Stella-Jones' (STLJF) CEO Brian McManus on Q3 2016 Results - Earnings Call Transcript

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About: Stella Jones Inc. (STLJF)
by: SA Transcripts

Google Inc (OTC:STLJF) Q3 2016 Results Earnings Conference Call November 8, 2016 10:00 AM ET

Executives

Brian McManus - President and Chief Executive Officer

Eric Vachon - Senior Vice-President and Chief Financial Officer

Analysts

Mona Nzir - Laurentian Bank

Leon Aghazarian - National Bank Financial

Mark Neville - Scotiabank

Benoit Poirier - Desjardins Capital Markets

Sara O'Brien - RBC

Michael Tupholme - TD Securities

Justin Keywood - GMP Securities

Brian Pow - Acumen

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Stella-Jones' Q3 2016 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. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions].

Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking 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 Tuesday, November 8, 2016.

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

Brian McManus

Thank you. Good morning everyone. I am here with Eric Vachon, Chief Financial Officer of Stella-Jones and thank you for joining us for this discussion of the financial and operating results for the company's third quarter ended September 30, 2016. Our press release reporting our Q3 results was published earlier this morning. Our MD&A for the quarter has been posted on our website at www.stella-jones.com and will be available on SEDAR. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated.

During the third quarter, the company registered solid financial results. Demand for our railway tie and utility pool products was as anticipated and we benefited from our greater reach in the residential lumber category. Sales reached CAD512.6 million, an 18.4% increase over the third quarter of last year. The contribution from RAM, which we acquired in October 2015, was CAD30.5 million. The contribution from the operations of Lufkin Creosoting and the Kisatchie group of companies, which we acquired in June 2016, was CAD20.6 million.

The additional acquisitions made in the latter part of 2015 in the Southeastern United States added sales of approximately CAD6.5 million. In addition, the conversion effect from fluctuations in the value of the Canadian dollar had a positive impact of CAD3 million on our U.S. dollar denominated sales over the same period last year. Excluding the exchange effect and acquisitions, organic sales increased by approximately CAD18.9 million or 4.4%.

Net income rose 16.1%, while EPS reached CAD0.66, up from CAD0.57 last year. Our cash flow generation was particularly strong as a result of reduced pressure on working capital which enabled us to reduce our debt. Eric will provide additional information on our financial performance in a few minutes.

Looking at our results by product category. Railway tie sales in the third quarter amounts to CAD16.6 million, a decrease of 7% over the comparable period last year. This result was anticipated following strong demand for ties in the first half of the year.

Turning to the utility pole category. Sales amounted to CAD160 million representing an increase of 12.4% over last year. If we exclude the currency conversion effect and the contribution of acquisitions, sales declined by 6.2%. This result was due to reduced sales of distribution poles as maintenance demand declined in certain regions. The sale of transmission poles increased slightly during the quarter.

In the residential lumber category, sales totaled CAD107.3 million, up from CAD53.2 million a year earlier. The increase was in part attributable to f sales of CAD30.5 million resulting from the RAM acquisition. If we exclude this factor and the currency exchange effect, sales rose CAD23.5 million or 44.1%. The improvement reflects the transition from providing treating services only for wholesalers to a value-added full service direct offering for retailers.

Sales in the industrial products category were CAD27.5 million compared with CAD28.4 million in 2015. Excluding the currency conversion effect and the contribution from acquisitions, sales decreased CAD2.8 million mainly due to the timing of orders for rail related products in the United States.

In the logs and lumber category, sales amounted to CAD31.3 million compared with CAD8.5 million last year. Sales were bolstered this year by the addition of lumber purchase and resale activity that support residential lumber requirements and by the timing of timber harvesting.

Turning to our ongoing network growth and optimization. Construction of our new wood treating facility in Cameron, Wisconsin continued during in the third quarter. This facility will expand our production capacity and primarily be used to service utility pole market. We expect the plant to be ready to begin production in the first quarter of 2017.

During the quarter, we also continued to unlock synergies the course of integrating recent acquisitions. Those acquisitions have served to highlight the Stella-Jones brand as a leading continental supplier of treated wood and a growing supplier of residential lumber.

Eric will now discuss the financial performance of the company in greater detail. Eric?

Eric Vachon

Thank you Brian. Gross profit amounted to CAD93.3 million or 18.2% of sales versus CAD87.5 million or 20.2% of sales a year ago. The higher dollar value reflects acquisition and the currency exchange effect. The decline as a percentage of sales resulted from higher log and lumber sales which we make at a value close to their cost to sale, a less favorable year-over-year product mix as well as softness in selling prices in some of our markets.

The variation in operating income mirrored that of gross profit, reaching CAD67.3 million or 13.1% million of sales in the third quarter of 2016, versus CAD62.9 million or 14.5% of sales in the third quarter of 2015. Net income totaled CAD45.7 million or CAD0.66 per diluted share, up from CAD39.3 million or CAD0.57 per diluted share a year ago. Cash flow from operating activities before changes in non-cash working capital components and interest and income taxes paid amounted to CAD77.1 million in the third quarter, up from CAD77 million last year.

Considering the effect of working capital variation, mainly the seasonal inventory reduction, operating activities provided a significant cash flow of CAD127.6 million compared to CAD55.9 million last year. The inventory reduction was more important this year versus prior year as a result of our greater presence in residential lumber category.

A portion of the strong cash flow generation was used to reduce our debt during the quarter. As a result, we concluded the third quarter of 2016 with a long-term debt including the current portion of CAD639.2 million, down from CAD731.7 million at the end of the second quarter. As at September 30, 2016, Stella-Jones' total debt to total capitalization ratio stood at 0.39 to 1, compared with 0.44 to 1 three months earlier.

Finally, our Board of Directors declared a quarterly dividend of CAD0.10 per common share to be paid on December 21, 2016 to shareholders of record at the close of business on December 2, 2016.

I turn the call back to Brian for the outlook.

Brian McManus

Thank you Eric. As we look ahead the final months of 2016 and our prospects in 2017, we are confident of ongoing steady demand for our core products.

In the railway tie category, as a result of currently reduced freight volumes and our strong sales in this category through the first half of 2016, we expect somewhat slower year-over-year sales through the early stages of 2017. Longer term, we anticipate traditional levels of demand as North American railroads continue to maintain their Continental rail networks.

In the utility pole category, we anticipate a gradual return to normal demand patterns for maintenance projects in 2017. As for transmission pools related to special projects, demand should improve following the stabilization in resource prices.

In the residential lumber category, we expect our growth momentum to continue as sales respond to solid demand for new construction and outdoor renovation projects. In regard to obtain additional assets for our production network, the company's growth plan supported by the strength of its financial position, allows for continued expansion through acquisition. We will act when opportunities arise that complement our core mission and strategic vision.

Finally, we remain focused on integrating recent acquisitions into our network to achieve the highest possible economies of scale and enhanced cash flow generation in the interest of building further shareholder value.

Eric and I would be pleased at this point to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Mona Nzir of Laurentian Bank. Please go ahead.

Mona Nzir

Good morning.

Brian McManus

Good morning Mona.

Eric Vachon

Morning Mona.

Mona Nzir

Hi. So just a couple of questions from me. Firstly on the tie side, I am just going into the 7% contraction that we saw following the 7% organic growth last quarter. I am just wondering what turned this quarter? Were you expecting this contraction of such magnitude? And do you think that that could continue heading into Q4 and early 2017? Or could it be lower from here, just given the results of one of your peers that they reported 18% decline in their rail segment earlier this week?

Brian McManus

Well, as we said at the end of Q2, we did expect to see a softening given the pull-forward we saw at the first part of 2016. If we go right back to the start of year, we anticipated overall flat year on ties and I think that's what we are anticipating it will come pretty close to. Fourth quarter is always a little difficult. It really depends on the Class 1s decisions on how much they want to get themselves set up for their tie programs for next year, so some may be pushed into the first quarter. But I would say, we are getting two effects right now. We have volumes that have softened a bit but we also are seeing some of the prices come down really as a flow-through of lower wood cost in our contract.

Mona Nzir

Okay. And then, so was it almost even in regard to the volume and the pricing? Or was it more on the volume side or more on the pricing side where you saw it contracted?

Brian McManus

I would probably say a bit more on the volume side.

Mona Nzir

Okay. And is there any changes or amendments to the contracts that you have in place like for this quarter with the Class 1s? Or was the contraction primarily driven by the short line customers? Or was it a mix?

Brian McManus

We tend not to give too much information on that, Mona. But it would be a bit little more heavily weighted to the non-Class 1 business.

Mona Nzir

Okay. And just lastly for me. Just looking at the leverage, it's down considerably. Are your near term plans, you mentioned incorporation of acquisitions, growing the residential segment and then the Wisconsin plant, or do you think M&A remains a near term possibility?

Brian McManus

Lot of it is just on the timing in regards to the opportunities that are out there. We take a very disciplined approach and we have to wait for those opportunities to materialize. So some of the medium-term may become near-term. It really is going to depend on the sellers.

Mona Nzir

Okay. That's it. Thank you so much.

Brian McManus

Thanks Mona.

Operator

Your next question comes from the line of Mark Neville of Scotiabank. Please go ahead.

Mark Neville

Hi guys. I just wanted to follow-up on pricing. Again, you mentioned some pricing pressure in the release and is it just ties? Or is it ties and poles?

Brian McManus

I would say, we have seen a bit on the pole side, probably more on the tie side. The poles are more in certain regions and it's really program cuts some of our larger utility customers that we have seen. So that's not a pricing issues, it's just a volume issue.

Mark Neville

All right. Okay. And is it regional? Or is it broad-based at this point, I guess more so on the ties?

Brian McManus

Ties would be more broad-based. Poles would have been more regional.

Mark Neville

All right. And it sounded like, you said that some of that is just, there isn't margin offset with little raw material costs, it is not all demand driven.

Brian McManus

Correct.

Mark Neville

Okay. And just on the poles, you mentioned maintenance demand improving in 2017. I am just curios, what visibility do you have into that? I am just trying to gauge how much of that commentary is based on historical trends or how much is based on an order book or what you are hearing from your customers?

Brian McManus

We are generally provided with good visibility, Mark. The problem is, often the utilities themselves maybe anticipating that they are going to get a increase in their rates as an example, that would help in their replacement programs. And what we saw this years is, we had a couple of our large utilities who did not get the rates they expected. And as such, backed off the pole replacement programs. So this is based on obviously conversations we have with our customers and they provide us the best they can with their forecast.

Mark Neville

Great. Okay. That makes sense. And just on the past acquisitions, on the pole side, it was a little weaker than we thought. I am just curious if there is anything there or if it's -- historically I think you have moved some business around from the acquired into your existing facilities. I was just wondering if there is anything worth mentioning there or if anything's going on there?

Brian McManus

No, nothing. You sort of answered your own questions. That's exactly what we do is move production and maximize which plants are doing what and in this case we even had certain product categories that we ended up shifting from some of the acquisitions we did, that one in the pool side.

Mark Neville

Okay. Thanks a lot.

Brian McManus

Thanks.

Operator

Your next question comes from the line of Leon Aghazarian of National Bank Financial. Please go ahead.

Leon Aghazarian

Hi. Good morning guys.

Brian McManus

Good morning.

Leon Aghazarian

Just a follow-up on that question. As it relates to the margins though, you mentioned in your prepared remarks that you were seeing some synergies from some of the acquired businesses. I just want to see where you are in terms of the integration of those acquisitions and how quickly you believe you will get the margins back to, let's call it, the Stella-Jones typical margins?

Brian McManus

The integration is going well, Leon. We are facing, as we have said, softer markets in certain regions. So that's unfortunately masking some of the improvements we are making on the cost side. Bear in mind as well, as our product mix is different now that we have a much larger logs and lumber category that is extremely low margins, especially in quarters tow and three, where it did have a slightly larger percentage role drags down the margins as well. So on a year-over-year, going into next year, that's going to obviously not have the effect, because we have a direct comparable. But this year, certainly compared to 2015, we see the difference on margins.

Leon Aghazarian

Fair enough. Regarding your visibility for the ties and you did talk about this earlier, but I just want to follow-up little bit here. Have you gotten any indication from the Class 1s relating to their CapEx for 2017?

Brian McManus

Yes. We have some overall pretty good indications. It varies between the different Class 1s and some are coming off a bit and there's even a few that are marginally increasing. So I would say overall, I would expect, on the Class 1 side, a slight softening.

Leon Aghazarian

And that's what's giving you your perceived visibility for the early parts of 2017, correct?

Brian McManus

That is right. Yes.

Leon Aghazarian

Okay. And then one final one for me would be just on the working capital. I realize obviously that Q3 is seasonally a weaker quarter in terms of working capital, not a weaker quarter, but less working capital requirements. Just looking forward, are you comfortable with your current inventory levels and what are your working capital requirements for Q4? Thanks?

Brian McManus

I would say we are comfortable for most product categories. The one exception would be, we will start to be building up on the lumber side.

Leon Aghazarian

And is that driven by new orders? Or that just --

Brian McManus

It's just by the seasonality of getting ready for the spring of 2017.

Leon Aghazarian

Thank you very much.

Brian McManus

Good. Thanks Leon.

Operator

Your next question comes from the line of Benoit Poirier of Desjardins Capital Markets. Please go ahead.

Benoit Poirier

Yes. Good morning Eric. Good morning Brian.

Brian McManus

Good morning Benoit.

Benoit Poirier

Yes. Just to come back on the previous question about the Class 1 CapEx for 2017. Overall, did you see a slight decline for 2017?

Brian McManus

That's our best guess at this point. And again I am talking on the overall industry. It will vary between suppliers, the overall effect, just based on which class when you may have more business with.

Benoit Poirier

Okay. And how this outlook compares to the non-Class 1 railroads going into next year?

Brian McManus

In terms of what we expect to see outside of the Class 1s?

Benoit Poirier

Yes, exactly.

Brian McManus

I think they will probably mirror the Class 1s. They will be a bit softer as well. Although towards the backend of 2016 right now, it's been a little weaker as well. So probably once you get to the backend of 2017, it will be more flat. I think it will just be in the first part of year we will see it little softer.

Benoit Poirier

Okay. Perfect. And just following your comment about the pricing softness and the volume impact overall on a consolidated basis, what should we be expecting in terms of EBITDA margin? It is still a range of 15% to 15.5% that you could maintain, guys?

Brian McManus

Yes. I think that's fair on a rolling 12-month basis.

Benoit Poirier

Okay. Perfect. And if I look at organic growth on the railway ties, the 7% includes FX. What would be the number excluding FX, Brian?

Brian McManus

The decline was 7.2%, I think it was.

Eric Vachon

Yes. FX was minor in the quarter.

Brian McManus

Actually, it was very minor. It was CAD3 million overall for us.

Benoit Poirier

Okay. So very minor. And just working capital for next year, I am just wondering given the pattern you seen so far, what we should be looking for in terms of working capital for next year?

Brian McManus

Our change in working capital next year will be, you know, there will be a bit of demand at the front part of the year and then you will see it mirror what happened again this year, but certainly 2015 into the first part of 2016, there was an unusually higher demand as we entered into the full service on the lumber side as well as we were still in the midst of replenishing dry inventory for railway ties.

Benoit Poirier

Okay. And just cash deployment opportunities as you improve the debt, you paid down debt in the quarter, obviously you are improving the balance sheet. Just wondering if you are becoming closer to the point where you could start considering some cash deployment opportunities?

Brian McManus

Certainly, I think as we roll into 2017. But a lot of that will be based on acquisition opportunities. Certainly for us, I think as we have shown our investing our cash into acquisition opportunities provides the greatest return for our shareholders. So that would be still our number one cash deployment. But I think we can take a balanced approach and as well look to other methods to the deploy our cash.

Benoit Poirier

Okay. Perfect. Thanks for the time.

Brian McManus

Thank you

Operator

Your next question comes from the line of Sarah O'Brien of RB. Please go ahead.

Sara O'Brien

Good morning.

Brian McManus

Good morning Sara.

Eric Vachon

Morning Sara.

Sara O'Brien

Can you comment, just on the gross margin pressure, I wondered how much of that is kind of transient given the cost base in the wood that you have in inventory? Like, could you see a pickup in margin as you replenish at lower cost going forward?

Brian McManus

Yes. That's a really good question, Sara. But it's going to take probably about six month period to work itself through. But I would still say, the greatest margin pressure, if you want to call, in Q3 was definitely based on the product mix overall.

Sara O'Brien

Okay. So in terms of the types of poles you are selling?

Brian McManus

Yes. Or even more if you look, while all of our product categories run pretty close together as we saw, poles were down, railway ties were down, lumber was up and then of course logs and lumber took a slightly higher percentage of our overall sales, all put pressure on margins.

Sara O'Brien

Okay. And then just wondered, in the comments there was mention of dividend optimization in the outlook. Is there a new kind of look or Board perspective on dividend payout ratio going forward?

Brian McManus

No. I would not say there is any difference. I think we were completing our 12th or 13th straight year of dividend increases. Could there be an opportunity that they increase at a slightly higher rate? That's possible. It's really going to be dependent on some of the opportunities that we have in the pipeline and the timing of those.

Sara O'Brien

Okay.

Brian McManus

We will definitely take a conservative approach.

Sara O'Brien

Okay. And then on consumer lumber, I just wondered organic growth rates going into 2017? Obviously there is some seasonal and weather-related impact, but based on the new accounts you are targeting, is there some kind of a target you would have for organic growth, if all else being equal into next year?

Brian McManus

I think there is going to be two things at play there, Sara. One is going to really, which at this time is a question mark, is the effects of the lumber agreement between U.S. and Canada and what that may do to the lumber prices within Canada. So I would rather answer the question more around volume as we may see prices pull us up or down from an organic growth perspective. But I would say, low single-digit growth opportunities out there.

Sara O'Brien

Okay. I was just going to ask, is there any impact that you can see either way from election results tonight on your business just given some cross-border flow?

Brian McManus

This is a question I want to get back with.

Sara O'Brien

No need to be named.

Brian McManus

I think on a cross-border, no, not really, because most of the sales we have in the U.S., almost probably 95% are produced in the U.S. So I think we are sheltered from that standpoint. And that's about all the political comments I will make.

Sara O'Brien

Okay. So can you go back to your first comment then on the consumer lumber about the effects of lumber agreement? How would that play into pricing in Canada?

Brian McManus

Just if there is a duty that's put on, how does that in turn affect the pricing of lumber within Canada, is that going to mean there is more availability which may push lumber pricing down within the Canadian market is more how we are viewing it and I think it's really going to be -- but there's other factors at play too because there is a number of sawmills that have announced they will be closing. So reduction in supply may offset that. There is a bit of a question mark there. We are watching it closely.

Sara O'Brien

Okay. And then just lastly on the Wisconsin facility. I just wondered, if there is still organic decline in poles going into early 2017, is this going to be a weight on margin just on additional overhead to absorb? Or do you feel that the synergies brought on by that facility will offset that?

Brian McManus

I feel not only the synergies but our access to a new market, Sara, is really going to be what's going to drive Wisconsin. As we have spoken to before, that plat is going to provide us with both synergy opportunities, but also access to a market that we have been unable to tap in the past.

Sara O'Brien

Okay. That's it for me. Thanks.

Brian McManus

Thanks Sara.

Operator

Your next question comes from the line of Michael Tupholme of TD Securities. Please go ahead.

Michael Tupholme

Thanks. Good morning.

Brian McManus

Hi Michael.

Michael Tupholme

Brian, can you elaborate a little bit further on what's happening in terms of the selling price pressures within ties, I guess, down at the procurement level. Is this alternately tied back to demand for the products that this wood is used for, not only in your industry but in others? Or is this, I remember a couple of years ago, we had issues with the prices actually going up, it was issues related to getting lumber out of harvested, can you elaborate on the dynamics right now?

Brian McManus

Certainly. I appear to have a bit of an echo, Michael. Sorry. It's actually both. We have seen the softer demand but we have also seen as a result the increased supply that's out there. Sorry, it's just distracting, I guess. I don't know if it's coming through the line, but there is an echo.

Michael Tupholme

It's not coming through badly.

Brian McManus

Okay. So yes, it's rally both of those points. As you pointed out, going back to 2014, 2015, supply conditions primarily wet conditions in certain area contracted supply. But I would say, we are in much better shape now in terms of the supply that's out there and a lot of other people have brought up their inventories. So as a result seen white wood type prices come down.

Michael Tupholme

Okay. And then shifting gears to the utility pole category. You talked about a gradual return to normal patterns beginning in 2017, which is encouraging. I guess what I haven't heard anything talked about on this call or seen in the MD&A is, is any mention of the longer term, more significant replacement cycle. Can you talk a little bit about where you see things as far as that?

Brian McManus

We certainly still see it there. But I guess we were getting a little shy of continuing to put it in. So we figure we will get a couple of quarters of increases on it and then maybe we will start talking about it again. But everything is still there to show that the aging infrastructure is definitely in need of repair. So we would still hold to that.

Michael Tupholme

So the longer term thesis is intact. But I guess we shouldn't look for increases of the order of magnitude that would be consistent with that cycle beginning to unfold in the next few quarters? Is that fair to say?

Brian McManus

I think that is fair to say. I am excited for this election to be over. I think that's caused some unnecessary holdback on some investments. I think no matter which it goes, we will start to see improvements or at least some certainty and people will move ahead.

Michael Tupholme

Okay. Within residential lumber, obviously extremely strong organic growth 44% in the quarter, year-over-year. And so I almost hesitate to sort of ask about this, but that was down somewhat from 63% growth in the second quarter. I am just wondering, has there been any change in the demand environment within consumer lumber since last quarter?

Brian McManus

No. Absolutely not. That's just seasonality and very much weather related.

Michael Tupholme

Okay. And then this is small, but there was mention of increased severance costs in the MD&A. I think you talked about incremental salaries and severance of CAD1.5 million year-over-year. The salaries, I imagine, are permanent. They are going to stay. Bu the severance could potentially should be sort of more of a one-time situation. Can you maybe, Eric, break that down, that CAD1.5 million increase?

Eric Vachon

Yes. So it's about 50/50 for the severance and the salaries.

Michael Tupholme

Okay. In industrial products, I know they were sort of flat year-over-year. Brian, how do we think about that? Is that going to largely follow the demand patterns or trends within the ties business?

Brian McManus

Not entirely, because some of that is not related to the tie business. When you think of piling and both foundation and marine pilings, as an example, that would not be related to the tie business. But certainly the bridges would be tied to the tie business. But I am comfortable in saying, it's probably going to be flattish as well as we roll into 2017.

Michael Tupholme

Okay. And then just lastly, so you have had a number of questions about M&A and I think it's clear that you can't predict timing and so when you are going to announce something is going to be completely dependent on the way things unfold. But can you just talk about what the opportunity pipeline looks like now compared to what it would have been historically?

Brian McManus

I would say, it's been fairly consistent over the years. We always sort of focus in on, I would say, two to three targets and depending on who is ready to move, we will move on to one in that position or more willing to be a seller.

Michael Tupholme

Okay. All right. Thank you very much.

Brian McManus

Thanks Michael.

Operator

Your next question comes from the line of Justin Keywood of GMP Securities. Please go ahead.

Justin Keywood

Hi. Thanks for taking my questions.

Brian McManus

Hi Justin.

Justin Keywood

Hi. I just want to come back to the utility pole segment. You mentioned the aging infrastructure and the need for these utility companies to accelerate purchases. I am just wondering if there like a catalyst we should look out for? Is it going to come through rate changes or some other type of scenario?

Brian McManus

Rate changes will certainly be a good indication, because without rate changes the increase or their ability to increase their programs significantly, they just won't have the capital dollars to do it. So yes, the rate changes is a good indication. And in fact, when they don't get the rate changes that sometimes where we see a bit of a surprise reduction in certain utilities demand.

Justin Keywood

Okay. And then, is it fair to assume if there is a rate change, capital will be deployed into this are pretty immediately, because it's in need? Or is it going to be on a gradual basis?

Brian McManus

That's more difficult to answer because it would really be on a case-by-case but I would say, again what the utility was targeting in their rate increase, I think you would see that it will be deployed. If the pool replacement program was part of that then they will certainly be under pressure to put the cash into that.

Justin Keywood

Okay. All right. That's helpful. And then given the upgrade cycle pending, would there be a more immediate desire to make an acquisition in the space before this uplift from the aging infrastructure happens? Or is that really not controlled by you and is kind of waiting for these opportunities to arise?

Brian McManus

It's not entirely controlled by us. We have always taken the approach that we are patient, we are disciplined and we wait foe the right opportunities to materialize. So I would not say we are going to try to accelerate back to -- again, we are just going to wait for those opportunities to materialize.

Justin Keywood

Okay. That's fair. And then there was some bad weather in the Southern regions over the last few months. Are you seeing any impact from this in the short-term? There's been any increase in utility Italy pole sales?

Brian McManus

Nothing of a material level. Our poles are pretty tough.

Justin Keywood

Okay. And then just one final question, just on the strong cash from ops. Are you able to parse out the contribution from the residential market compared to the rest of the business?

Brian McManus

Sorry, just so I understand, you are wondering how much of the residential part contributed to that cash generation? Is that correct?

Justin Keywood

Correct. Yes.

Brian McManus

Eric, would you take a guess at that.

Eric Vachon

I would say, definitely over 50% of that would be from the residential.

Brian McManus

A fair estimate.

Eric Vachon

Yes.

Justin Keywood

Okay. All right. Thanks for taking my questions.

Brian McManus

Thank you.

Operator

Your next question comes from line of Brian Pow of Acumen. Please go ahead.

Brian Pow

Good morning Eric. Good morning Brian.

Brian McManus

Good morning Brian.

Brian Pow

I just wanted to dig in a little bit more on the residential lumber and specifically on the growth ex-RAM. Just of that 44%, how much of that growth would have been from the change in services you are offering and how much would sort of be volume related?

Brian McManus

Almost entirely, the change would be from moving from TSO or treatment services only basis to a full-service, definitely 90% to 95%. We did also see volume increases, more tied to our growth or our clients' growth.

Brian Pow

Okay. That's helpful. And then just on the logs and lumber again, you tried to give an indication of what was driving the growth. Again, was that primarily the residential lumber requirements and just a little bit on the timber harvesting?

Brian McManus

Yes. Definitely the vast majority was driven by the lumber trading.

Brian Pow

Okay. So as that business becomes more influential on your topline and margins, is Q3 sort of high-teens quarter for that kind of stuff? Or what can we expect on the various quarters as we go forward?

Brian McManus

High-teens in terms of the sales within that?

Brian Pow

Yes. Sorry, go ahead.

Brian McManus

It's going to be pretty, it's amazing that that's going to be not all that seasonal. So I would say, it's going to run pretty much what we see in Q2, Q3, will be flowing for most of the year at about that level. Some of the timber harvesting is a little more difficult to get a good forecast on, but certainly on the lumber side.

Brian Pow

Okay. So, if we continue to have some quarters like this one then we can expect margins to be at that low-18% range because of that influence. Is that fair to say?

Brian McManus

Certainly in the quarters where you would have less influence from the other product categories.

Brian Pow

Yes. Okay. And then just finally, some of the direction you are giving on the tie, so I am just trying to connect some numbers. You always provided the railway tie industry overview and the number you show in there is like 5.5% to the first eight months and then your nine-month number is 2% and change. Can you just sort of help me understand the difference there? Maybe what's taking place?

Brian McManus

In terms of the --

Brian Pow

Yes. Your growth is less than what the demand was in the industry. So I am just trying to understand that.

Brian McManus

To be --

Brian Pow

Or maybe I can't connect those numbers?

Brian McManus

Well, to be fair, it's hard to connect. I would have to really dig into that for you, Brian. I don't have a solid answer on that.

Brian Pow

Okay. Maybe we can follow-up offline. Again, I just wanted to understand if there was anything or I am reading too much into it?

Brian McManus

Well, the periods don't perfectly match. That's part of it. If you look at ones at the end of August and our results through the end of September.

Brian Pow

Yes. Okay. Maybe we will take it offline.

Brian McManus

Yes.

Brian Pow

All right. Thanks. Those are my questions.

Brian McManus

Thanks.

Operator

[Operator Instructions]. Your next question comes from the line of Mona Nzir of Laurentian Bank. Please go ahead.

Mona Nzir

Hi. This is just more of a clarification question. When you were talking about flat rail tie growth in 2016, you are referring to just organic growth not absolute numbers? So excluding FX?

Brian McManus

Yes.

Mona Nzir

Okay. Perfect. Thank you.

Brian McManus

Thanks Mona.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Brian McManus

Good. I would like to thank everyone for joining us on this call. And we look forward to speaking with you again at our next quarterly call. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.