Features Operation Reports Remanufacturing
Stella-Jones benefits from high demand, acquisitions

The acquisition of Ram Forest Group Inc. and Ramfor Lumber Inc. (collectively, “Ram”) on Oct. 1, 2015, contributed sales of approximately $51.7 million. The acquisitions of Lufkin Creosoting Co., Inc. (“Lufkin Creosoting”) and of 440 Investments, LLC, the parent company of Kisatchie Treating, LLC, Kisatchie Pole & Piling, LLC, Kisatchie Trucking, LLC and Kisatchie Midnight Express, LLC (collectively, “Kisatchie”), both completed on June 3, 2016, added combined sales of $5.6 million, while acquisitions in the southeastern United States completed in the second half of 2015 added sales of approximately $7.4 million. The conversion effect from fluctuations in the value of the Canadian dollar, Stella-Jones’ reporting currency, versus the U.S. dollar, had a positive impact of $13.2 million on the value of U.S. dollar denominated sales when compared with last year’s second quarter. Excluding these factors, organic growth was approximately $57.2 million, or 13.4%.

“Stella-Jones’ strong sales growth in the second quarter stems from its greater reach in the residential lumber category and sustained demand in the railway tie category. Further improvement in operating profitability reflects economies of scale generated by higher volumes as well as our ongoing focus on optimizing network efficiencies,” President and CEO Brian McManus said in a press release.

Railway tie sales amounted to $216.3 million, up 11.1% from $194.8 million last year. Excluding the currency conversion effect, railway tie sales rose approximately 7.3%, primarily as a result of healthy industry demand.

Sales of utility poles reached $142.8 million, compared with $136.7 million last year. Excluding the currency conversion effect and the contribution from acquisitions, sales declined approximately 6.7%. During the quarter, sales of distribution poles softened as a result of reduced maintenance demand in certain regions, while sales of transmission poles held steady versus last year.

Sales of residential lumber totalled $152.1 million, up from $60.9 million last year. This strong increase reflects sales of $51.7 million from the Ram acquisition, increased market demand as well as the impact of the transition from treating services only for wholesalers to a value-added full service direct offering for retailers.

Industrial product sales amounted to $27.0 million, compared with $25.4 million a year ago, as the currency conversion effect more than offset a decline related to the timing of orders for rail related products in the United States. Logs and lumber sales were $24.8 million, versus $10.4 million last year, due to procurement efforts to support residential lumber requirements and the timing of timber harvesting.

Operating income reached $83.2 million, or 14.8% of sales, versus $61.1 million, or 14.3% of sales, last year. The increase in absolute dollars stems from increased business activity, the contribution from acquisitions and the effect of currency translation. As a percentage of sales, the increase is mainly attributable to economies of scale generated by higher volumes in the residential lumber category, greater efficiencies throughout the Company’s plant network and the year-over-year variation in other net losses and gains. These factors were partially offset by the greater logs and lumber sales, which are performed at a value close to their cost of sales.

Net income for the second quarter of 2016 increased 40.4% to $54.7 million, or $0.79 per diluted share, compared with $38.9 million, or $0.56 per diluted share, in the second quarter of 2015.

Outlook

“Market demand for our products should remain healthy for the remainder of 2016. With respect to railway ties, we expect second-half demand for 2016 to be down on a year-over-year basis following a strong first half of the year. In the utility pole market, regular maintenance demand is expected to remain relatively steady for the balance of the year, despite a slight softening in the first half of 2016, while transmission pole sales should hold following the stabilization in resource prices. Stella-Jones’ broader reach in the residential lumber category will allow us to further benefit from continued demand for new construction and outdoor renovation projects in the North American residential and commercial markets. As for the short-term, our priority is to integrate recent acquisitions into our network by leveraging best practices to enhance network efficiencies and create lasting value for our shareholders,” McManus said.