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Stella-Jones pleased with Q2 2019 results despite short-term challenges

Stella-Jones Inc. today announced financial results for its second quarter ended June 30, 2019.

“We are pleased with our second quarter results given the short-term challenges experienced in certain markets. Sales were stable as higher sales prices and healthy demand for utility poles, combined with the positive currency conversion effect, were offset by lower volume and pricing in logs and lumber, temporary shipment delays in railway ties and wet weather conditions in residential lumber. Notwithstanding this operating environment, we delivered increased profitability driven by improved pricing and better operational efficiencies in the U.S. Southeast,” said Brian McManus, President and Chief Executive Officer.

“We continued to follow our strategy of continental expansion by completing a tuck-in acquisition in Ontario in April and finalizing our plant expansion in Cameron, Wis. For 2019, we expect higher year-over-year sales and margin improvement over last year. Our strategy remains intact as we will continue to focus on optimizing our operations across the organization while seeking acquisitions to further expand our presence in our core markets,” stated Eric Vachon, Senior Vice-President and CFO.

Second quarter results

Sales reached $661.8 million, stable, versus sales of $662.3 million for the corresponding period last year. The currency conversion effect had a positive impact of $17.7 million. Excluding the currency conversion effect, sales decreased approximately $18.2 million, or 2.7 per cent, primarily due to lower volume and pricing in logs and lumber, temporary delayed shipments in railway ties and wet weather conditions in residential lumber. This was offset by higher selling prices and healthy demand for utility poles as detailed below.

• Utility poles (31.2 per cent of Q2-19 sales): Sales reached $206.3 million, up 15.0 per cent from sales of $179.4 million last year. The currency conversion effect had a positive impact of $6.6 million. Excluding the currency conversion effect, utility pole sales increased approximately $20.3 million, or 11.3 per cent, primarily driven by increased sales prices coupled with continued volume increases in the U.S. Southeast and overall healthy demand in the United States.
• Railway ties (29.4 per cent of Q2-19 sales): Sales totalled $194.7 million, down 3.2 per cent from sales of $201.2 million last year. The currency conversion effect had a positive impact of $6.7 million. Excluding the currency conversion effect, railway tie sales decreased approximately $13.2 million, or 6.6 per cent. This variance is mainly explained by delayed shipments due to low railcar availability and longer treating cycle times which has pushed the delivery of certain orders to the second half of 2019. The longer treating cycles are a result of the tight supply market for untreated railway ties which requires the company to treat railway ties that are not air-seasoned.
• Residential lumber (29.4 per cent of Q2-19 sales): Sales totalled $194.8 million, down 4.3 per cent from sales of $203.5 million last year. The currency conversion effect had a positive impact of $2.5 million. Excluding the currency conversion effect, residential lumber sales decreased approximately $11.2 million, or 5.5 per cent. This variance is primarily explained by lower demand due to wet weather conditions in Eastern Canada and to a lesser extent, by lower pricing.
• Industrial products (5.9 per cent of Q2-19 sales): Sales reached $38.8 million, compared with $32.9 million last year. The currency conversion effect had a positive impact of $1.4 million. Excluding the currency conversion effect, sales increased $4.5 million, or 13.8 per cent, primarily as a result of stronger rail-related product sales.
• Logs and lumber (4.1 per cent of Q2-19 sales): Sales totalled $27.1 million, compared with $45.3 million last year. Excluding the currency conversion effect, sales for this product category decreased by $18.6 million. This variance is a result of reduced selling prices driven by lower lumber market costs, a decrease in lumber transaction volumes as well as lower log sales due to the timing of harvesting activities.

Operating income was $76.7 million, or 11.6 per cent of sales, compared with $71.0 million, or 10.7 per cent of sales, in the second quarter of the previous year. The increase versus last year is explained by improved pricing and better operational efficiencies in the U.S. Southeast. In addition, lower lumber costs, which are passed through in a timely manner to customers via lower selling prices, have contributed to decreased cost of sales but have also driven margins up as a percentage of sales. These factors were partially offset by the effect of currency translation.

Net income for the second quarter of 2019 reached $52.3 million, or $0.76 per diluted share, versus net income of $48.1 million, or $0.69 per diluted share, in the corresponding period last year.

Six-month results

For the first six months of 2019, sales amounted to $1.10 billion, versus $1.06 billion for the corresponding period last year. Acquisitions contributed sales of $11.5 million, while the currency conversion effect had a positive impact of $36.4 million. Excluding these factors, sales decreased approximately $6.4 million, or 0.6 per cent.

Operating income reached $122.4 million, or 11.1 per cent of sales, compared with $106.5 million, or 10.0 per cent of sales last year. Net income totalled $81.7 million, or $1.18 per diluted share, versus $71.2 million, or $1.03 per diluted share last year.

Acquisition

On April 1, 2019, the company completed the acquisition of substantially all of the assets of Shelburne Wood Protection Ltd. (SWP), located in Shelburne, Ont. The SWP plant is specialized in the treatment of residential lumber. The total consideration for the acquisition was approximately $9.2 million of which $8.5 million was financed through the company’s syndicated credit facilities and $0.7 million was recorded as a balance of purchase price. The balance of purchase price bears no interest, will be paid to the seller in two equal amounts on the first and second anniversary of the transaction and was recorded at fair value using an effective interest rate of 3.31 per cent. The SWP acquisition has been accounted for as an acquisition of a group of assets.

CEO to step down

On July 15, 2019, the company announced that Brian McManus has made the decision to step down as President and CEO, effective Oct. 11, 2019. Until such date, McManus will work closely with management and the Board to ensure a smooth transition. Upon McManus’ departure, Eric Vachon, Senior Vice-President and CFO, will be serving as interim CEO. Vachon is a 12-year veteran of the company, whose prior roles have included Director, Treasury and Financial Reporting, Vice-President Finance, U.S. Operations and Vice-President and Treasurer since joining Stella-Jones in 2007. Vachon will retain his CFO responsibilities during the interim period. A special committee of the Board of Directors has been formed to conduct a search for the company’s next CEO and will be considering both internal and external candidates.

Outlook

The general outlook remains unchanged from last quarter. Management expects higher year-over-year sales, based on current market conditions, the current level of lumber prices and assuming stable currencies. This increase is driven by stronger pricing for railway ties and utility poles as well as increased market reach for the utility pole product category. Management also expects improved year-over-year margins on a consolidated basis. Higher margins will be primarily driven by increased pricing and volume for railway ties coupled with improved product mix and demand for utility poles.