

Speaker 5

Okay. So still when you put that all together, you're still thinking in the second half of this year, we could see a little bit of a moderation in organic growth versus that kind of mid single digits we've been seeing.

Speaker 1

Yes, yes, yes, exactly. Okay, that's great. Thank you. Thank

Operator

you. We have no further questions in the queue. Thank you.

Speaker 1

Only. Thank you, Shirley, and thank you, everyone, for joining us today. We look forward to speaking with you again at our Q3 update in November.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for your participation, and you may now disconnect your lines. Good morning and thank you for standing by. Welcome to the Stella Jones Second Quarter 2023 Earnings Call. At this time, all participants are in listen only mode.

Operator

Following the presentation, we will hold a question and answer session. If anyone has any difficulties hearing the conference, please press star 1 for operator assistance at any time. I would like to remind everyone that this conference call is being ordered on Wednesday, August 9, 2023. Please note that comments made on today's call may contain forward looking information, and this information by its nature is subject to risk and uncertainties. Actual results may differ materially from the views expressed today.

Operator

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 at www.stella jones.com. We have also prepared a corresponding presentation, which we encourage you to follow along during this call. I'll now pass the call over to Eric Vachon, President and Chief Executive of Stella Jones.

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Earnings Conference Call
Stella-Jones Q2 2023
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