Wood Business

Features Operation Reports Remanufacturing
Stella-Jones reports healthy demand

Nov. 7, 2014, Montreal - Stella-Jones Inc. is reporting positive financial results for its third quarter ended September 30, 2014. Sales reached $357.3 million, up 25.2% from $285.3 million in the same period last year. The operating assets acquired from The Pacific Wood Preserving Companies ("PWP") on November 15, 2013 and from Boatright Railroad Products, Inc. ("Boatright") on May 22, 2014 contributed sales of $11.2 million and $12.0 million, respectively. The conversion effect from fluctuations in the value of the Canadian dollar, Stella-Jones' reporting currency, versus the U.S. dollar, increased the value of U.S.-dollar denominated sales by about $8.9 million when compared with the previous year. Excluding these factors, sales increased approximately $39.9 million, or 14.0%.

"We are pleased with Stella-Jones' solid sales growth in the third quarter, which reflects our expanding presence in our core markets and healthy industry demand. While margins remained affected by higher year-over-year costs for untreated railway ties, we have initiated certain selling price adjustments permitted in the majority of our multi-year contracts. Our focus on operating efficiency led to further growth in operating income, while a solid cash flow generation allowed Stella-Jones to substantially reduce its long-term debt," said Brian McManus, President and Chief Executive Officer.

Railway tie sales amounted to $148.8 million, up 49.7% from $99.4 million a year earlier. Excluding sales from acquired assets and the conversion effect, railway tie sales rose approximately 34.7%. Further adjusting for the approximately $15.0 million negative effect on last year's third-quarter railway tie sales as a result of the transition of a Class 1 railroad customer from a "treating services only" program to a "black-tie" program, year-over-year sales increased $19.5 million, or 17.0%. This increase reflects solid market demand for tie replacement programs as well as increased pricing.

Sales of utility poles reached $127.6 million, up from $112.8 million last year. Excluding sales from acquisitions and the conversion effect, utility pole sales increased $4.0 million, or 3.5%, as a result of higher sales of distribution poles stemming from increased demand from replacement programs, partially offset by slightly lower sales of transmission poles due to the timing of certain special projects.

Sales in the residential lumber category totalled $43.5 million, up 10.6% from $39.3 million a year ago, mainly reflecting solid demand in Western Canada and the United States. Industrial product sales reached $29.7 million, versus $16.5 million last year due to the contribution from acquisitions and increased sales of rail-related products. Finally, non-pole-quality log sales amounted to $7.7 million, down from $17.2 million a year ago, as a result of the timing of timber harvesting.

Operating income stood at $45.5 million, or 12.7% of sales, versus $38.6 million, or 13.5% of sales, last year. The decrease as a percentage of sales is mainly due to higher year-over-year costs for untreated railway ties, partially offset by greater efficiencies throughout the Company's plant network. As the Company is gradually able to adjust its selling prices, as per provisions in most of its multi-year contracts, the year-over-year negative variation of operating income as a percentage of sales due to higher costs was less in the third quarter of 2014 than in the previous quarter.

Net income for the third quarter of 2014 increased 6.8% to $29.5 million or $0.43 per share, fully diluted, compared with $27.7 million or $0.40 per share, fully diluted, in the third quarter of 2013.

NINE-MONTH RESULTS

For the nine-month period ended September 30, 2014, sales amounted to $959.6 million, versus $788.8 million for the same period in 2013. Acquisitions accounted for total sales of $52.0 million, while the conversion effect from fluctuations in the value of the Canadian dollar versus the U.S. dollar had a positive year-over-year impact of $43.2 million on the value of U.S. dollar denominated sales. Excluding these factors, sales increased approximately $75.6 million, or 9.6%.

Operating income was $121.8 million, or 12.7% of sales, up from $109.2 million, or 13.8% of sales, last year. Net income reached $80.9 million, or $1.17 per share, fully diluted, compared with $72.8 million, or $1.05 per share, fully diluted, a year ago.

FINANCIAL POSITION

As at September 30, 2014, the Company's long-term debt, including the current portion, stood at $433.6 million down from $456.8 million three months earlier. The reduction reflects the repayment of approximately $44.0 million in long-term debt during the quarter, driven by a strong cash flow generation, partially offset by the effect of currency conversion on U.S.-dollar denominated debt. As at September 30, 2014, an amount of $365.9 million had been drawn against the Company's committed revolving credit facility of $450.0 million.

As a result of this lower debt, Stella-Jones' total debt to total capitalization ratio was 0.40:1 as at September 30, 2014, down from 0.43:1 three months earlier.

OUTLOOK

"Driven by continuing economic growth and sound fundamentals, we expect demand for Stella-Jones' core products to remain healthy for the remainder of 2014 and through 2015. For this reason, our established reputation as a reliable provider of high-quality treated wood products should allow the Company to gain further momentum in its core markets across North America. In the short-term, we continue to adjust selling prices in response to higher untreated railway tie costs and we are pleased with the progress achieved so far. Over the longer term, a continuous focus on enhancing efficiency and productivity across our continental network should allow Stella-Jones to sustain profitability and cash flow growth to the benefit of its shareholders," concluded Mr. McManus.