Mr. Eric Vachon reports

STELLA-JONES ANNOUNCES THIRD QUARTER RESULTS

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

"In Q3, Stella-Jones made notable progress in its growth trajectory, delivering not only another quarter of strong sales growth, but record increase in profitability," said Eric Vachon, president and chief executive officer of Stella-Jones. "These results were supported by the ongoing robust performance of our infrastructure-related businesses, and by residential lumber delivering in line with our expectations. While utility poles sales continued to benefit from favourable pricing dynamics, we also saw a progressive improvement in utility poles sales volumes in the quarter, as well as significant production volume gains stemming from capital projects and the recent acquisition of Baldwin. Combined with replenished railway tie inventory levels, we are confident in the sustained growth of the company as we move into 2024. Additionally, in the third quarter, we published our 2022 environmental, social and governance report, in which we introduced our ESG strategy and targets to contribute to a more sustainable future.

"As we approach the end of the year, I am pleased with the performance and milestones we have achieved so far in 2023. They highlight our ability to capitalize on positive industry trends by leveraging our expansive North American presence and the invaluable collective expertise of our people to drive long-term profitable growth for our shareholders," concluded Mr. Vachon.

Third quarter results

Sales in the third quarter of 2023 increased by 13 per cent to $949-million, compared with sales of $842-million last year. Excluding the contribution from the acquisition of the utility pole manufacturing business of Texas Electric Cooperatives Inc. (TEC) in November, 2022, and Baldwin in 2023, and the positive effect of currency conversion, sales were up $61-million, or 7 per cent. The increase was driven by a 17-per-cent organic sales growth in 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 continued strong organic sales growth, particularly for the company's largest product category, utility poles, EBITDA (earnings before interest, taxes, depreciation and amortization) increased to $193-million in the third quarter of 2023 compared with $119-million in the third quarter last year, and EBITDA margin expanded from 14.1 per cent in 2022 to 20.3 per cent in 2023.

Pressure-treated wood products:

• Utility poles (46 per cent of Q3 2023 sales): Utility poles sales amounted to $438-million, up from $331-million for the same period last year. Excluding the contribution from acquisitions and the currency conversion effect, utility poles sales increased by $68-million, or 21 per cent. The increase was driven by higher pricing as sales volumes remained relatively unchanged when compared with the same quarter last year, but were higher versus the prior quarter. In the third quarter of 2023, production volumes continued to increase, benefiting from additional capacity stemming from capital projects. This incremental production enabled the company to increase inventories to the level required to secure and deliver on longer-term sales commitments.
• Railway ties (24 per cent of Q3 2023 sales): Sales of railway ties amounted to $230-million, versus $199-million in the corresponding period last year. Excluding the currency conversion effect, sales of railway ties increased by $26-million, or 13 per cent, largely attributable to sales price increases in response to higher costs. Volumes were relatively stable compared with the same period last year as lower non-Class 1 volumes, due to the reduced level of treated ties inventory following the limited fibre supply availability in 2022, were offset by higher sales volumes for Class 1 customers, largely attributable to timing of shipments.
• Residential lumber (21 per cent of Q3 2023 sales): Sales in residential lumber decreased $24-million to $202-million in the third quarter of 2023, compared with sales of $226-million in the corresponding period last year. Excluding the currency conversion effect, residential lumber sales decreased $25-million, or 11 per cent. While sales volumes were higher in the third quarter of 2023 compared with the same quarter last year, the volume gains were not sufficient to offset lower pricing attributable to the decrease in the market price of lumber.
• Industrial products (5 per cent of Q3 2023 sales): Industrial product sales were $42-million in the third quarter of 2023, relatively unchanged compared with sales of $40-million in the corresponding period last year.
• Logs and lumber (4 per cent of Q3 2023 sales): Sales in the logs and lumber product category were $37-million in the third quarter of 2023, compared with $46-million in the corresponding period last year. The decrease in sales compared with the third quarter last year was largely attributable to less lumber trading activity. Logs sales remained stable as higher log sales activity was largely offset by the lower market price of logs.

Gross profit was $215-million in the third quarter of 2023, compared with $139-million in the corresponding period last year, representing a margin of 22.7 per cent and 16.5 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 utility poles, and the contribution of the wood utility pole manufacturing businesses acquired in late 2022 and 2023. 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 $166-million in the third quarter of 2023 versus operating income of $98-million in the corresponding period of 2022.

Net income for the third quarter of 2023 was $110-million, or $1.91 per share, compared with net income of $65-million, or $1.07 per share, in the corresponding period of 2022.

Nine-month results

For the first nine months of 2023, sales amounted to $2,631-million, versus $2.4-billion for the corresponding period last year, driven by a 15-per-cent organic sales growth of the company's infrastructure-related businesses. Excluding the contribution from the acquisition of the TEC and Baldwin assets of $60-million, and the currency conversion of $83-million, pressure-treated wood sales rose by $147-million, or 7 per cent, while logs and lumber sales dropped by $60-million, or 39 per cent. The year-over-year organic growth in pressure-treated wood sales stemmed from favourable pricing across all the infrastructure-related product categories and higher residential lumber volumes. These factors were partially offset by a decrease in pricing for residential lumber and lower volumes for infrastructure-related product categories. The lower logs and lumber sales compared with the same period last year was largely attributable to a decline in the market price of lumber, and less lumber trading activity.

Gross profit increased to $551-million, or 20.9 per cent of sales, from $412-million, or 17.2 per cent of sales, in the corresponding period last year. Operating income amounted to $410-million, versus $298-million a year ago, while EBITDA was $488-million, compared with $361-million in the prior year, and EBITDA margin expanded from 15 per cent in 2022 to 18.5 per cent in 2023.

Net income in the first nine months of 2023 was $270-million, or $4.63 per share, versus net income of $205-million, or $3.30 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 third quarter ended Sept. 30, 2023, Stella-Jones used the cash generated from operations of $130-million to maintain and upgrade its assets, and expand and secure production capacity, including acquiring the utility pole manufacturing business of Baldwin, as well as return capital to shareholders.

During the first nine months of 2023, the company has returned $145-million to its shareholders, through dividends of $40-million and share repurchases of $105-million. Since the beginning of the current normal course issuer bid commencing on Nov. 14, 2022, the company has repurchased 2,210,172 common shares for cancellation in consideration of $125-million.

As at Sept. 30, 2023, the company had a total of $271-million available under its credit facilities and maintained a solid financial position with a net debt-to-EBITDA ratio of 2.4 times.

Acquisition of utility pole manufacturing business

During the third quarter, the company acquired substantially all of the assets of the wood utility pole manufacturing business of Baldwin for a total consideration of $64-million ($49-million (U.S.)). Baldwin is a Southern Yellow Pine pole treating business 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.

Announcement of normal course issuer bid

On Nov. 7, 2023, the company announced that the Toronto Stock Exchange accepted its notice of intention to make a NCIB. Please refer to the press release issued by the company, a copy of which is located in the investor relations section of its website.

Quarterly dividend

On Nov. 6, 2023, the board of directors declared a quarterly dividend of 23 cents per common share payable on Dec. 21, 2023, to shareholders of record at the close of business on Dec. 4, 2023. This dividend is designated to be an eligible dividend.

Two thousand twenty-three to 2025 financial objectives

The company provided updated three-year financial objectives at its investor day on May 25, 2023. Excluding acquisitions, the company's 2023 to 2025 financial objectives are set forth in the associated 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.

Publication of environmental, social and governance report

On Sept. 12, 2023, the company published its 2022 ESG report. It can be found on the Stella-Jones website.

Conference call

Stella-Jones will hold a conference call to discuss these results on Nov. 7, 2023, at 10 a.m. ET. 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, on the investor relations section. This recording will be available on Tuesday, Nov. 7, 2023, as of 1 p.m., until 11:59 p.m. on Tuesday, Nov. 14, 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.

We seek Safe Harbor.