Stella-Jones Reports 2018 Third Quarter Results

• Sales increased over 20% to $630.0 million, driven by all product categories
• Operating margins continue to trend upward from previous 2018 quarters
• Net income and diluted EPS increased to $45.8 million and $0.66 per share
• Solid financial position maintained with a total debt to EBITDA ratio of 2.1x

MONTREAL, Nov. 02, 2018 (GLOBE NEWSWIRE) -- Stella-Jones Inc. (TSX: SJ) (“Stella-Jones” or the “Company”) today announced financial results for its third quarter ended September 30, 2018.

“Third quarter results demonstrated strong sales growth and continued improvement in operating margins on a sequential basis. Sales increased in all product categories driven by sales prices, market demand and acquisitions. While margins are up when compared to previous 2018 quarters, the pace of improvement was mitigated by the timing of customer price adjustments for higher untreated railway tie costs.

Looking forward, we are encouraged by the improving market conditions in the railway tie product category and the rising demand for utility poles. Given current market conditions and the recent decrease in residential lumber prices, we are on track to improve our operating margins in 2019. As always, we will continue to remain focused on optimizing our operations across the organization while diligently seeking market opportunities in all product categories,” said Brian McManus, President and Chief Executive Officer.  

THIRD QUARTER RESULTS
Sales for the third quarter of 2018 reached $630.0 million, versus sales of $517.6 million for the corresponding period last year. Acquisitions contributed sales of approximately $19.9 million, while the currency conversion effect had a positive impact of $12.9 million. Excluding these factors, sales increased approximately $79.6 million, or 15.4%.

Railway tie sales for the third quarter of 2018 amounted to $187.7 million, representing an increase of 16.7%, from sales of $160.8 million in the corresponding period last year. Excluding the currency conversion effect, railway tie sales increased approximately $21.8 million, or 13.5%, primarily as a result of price increases.

Utility pole sales reached $200.6 million in the third quarter of 2018, up 16.3% from sales of $172.5 million in the corresponding period last year. Acquisitions contributed sales of $0.1 million, while the currency conversion effect increased sales by about $5.1 million when compared with the third quarter of last year. Excluding the contribution from acquisitions and the currency conversion effect, utility pole sales increased approximately $22.9 million, or 13.3%, primarily driven by increased sales in the U.S. Southeast, increased projects related to transmission poles and a healthy demand for replacement programs.

Sales in the residential lumber category totalled $160.5 million in the third quarter of 2018, up 27.6% from sales of $125.8 million for the corresponding period last year. Acquisitions contributed sales of approximately $15.2 million, while the currency conversion effect increased sales by about $1.5 million when compared with the same period last year. Excluding these factors, residential lumber sales increased approximately $18.0 million, or 14.3% as a percentage of sales. This is primarily explained by higher selling prices as a result of lumber cost escalations passed through to customers.

Industrial product sales reached $32.4 million in the third quarter of 2018, compared with $25.6 million in the corresponding period last year. Excluding the contribution from acquisitions and the currency conversion effect, sales increased 7.0%, explained in most part by demand for rail-related products.

Sales in the logs and lumber category totalled $48.8 million in the third quarter of 2018, compared with $32.9 million in the corresponding period last year. Excluding the contribution from acquisitions and the currency conversion effect, logs and lumber sales increased 45.9%.  This significant variance reflects higher selling prices due to escalating lumber costs coupled with increased harvesting activity related to procurement activities to support strong pole sales. Since this product category does not generate margin, sales growth of this product category reduces overall margin as a percentage of sales.

Operating income stood at $67.9 million, or 10.8% of sales, compared with $63.1 million, or 12.2% of sales in the corresponding period last year. While operating income in absolute dollars is higher than last year, it is lower on a percentage of sales basis. This variation is primarily explained by the increasing cost of untreated railway ties and certain untreated species of poles. In addition, the higher lumber costs, which are passed through in a timely manner to customers via higher selling prices, have contributed to increased cost of sales but have also put downward pressure on margins as a percentage of sales.  These cost increases were also exacerbated by the effect of currency translation.

Net income for the third quarter of 2018 was $45.8 million, or $0.66 per diluted share, versus $42.0 million, or $0.61 per diluted share, in the third quarter of 2017.

NINE-MONTH RESULTS
For the first nine months of 2018, sales amounted to $1.69 billion, versus $1.51 billion for the corresponding period last year. Acquisitions contributed sales of $49.0 million, while the currency conversion effect had a negative impact of $21.9 million on sales. Excluding these factors, sales increased approximately $155.2 million, or 10.3%.

Operating income reached $174.5 million, or 10.3% of sales, compared with $178.4 million, or 11.8% of sales last year. Net income totalled $117.0 million, or $1.69 per diluted share, versus $116.8 million, or $1.68 per diluted share last year.

SOLID FINANCIAL POSITION
As at September 30, 2018, the Company’s long-term debt, including the current portion, stood at $499.0 million compared with $455.6 million as at December 31, 2017. The increase mainly reflects higher working capital requirements, financing required for the acquisitions of Prairie Forest Products and Wood Preservers Incorporated, higher capital expenditures as well as the effect of local currency translation on U.S. dollar denominated long-term debt. As at September 30, 2018, Stella-Jones’ total debt to EBITDA was 2.1x, up from 1.9x as at December 31, 2017.

QUARTERLY DIVIDEND OF $0.12 PER SHARE
On November 1, 2018, the Board of Directors declared a quarterly dividend of $0.12 per common share, payable on December 20, 2018 to shareholders of record at the close of business on December 3, 2018. This dividend is designated to be an eligible dividend.

OUTLOOK
For 2018, based on current market conditions and assuming stable currencies, Management expects higher year-over-year overall sales for Stella-Jones driven by pricing as well as increased market reach for the residential lumber and the utility pole product categories. Operating margins are improving thus far in the second half of 2018 when compared to the first half of the year. However, the progression of operating margins in the fourth quarter of 2018 will continue to be impacted by higher untreated railway tie costs until sales prices can be adjusted. The Company plans on spending up to $45.0 million on property, plant and equipment in 2018, driven by capacity enhancement projects and its overall effective tax rate is expected to be approximately 27.0%.

For 2019, based on current market conditions and assuming stable currencies, Management expects higher year-over-year overall sales for Stella-Jones, driven by stronger pricing in some product categories as well as increased market reach for utility poles and residential lumber. Operating margins are expected to improve over 2018, primarily driven by increased pricing for railway ties and higher volume and improved product mix for utility poles.

For details per product category please refer to the Management’s Discussion and Analysis for the quarter.

CONFERENCE CALL
Stella-Jones will hold a conference call to discuss these results on November 2, 2018, at 10:00 AM Eastern Time. Interested parties can join the call by dialing 1-647-788-4922 (Toronto or overseas) or 1-877-223-4471 (elsewhere in North America). Parties unable to call in at this time may access a recording by calling 1‑800-585-8367 and entering the passcode 5563718. This recording will be available on Friday, November 2, 2018 as of 1:00 PM Eastern Time until 11:59 PM Eastern Time on Friday, November 9, 2018.

NON-IFRS FINANCIAL MEASURES
EBITDA (operating income before depreciation of property, plant and equipment and amortization of intangible assets), operating income and operating margins are financial measures not prescribed by IFRS and are not likely to be comparable to similar measures presented by other issuers. Management considers these non-IFRS measures to be useful information to assist knowledgeable investors regarding the Company’s financial condition and results of operations as it provides an additional measure of its performance. Please refer to the non-IFRS financial measures section in the Management’s Discussion and Analysis.

ABOUT STELLA-JONES
Stella-Jones Inc. (TSX: SJ) is a leading producer and marketer of pressure treated wood products. The Company supplies North America’s railroad operators with railway ties and timbers, and the continent’s electrical utilities and telecommunication companies with utility poles. Stella-Jones also manufactures and distributes residential lumber and accessories to retailers for outdoor applications, as well as industrial products for construction and marine applications. The Company’s common shares are listed on the Toronto Stock Exchange.

Except for historical information provided herein, this press release may contain information and statements of a forward-looking nature concerning the future performance of the Company. These statements are based on suppositions and uncertainties as well as on management's best possible evaluation of future events. Such factors may include, without excluding other considerations, fluctuations in quarterly results, evolution in customer demand for the Company's products and services, the impact of price pressures exerted by competitors, the ability of the Company to raise the capital required for acquisitions, and general market trends or economic changes. As a result, readers are advised that actual results may differ from expected results.

Note to readers:  Condensed interim unaudited consolidated financial statements for the third quarter ended September 30, 2018 are available on Stella-Jones' website at www.stella-jones.com