Features Remanufacturing
Stella-Jones reports sales jump from acquisitions

The company’s Q3 report states a 16.1 per cent increase in net income to $45.7 million, or $0.66 per diluted share, versus $39.3 million, or $0.57 per diluted share, last year.

“Stella-Jones’ sales and net income growth in the third quarter reflects the contribution from acquisitions and our greater reach in the residential lumber product category. As anticipated, year-over-year railway tie sales were lower following strong demand in the previous twelve months, while market conditions remained relatively soft in the utility pole category. Still, improved working capital resulted in a solid cash flow generation that we directed towards reducing our debt,” said Brian McManus, President and Chief Executive Officer.

Third quarter results
Sales reached $512.6 million, up 18.4 per cent from $433.1 million a year ago. The acquisition of Ram Forest Group Inc. and Ramfor Lumber Inc. on Oct. 1, 2015, contributed sales of approximately $30.5 million. The acquisitions of Lufkin Creosoting Co., Inc. and of 440 Investments, LLC, the parent company of Kisatchie Treating, LLC, Kisatchie Pole & Piling, LLC, Kisatchie Trucking, LLC and Kisatchie Midnight Express, LLC, both completed on June 3, 2016, added combined sales of $20.6 million, while acquisitions in the southeastern United States completed in the second half of 2015 added sales of approximately $6.5 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 $3.0 million on the value of U.S. dollar denominated sales when compared with last year’s third quarter. Excluding these factors, organic growth was approximately $18.9 million, or 4.4 per cent.

Railway tie sales amounted to $186.6 million, down 7 per cent from $200.6 million last year, primarily as a result of lower industry demand in the third quarter following a strong first half in 2016.

Sales of utility poles reached $160.0 million, compared with $142.3 million last year. Excluding the currency conversion effect and the contribution from acquisitions, sales declined approximately 6.2 per cent. During the quarter, year-over-year sales of distribution poles were lower as a result of reduced maintenance demand in certain regions, while sales of transmission poles increased slightly versus last year.

Sales of residential lumber totalled $107.3 million, up from $53.2 million last year. This strong increase reflects sales of $30.5 million from the Ram acquisition, 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 declined to $27.5 million, from $28.4 million a year ago, due to the timing of orders for rail-related products in the United States. Logs and lumber sales reached $31.3 million, versus $8.5 million last year, due to procurement efforts to support residential lumber requirements and the timing of timber harvesting.

Operating income amounted to $67.3 million, or 13.1 per cent of sales, versus $62.9 million, or 14.5 per cent of sales, last year. The increase in absolute dollars reflects the contribution from acquisitions and the effect of currency translation. As a percentage of sales, the decrease is mainly attributable to greater logs and lumber sales, which are made at a value close to their cost of sales, a less favourable product mix this year compared to 2015 and softness in selling prices for certain regions.

Net income for the third quarter of 2016 increased 16.1 per cent to $45.7 million, or $0.66 per diluted share, compared with $39.3 million, or $0.57 per diluted share, in the third quarter of 2015.

Nine-month results
For the nine-month period ended Sept. 30, 2016, sales amounted to $1.50 billion, versus $1.20 billion for the corresponding period a year earlier. Acquisitions contributed sales of approximately $137.2 million, while the currency conversion effect had a positive impact of $52.0 million on the value of U.S. dollar denominated sales. Excluding these factors, sales increased approximately $105.5 million, or 8.8 per cent.

Operating income stood at $205.1 million, or 13.7 per cent of sales, compared with $171.8 million, or 14.3 per cent of sales, a year earlier. Net income for the first nine months of 2016 increased 24.9 per cent to $135.4 million, or $1.96 per diluted share, up from $108.4 million, or $1.57 per diluted share, in the first nine months of 2015.

Financial position 
As at Sept. 30, 2016, the Company’s long-term debt, including the current portion, stood at $639.2 million compared with $731.7 million three months earlier. This significant reduction of $92.5 million mainly stems from a strong cash flow generation. This cash flow resulted from reduced working capital requirements, including the seasonal inventory reduction in the residential lumber category. As at September 30, 2016, Stella-Jones’ total debt to total capitalization ratio was 0.39:1, compared with 0.44:1 as at June 30, 2016.

Outlook
“In the short-term, we expect lower year-over-year railway tie demand through the early stages of 2017 following a strong first half in 2016. In the utility pole category, regular maintenance demand is expected to gradually return to normal patterns in 2017, while transmission pole sales should improve with more stable resource prices. We are also confident that we will sustain our momentum in the residential lumber category and further benefit from solid demand for new construction and outdoor renovation projects in the North American residential and commercial markets. With its stronger financial position, Stella-Jones has greater flexibility to pursue its proven business strategy. We will seek opportunities to further grow our presence in core businesses by expanding our continental network, while ensuring an optimal dividend policy,” concluded Mr. McManus.