Stella-Jones' (STLJF) CEO Brian McManus on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Stella Jones (STLJF)

Stella-Jones Inc. (OTC:STLJF) Q2 2014 Earnings Conference Call August 8, 2014 10:00 AM ET

Executives

Brian McManus – President and CEO

Éric Vachon – CFO

Analysts

Mona Nazir – Laurentian Bank Securities

Sarah O’Brien – RBC

Michael Tupholme – TD Securities

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Stella Jones’ Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions).

Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking statements and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.

I would like to remind everyone that this conference call is being recorded on Friday, August 08, 2014.

I will now turn the conference over to Brian McManus, President and CEO. Please go ahead.

Brian McManus

Thank you. Good morning ladies and gentlemen, I’m here with Éric Vachon, Chief Financial Officer of Stella-Jones. Thank you for joining us for this discussion of the financial and operating results for the company’s second quarter ended June 30, 2014.

Our press release reporting our Q2 results was published earlier this morning. Our MD&A for the second quarter has been posted on our website at www.stella-jones.com and will be available on CEDAR. Let me remind you that all figures expressed on today’s call are in Canadian Dollars unless otherwise stated.

Stella-Jones experienced a solid second quarter, we saw significant growth in core product sales due to sustained industry demand. Recent acquisitions also strongly contributed to the company’s results.

Core product sales also reflected the increasing momentum of replacement programs for railway ties and utility pool. At the same time, the proven reliability of the Stella-Jones network made still more efficient by the ongoing focus on optimization contributed to further penetration of our traditional markets.

As expected, operating profitability was affected by higher costs for untreated railway ties resulting in a year-over-year decrease in operating profit as a percentage of sales.

Total revenues during the quarter amounted to CAD344.8 million, a 22.7% increase over the comparable period last year. The contribution to sales by specific wood preserving companies or PWP which we acquired in November 2013 was CAD12 million. The contribution from Boatright Railroad Products which we acquired in May 2014 was CAD3.7 million.

The conversion effect from fluctuations in the value of the Canadian dollar, our reporting currency increased the value of the U.S. dollar denominated sales at about CAD18 million, when compared to the second quarter of last year. Excluding this currency effect and the contribution from acquisitions, sales increased approximately CAD30.2 million or 10.8%.

The railway tie category registered sales of CAD141.5 million, an increase of 18.1% over the previous year. Excluding the currency conversion effect and sales from acquisition, railway tie revenue rose approximately CAD7.7 million or 6.4%. As I mentioned this performance then from railway replacement programs as well as improved market penetration.

In the utility pool category, sales reached CAD121.6 million up from CAD95.1 million last year excluding the currency conversion effect and acquisition revenue, sales improved by CAD14 million or 14.7%. This organic growth resulted from larger customer orders for distribution and transmission pools. Again, replacement programs played a main role in the strong demand while certain special projects carried us for networks for industrial growth also increased our pool sales.

In the residential lumber category, we experienced solid demand in Western Canada and the United States. Sales reached CAD49.4 million, a CAD8.1 million increase over the year ago.

In industrial products, the contribution from acquisitions together with increased sales of rail related products brought our sales in this category to CAD25.1 million up from CAD17 million last year.

In our new reporting category of non-pool quality logs, revenue came to CAD7.2 million, as a result of the timing of timber harvesting this figure was down slightly by CAD500,000 in comparison to last year.

Éric will now provide additional details on our results and financial position.

Éric Vachon

Thank you, Brian. Second quarter operating income reached CAD41.6 million or 12.1% of sales versus CAD41 million or 14.6% of sales a year earlier. As Brian mentioned, the decline as a percentage of sales mainly reflects higher year-over-year cost for untreated railways ties partially offset by greater efficiencies across our network.

Net income amounted to CAD28.8 million or CAD0.42 per share fully diluted up 9.1% from CAD26.4 million or CAD0.38 per share fully diluted last year.

Cash flow from operating activities before changes in non-cash working capital components and interest and income tax was paid, stood at CAD48.5 million versus CAD48.2 million a year ago.

Briefly, for the first six months of 2014, sales totaled CAD602.3 million up 19.6% from CAD503.5 million in the first six months of 2014. Excluding acquisitions and the currency conversion effect, year-to-date sales increased approximately 7.1%.

Operating income was CAD76.4 million or 12.7% of sales up from CAD70.6 million or 14% of sales last year. Net income reached CAD51.3 million or CAD0.74 per share fully diluted compared with CAD45.2 million or CAD0.65 per share fully diluted a year ago.

Cash flow from operating activities before changes in non-cash working capital components and interest and income taxes paid amounted to CAD88.8 million up from CAD82.5 million a year ago.

Turning to our financial position, Stella-Jones’ long-term debt including the current portion stood at CAD456.8 million as of June 30, 2014 up from CAD407 million three months earlier. The increase is mainly attributable to the Boatright acquisition.

To partially finance this transaction, the company’s committed revolving credit facility was increased from CAD400 million to CAD450 million during the second quarter. As of June 30, 2014, our ratio of total debt to total capitalization remained healthy at 0.43 to 1.

Finally the board of directors at Stella-Jones declared a quarterly dividend of CAD0.07 per common share payable on September 26, 2014 to shareholders of record at the close of business on September 2, 2014.

I turn the call back to Brian, for the outlook.

Brian McManus

Thank you, Éric. We anticipate to, stay in strong demand for our core products for the remainder of 2014 as an improving economy tends to encourage investment and the infrastructure that drive sales growth for both railway ties and utility pools.

In the railway tie category, we believe the railways will maintain their current level of component investment and track upgrades while increasing number of aging pools requiring replacement should provide a healthy business flow in the utility pool market.

Also in the coming quarters, we expect to make further progress in regards to the integration of the operating assets acquired in the past year. These latest enhancements to our network should provide us with new efficiencies that will improve our margins, attract new customers and better serve existing customers.

Looking ahead at the remainder of the year, those goals will remain our principle focus. Our margins will be impacted in the short-term by the higher cost of untreated railways ties, however we expect this effect to be gradually reduced as we expect to be able to adjust selling prices in accordance with provisions included in most of our multi-year contracts.

Continued expansion of Stella-Jones network remains our goal and we will study all opportunities for strategic disciplined acquisition. Éric and I would be pleased at this point to answer question you may have. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Mona Nazir with Laurentian Bank Securities. Your line is open.

Mona Nazir – Laurentian Bank Securities

Good morning.

Éric Vachon

Good morning, Mona.

Brian McManus

Good morning Mona.

Mona Nazir – Laurentian Bank Securities

So, just in regards to the wood supply issues and related margin compression, Coppa (ph) stated yesterday that they are starting to see this supply issue starting to upbeat and they also spoke to increased lumber availability and their expectation at the back half of 2014 will be stronger than the first half.

Are you seeing the same and can you also speak about the timing of when you expect to pass-through some of these price increases to your customers?

Brian McManus

In regards to the first part your question, we – I’m a bit more cautious than their view. We’re starting to see certain regions where supply is starting to decrease a bit. I’m not ready to call it just yet at this point that we’re seeing a dramatic change. We’re certainly hopeful.

In regards to the second part of the question, in terms of the pricing adjustments, it’s already started to happen. We expect these other contracts that will continue to happen throughout the year, some even at the end of the year. But if call it an inflexion point of where we started to see the tie change would have been really towards the tail end of Q2. So, we’ll slowly gradually start to see things improve in the coming quarters.

Mona Nazir – Laurentian Bank Securities

Thank you. And then on the organic growth front, you expected pool growth to kind of outpace GDP while expectations for all other segments with kind of GDP type growth. I’m just wondering about the double-digit growth on the pool side that you had excluding acquisitions and FX, and also very strong growth on the tie side. Is there any timing issue that may have caused Q2 sales to be so high or is it a product of the replacement cycle or just timely picking up in strong demand?

Brian McManus

The strong demand was out there, Mona, one quarter is little higher to call it as stay in trend. We’re confident in where we set our belief that we are going to continue to see especially as it relates to the pool side continued replacement demand driving our sales going forward.

But as I said in the past, we do see it being a little lumpy in terms of how that growth is going to happen. So, we’re hoping that to continue to see this strong growth, again, this is one quarter, probably the timing issues would be difficult to say. It was just overall good demand. But again, I would caution that let’s wait to see how that trend plays out.

Mona Nazir – Laurentian Bank Securities

Okay. So just on that, are you still comfortable with your kind of GDP growth for the tie side and higher than GDP growth on the pool side?

Brian McManus

Yes.

Mona Nazir – Laurentian Bank Securities

Okay. Okay, I know that cost of sales was up but there were a number of factors contributing to such acquisitions which is offset by efficiency, I don’t know if you can provide that. But you have just the impact of the higher tie prices on your cost line, just wanted to try to compare apples-to-apples?

Brian McManus

I would say, 80% of the impact can be probably relate to the tie, the impact of the rapid rise in our weight type cost.

Mona Nazir – Laurentian Bank Securities

Okay. And lastly here, you stated on the last call that you started to repeat orders from some utilities on the back of the pool replacement cycles. Just given the tight supply and the high volume of pools that need to be replaced, I’m wondering what kind of lead time are you giving. Are most orders to be completed in the next 12 months or you’re getting orders two to three years out?

Brian McManus

Not specific, we don’t call it specific orders but we certainly have multi-year contracts and we are provided with forecast within those multi-year contracts that we have set out sort of this increased demand that the utility is expecting to see.

Mona Nazir – Laurentian Bank Securities

Okay, perfect. Thank you.

Operator

Your next question comes from the line of Sarah O’Brien with RBC. Your line is open.

Sarah O’Brien – RBC

Hi, good morning.

Brian McManus

Hi Sarah.

Éric Vachon

Good morning.

Sarah O’Brien – RBC

In your outlook session you talked about a focus on prudent debt management in the near term and then longer term, I guess back to business on the acquisition front. Is that a correct read or are you really more focused internally given hard with shortages right now. So we should not expect acquisition enhancements in the next couple of quarters?

Brian McManus

Hard to answer that Sarah. I mean, as you know sometimes acquisition opportunities present themselves and got it straight when the iron is hot. So, I don’t want to rule that out. We are of course very focused as we always are on our planned operations, on our efficiencies.

I’m certainly dealing with the type hard wood market in terms of the railway tie side of the business. But I would not rule out that if an opportunity presents itself that we could certainly, we wouldn’t push it aside.

Sarah O’Brien – RBC

Okay. And then just following on that, in terms of your leverage right now, I think you have close to CAD60 million available on your line of credit. Is there anything that would draw on working capital in terms of additional inventory needs or something related to the shortage hard wood going forward into F15 that would concern you?

Brian McManus

Well, it concerns me and I really do hope that there will be a draw on working capital needs. But I think a lot of that working capital would be self-funded just by our internal cash generation. But we certainly are hopeful that we will be able to be buying more into railway are greater amount of inventory to get some additional ties on the ground.

Sarah O’Brien – RBC

Okay. I guess the question is, do you feel comfortable with your debt of the availability right now or do you have to look for additional availability?

Brian McManus

No, I’m very comfortable in the current context of no acquisition on the table right now. Yes, I’m very comfortable with our debt position.

Sarah O’Brien – RBC

Okay. And then maybe just on the supply issue, going into F15, how confident are you that volume demand would be, you can meet the volume demand based on what’s currently out there?

Brian McManus

That’s a really good question Sarah. We’re confident we will get what we need. And the difference would be, is a lot of that demand may have to be met with longer treating cycles because we will be treating greener wood. So which, we usually try to avoid, we like to have dry inventory. But certain clients they do accept what we refer to as a boltenized railway tie, we will be having to boltenize ties.

Our recent acquisition of Boatright plays very well because they did provide us with additional capacity, so these longer cycles would reduce capacity just by the fact that we have a slower throughput. So things are past decisions, are certainly well for us, put us in a good position for next year.

Sarah O’Brien – RBC

Okay.

Brian McManus

And it will probably take good, almost a good year to possibly, 14 to 16 months to get things back to what I would say the normal inventory position from a standpoint of dry wood if you want to call it.

Sarah O’Brien – RBC

So, if that’s the case and are you expecting additional cost to weigh on results going to F15 just based on some of this additional process that you may have to do in terms of boltenizing?

Brian McManus

Well, yes, there will be a bit of an impact but it certainly would not be what we have seen from a standpoint of the raw wood cost. It would be rather minor.

Sarah O’Brien – RBC

Okay. And then, just a last question on volumes in rail ties, I just wonder how much volume was up year-over-year if we peel out the impact of the higher cost of goods going through to the top-line?

Brian McManus

I would say yes, that’s a good question. I would say that volume is up. But there is about – roughly about three quarters that would be attributable to some higher selling prices.

Sarah O’Brien – RBC

Okay, okay, thank you.

Brian McManus

Thanks Sarah.

Operator

(Operator Instructions). Your next question comes from the line of Michael Tupholme with TD Securities. Your line is open.

Michael Tupholme – TD Securities

Thanks, good morning.

Brian McManus

Hi Mike.

Éric Vachon

Good morning, Michael.

Michael Tupholme – TD Securities

You sort of touched on this already but I just wanted to go back and revisit. The price increases on the tie side, you mentioned that you sort of saw the tie start to turn rate towards the end of the second quarter as it relates to your getting some higher pricing.

I just want to be I guess clear, is that – you are suggesting at that point you’re sort of I guess the majority or you’re past the half way mark or 50% point of contracts that have been re-priced or you’re just saying that momentum is really now starting to build. I was just trying to get a sense as to when this?

Éric Vachon

The latter part of your question you answered yourself, it’s the momentum has shifted.

Michael Tupholme – TD Securities

Okay. So there is still, momentum is shifted but I mean, there is still a fair bit to go in terms of perhaps and get them re-priced?

Éric Vachon

Correct.

Michael Tupholme – TD Securities

And at what point would you expect to be sort of largely through that process?

Brian McManus

I guess the end of the year.

Michael Tupholme – TD Securities

Okay. So, it happens fairly quickly then?

Brian McManus

Yes, yes.

Michael Tupholme – TD Securities

Okay. That’s it. Thank you.

Éric Vachon

Good.

Brian McManus

Thanks Mike.

Operator

Mr. McManus, there are no further questions at this time. Please continue.

Brian McManus

Thank you everyone for joining us on this call. We look forward to speaking with you again at our next quarterly call. Have a nice day.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. Please disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!