Mr. Eric Vachon reports

STELLA-JONES RECORDS STRONG SECOND QUARTER RESULTS EXECUTING ON ITS THREE-YEAR GROWTH PLAN

Stella-Jones Inc. has released financial results for its second quarter ended June 30, 2023.

"Stella-Jones is executing on its three-year growth plan with the achievement of another strong performance in the second quarter, reflecting the upward momentum generated by accelerating demand for our infrastructure-related products," said Eric Vachon, president and chief executive officer of Stella-Jones. "Our second quarter results continued to benefit from higher pricing dynamics for utility poles, railway ties and industrial products while residential lumber delivered sales in line with expectations.

"In the second half of the year, we expect replenished railway tie inventory levels and ongoing capital projects for utility poles to facilitate anticipated volume gains while our recent acquisitions of Balfour Pole Co. and Baldwin Pole and Pilings' assets will further broaden the company's presence across North America. Our performance so far this year aligns with our plan to continue to grow our infrastructure-related businesses, increase profitability, as evidenced by the strong EBITDA [earnings before interest, taxes, depreciation and amortization] margin generated in the second quarter, and to return capital and drive value for our shareholders. Managing capital projects, acquisitions and strong organic growth requires the resourcefulness and agility of our team of experts, and I am proud to recognize their invaluable contribution to our business."

Second quarter results

Sales in the second quarter of 2023 increased by 7 per cent to $972-million, compared with sales of $907-million last year. Excluding the contribution from the 2022 acquisition of the utility pole manufacturing business of Texas Electric Cooperatives Inc. (TEC) and the positive effect of currency conversion, sales were up $17-million, or 2 per cent. The increase was driven by a 10-per-cent organic sales growth of the company's infrastructure-related businesses, namely utility poles, railway ties and industrial products, offset in large part by lower residential lumber and logs and lumber sales when compared with the same period last year. Led by the strong organic sales growth, particularly for the company's largest product category, utility poles, EBITDA increased to $175-million in the second quarter of 2023, compared with $154-million in the second quarter last year, and EBITDA margin expanded from 17.0 per cent in 2022 to 18.0 per cent in 2023.

Pressure-treated wood products:

• Utility poles (40 per cent of Q2 2023 sales): Utility poles sales amounted to $388-million, up from $316-million for the same period last year. Excluding the contribution from the 2022 acquisition of the TEC assets and the currency conversion effect, utility poles sales increased by $40-million, or 13 per cent, driven by higher pricing. While demand for utility poles remained strong, delayed timing of shipments and the deferred maintenance of utilities in California due to the impact of extreme weather events unfavourably impacted sales volumes in the second quarter of 2023.
• Railway ties (24 per cent of Q2 2023 sales): Sales of railway ties amounted to $238-million, versus $215-million in the corresponding period last year. Excluding the currency conversion effect, sales of railway ties increased by $13-million, or 6 per cent, attributable to sales price increases, largely to cover higher costs. This increase was offset in part by lower non Class 1 volumes, largely due to the reduced level of treated ties inventory following the limited fibre supply availability in 2022.
• Residential lumber (28 per cent of Q2 2023 sales): Sales in residential lumber decreased $15-million to $271-million in the second quarter of 2023, compared with sales of $286-million in the corresponding period last year. Excluding the currency conversion effect, residential lumber sales decreased $18-million, or 6 per cent. While sales volumes were higher in the second quarter of 2023 compared with the same quarter last year, the volume gains were not enough to offset lower pricing attributable to the decrease in the market price of lumber.
• Industrial products (4 per cent of Q2 2023 sales): Industrial product sales were $43-million in the second quarter of 2023, compared with sales of $38-million in the corresponding period last year. The increase was largely due to higher pricing across most industrial products.

Logs and lumber:

• Logs and lumber (4 per cent of Q2 2023 sales): Sales in the logs and lumber product category were $32-million in the second quarter of 2023, as compared with $52-million in the corresponding period last year. The decrease in sales was largely attributable to lower logs and lumber pricing compared with the second quarter last year.

Gross profit was $200-million in the second quarter of 2023, compared with $173-million in the corresponding period last year, representing a margin of 20.6 per cent and 19.1 per cent, respectively. The increase in gross profit in absolute dollars was largely due to the margin expansion of the company's infrastructure-related businesses, particularly stemming from the price increases realized for utility poles. This improvement was offset in part by a decrease in the gross profit of residential lumber due to lower pricing. As a percentage of sales, the gross profit margin also benefited from a better product mix, led by the strong growth of utility poles sales. Similarly, operating income totalled $149-million in the second quarter of 2023 versus operating income of $133-million in the corresponding period of 2022. Net income for the second quarter of 2023 was $100-million, or $1.72 per share, compared with net income of $94-million, or $1.51 per share, in the corresponding period of 2022.

Six-month results

For the first six months of 2023, sales amounted to $1,682-million versus $1,558-million for the corresponding period last year, driven by the 13-per-cent organic sales growth of the company's infrastructure-related businesses. Excluding the contribution from the 2022 acquisition of the TEC assets of $31-million and the currency conversion of $66-million, pressure-treated wood sales rose by $77-million, or 5 per cent, while logs and lumber sales dropped by $51-million, or 47 per cent. The year-over-year organic growth in pressure-treated wood sales stemmed from favourable pricing for utility poles and railway ties as well as higher residential lumber volumes. These factors were partially offset by lower residential lumber pricing as well as lower volumes for utility poles and railway ties. The decrease in logs and lumber sales compared with the same period last year is largely attributable to a decline in the market price of logs and lumber.

Gross profit increased to $336-million, or 20.0 per cent of sales, from $273-million, or 17.5 per cent of sales, in the corresponding period last year. Operating income amounted to $244-million, versus $200-million a year ago, while EBITDA was $295-million, compared with $242-million in the prior year, and EBITDA margin expanded from 15.5 per cent in 2022 to 17.5 per cent in 2023.

Net income in the first six months of 2023 was $160-million, or $2.73 per share, versus net income of $140-million, or $2.23 per share, in the corresponding period last year. Earnings per share was positively impacted by the increase in net income and the company's repurchase of shares through its normal course issuer bids.

Liquidity and capital resources

During the second quarter ended June 30, 2023, Stella-Jones used the cash generated from operations of $127-million to maintain the quality of its assets; expand and secure production capacity, including acquiring the utility pole peeling and drying assets of Balfour Pole; as well as return capital to shareholders.

During the first six months of 2023, the company has returned $87-million to its shareholders through dividends of $27-million and share repurchases of $60-million. Since the beginning of the normal course issuer bid on Nov. 14, 2022, the company has repurchased 1,528,317 common shares for cancellation in consideration of $80-million.

As at June 30, 2023, the company had a total of $292-million available under its credit facilities and maintained a solid financial position with a net debt to EBITDA ratio of 2.6 times.

Acquisitions

During the second quarter, the company acquired substantially all of the Southern Yellow Pine pole peeling and drying assets of Balfour Pole, located in Baconton, Ga., for a total consideration of $20-million ($15-million (U.S.)). Similarly to the acquisition of the peeling and drying assets of IndusTree Pole & Piling in the first quarter of 2023, this acquisition will provide security of supply to support the growing demand for utility poles as well as drive cost-efficiencies.

In addition, subsequent to the quarter-end, the company acquired substantially all of the assets of the wood utility pole manufacturing business of Baldwin Pole and Piling for a total consideration of approximately $64-million ($48-million (U.S.)). Baldwin is a Southern Yellow Pine pole treating company with facilities in Bay Minette, Ala., and Wiggins, Miss. This acquisition will expand the company's capacity to supply the growing needs of North America's utility pole industry while optimizing the overall efficiency of its continental network.

Quarterly dividend

On Aug. 8, 2023, the board of directors declared a quarterly dividend of 23 cents per common share payable on Sept. 25, 2023, to shareholders of record at the close of business on Sept. 5, 2023. This dividend is designated to be an eligible dividend.

2023 to 2025 financial objectives

The company held its inaugural investor day on May 25, 2023, during which it provided its updated three-year financial objectives, which now extend to 2025. Excluding acquisitions, the company's 2023 to 2025 financial objectives are set forth in an attached table.

Key highlights:

1. Projected compound annual growth rate (CAGR) for sales of 6 per cent for the 2023 to 2025 period, driven by a 9-per-cent CAGR for the company's infrastructure-related businesses, expected to account for 75 per cent to 80 per cent of total sales:
   • Utility poles -- 15-per-cent sales CAGR, supported by a growth capital expenditure program of $115-million;
   • Railway ties -- low-single-digit annual sales growth;
2. Residential lumber -- annual sales target of $600-million to $650-million, representing less than 20 per cent of total sales;
3. Expansion of EBITDA margin to 16 per cent through 2025 driven by improvement in product mix.

Conference call

Stella-Jones will hold a conference call to discuss these results on Aug. 9, 2023, at 10 a.m. Eastern Daylight Time. Interested parties can join the call by dialling 1-866-518-4114. A live audio webcast of the conference call will be available on the company's website in the investor relations section. This recording will be available on Wednesday, Aug. 9, 2023, as of 1 p.m. until 11:59 p.m. on Wednesday, Aug. 16, 2023.

About Stella-Jones Inc.

Stella-Jones is North America's leading producer of pressure-treated wood products. It supplies the continent's major electrical utilities and telecommunication companies with wood utility poles and North America's Class 1, short line and commercial railway operators with railway ties and timbers. Stella-Jones also provides industrial products, which include wood for railway bridges and crossings, marine and foundation pilings, construction timbers, and coal-tar-based products. Additionally, the company manufactures and distributes premium treated residential lumber and accessories to Canadian and American retailers for outdoor applications, with a significant portion of the business devoted to servicing the Canadian market through its national manufacturing and distribution network. The company's common shares are listed on the Toronto Stock Exchange.

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