Stella-Jones reports 2016 fourth quarter and annual results
March 17, 2017 - Stella-Jones Inc. has announced financial results for its fourth quarter and fiscal year ended December 31, 2016.
"2016 marked the sixteenth consecutive year of sales and net income growth for Stella-Jones. These results reflect the efficiency of our operations and the benefits of our expansion strategy. Most significantly, they point to the Company's deeply rooted role as a principal North American provider of treated wood products in our main product categories," said Brian McManus, president and chief executive officer.
Sales reached $1.84 billion, up 17.9% from last year's sales of $1.56 billion. Acquisitions contributed additional sales of $156.8 million, while 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 about $53.1 million on the value of U.S. dollar denominated sales. Excluding these factors, sales increased approximately $69.1 million, or 4.4%.
Railway tie sales for 2016 amounted to $716.2 million, up from sales of $709.7 million in 2015. Excluding the conversion effect, railway tie sales decreased approximately $22.9 million, or 3.2%, as lower industry demand in the second half of the year offset strong first-half demand.
Utility pole sales reached $579.2 million in 2016, representing an increase of $51.5 million, or 9.8%, from sales of $527.7 million in 2015. Excluding the currency conversion effect and the contribution from acquisitions, sales declined approximately $24.8 million, or 4.7%. This variation reflects a decline in sales of distribution poles due to reduced maintenance demand in certain regions, while sales of transmission poles held relatively steady.
Sales in the residential lumber category totalled $345.7 million in 2016, up from $182.6 million in 2015. This $163.2 million, or 89.4% increase mostly reflects additional sales of $91.5 million from the Ram acquisition in the first nine months of 2016. Excluding this factor and the currency conversion effect, sales increased $68.5 million, or 37.6%, reflecting the transition from treating services only for wholesalers to a value-added full service direct offering to retailers.
Industrial product sales were $96.3 million in 2016, compared with $97.3 million in 2015. This decrease is mainly attributable to the timing of orders for rail-related products in the United States, partially offset by the currency conversion effect. Logs and lumber sales amounted to $100.8 million in 2016, up from $42.0 million in 2015. This increase is explained by the addition of the purchase and resale of lumber resulting from procurement efforts to support residential lumber requirements and by the timing of timber harvesting.
Operating income stood at $233.2 million, or 12.7% of sales, compared with $220.1 million, or 14.1% of sales, in 2015. The increase in absolute dollars essentially reflects higher business activity for the year and the contribution from acquisitions. As a percentage of sales, the decrease is mainly attributable to a higher proportion of low-margin logs and lumber sales, a less favourable product mix this year compared to 2015 and softness in selling prices for certain regions. These factors were partially offset by economies of scale generated by higher volumes in the residential lumber category.
Net income for 2016 increased 8.9% to $153.9 million, or $2.22 per diluted share, up from $141.4 million, or $2.04 per diluted share, in 2015.
FOURTH QUARTER RESULTS
Sales amounted to $341.7 million, versus $357.5 million a year ago. Acquisitions accounted for sales of approximately $19.5 million, while the conversion effect from fluctuations in the value of the Canadian dollar, versus the U.S. dollar, had a positive impact of $1.1 million on the value of U.S. dollar denominated sales when compared with last year's fourth quarter. Excluding these factors, sales decreased approximately $36.4 million, or 10.2%.
Railway tie sales totalled $113.1 million, down from $147.5 million last year, primarily as a result of lower industry demand at the end of the year. Sales of utility poles reached $144.6 million, compared with $129.5 million last year. Excluding acquisitions, sales declined approximately $3.6 million as a result of slight decreases in sales of both distribution and transmission poles. Sales of residential lumber amounted to $44.6 million, up from $40.1 million last year, reflecting solid market demand and higher direct sales to retailers. Industrial product sales were $15.3 million, down from $23.6 million a year ago, as a result of lower sales of rail related products. Logs and lumber sales stood at $24.1 million, versus $16.7 million last year, due to the timing of lumber purchase and resale activities as well as the timing of timber harvesting.
Operating income amounted to $28.2 million, or 8.2% of sales, in the fourth quarter of 2016, versus $48.3 million, or 13.5% of sales, last year. The decrease in absolute dollars and as a percentage of sales mainly reflects lower business activity in railway ties sales and a less favourable product mix. Net income for the fourth quarter of 2016 was $18.5 million, or $0.27 per diluted share, compared with $33.0 million, or $0.48 per diluted share, in the fourth quarter of 2015.
ACQUISITION OF KMS AND NPTW
On December 21, 2016, the Company completed the acquisition of substantially all the operating assets employed in the businesses of Bois KMS (GMI) Ltée ("KMS") and Northern Pressure Treated Wood (N.P.T.W.) Ltd ("NPTW"). KMS and NPTW manufacture treated wood utility poles at their facilities located in Rivière-Rouge, Québec and Kirkland Lake, Ontario, respectively.
Total cash outlay associated with the acquisition was approximately $19.2 million, excluding acquisition costs of approximately $1.0 million, recognized in the consolidated statement of income under selling and administrative expenses. The Company financed the acquisition through its committed revolving credit facility.
SOLID CASH FLOW AND FINANCIAL POSITION
In 2016, Stella-Jones generated a cash flow from operating activities before changes in non-cash working capital components and interest and income taxes paid of $268.9 million, up 5.7% from $254.3 million in 2015. This increase mostly reflects a higher net income for the year.
As at December 31, 2016, the Company's long-term debt, including the current portion, stood at $694.4 million compared with $669.9 million at the end of 2015. The variation reflects higher borrowings to finance the acquisitions completed in 2016, partially offset by the effect of local currency translation on U.S. dollar denominated long-term debt. As at December 31, 2016, Stella-Jones' total debt to total capitalization ratio was 0.40:1, compared with 0.42:1 twelve months earlier.
QUARTERLY DIVIDEND OF $0.11 PER SHARE
On March 16, 2017, the Board of Directors declared a quarterly dividend of $0.11 per common share, payable on April 28, 2017 to shareholders of record at the close of business on April 3, 2017.
Based on current market conditions in our main product categories, we expect sales to be weaker in the first half of 2017 when compared to 2016 with an expected year-over-year increase in the second half of the year. Operating margins will be negatively impacted by product mix and softer pricing in certain regions. In the railway tie category, given strong demand in the first half of 2016, we anticipate lower year-over-year demand for 2017, while softer pricing will also reduce revenues. In the utility pole category, demand for regular maintenance projects should gradually return to normal patterns in the second half of 2017, but operating margins are also expected to decrease as a result of the geographical sales mix. As for the residential lumber category, we remain confident to further benefit from solid demand for new construction and outdoor renovation projects in the residential and commercial markets. Our immediate focus will be on the integration of our recent acquisitions as well as taking the necessary steps to adjust production levels, maximize operating efficiencies and minimize costs throughout the organization.