Mr. Eric Vachon reports

STELLA-JONES ANNOUNCES FOURTH QUARTER AND YEAR-END RESULTS

Stella-Jones Inc. has released financial results for its fourth quarter and year ended Dec. 31, 2023.

"We concluded 2023 with a marked improvement in profitability and the successful execution of investments to support the continued growth momentum in our infrastructure product categories," said Eric Vachon, president and chief executive officer of Stella-Jones. "With the first year of our three-year strategic plan now completed, I am proud of our collective achievements. We reinforced our solid industry presence through strategic acquisitions and capital projects, we worked to secure additional long-term sales commitments to seize growing demand from existing and new customers, and we leveraged the forward-thinking and expert know-how of our team to deliver exceptional results.

"Driven by the increased level of profitability, we announced a 22-per-cent growth in the company's quarterly dividend. This is the 20th year of continuous dividend increases, which truly speaks to our confidence in the long-term financial strength of our business. We are optimistic that the thoughtful planning and execution of our business strategy, combined with recently set sustainability targets and our disciplined capital management, will enable us to sustain profitable growth and deliver meaningful value for all our stakeholders. On the heels of such a banner year for our business, Stella-Jones's growth prospects are promising, and we are ready for the future," concluded Mr. Vachon.

Fourth quarter results

Sales for the fourth quarter of 2023 amounted to $688-million, up 3 per cent from sales of $665-million for the same period in 2022. Excluding the contribution from the acquisition of the utility pole manufacturing business of Texas Electric Cooperatives Inc. (TEC) in November, 2022, and Baldwin Pole and Piling in July, 2023, of $15-million and currency conversion of $1-million, pressure-treated wood sales rose $22-million, or 4 per cent, driven by the 8-per-cent organic sales growth of the company's infrastructure businesses, namely utility poles, railway ties and industrial products. Higher pricing for utility poles and railway ties was partially offset by lower volumes and a decrease in residential lumber sales.

Pressure-treated wood products:

• Utility poles (56 per cent of Q4 2023 sales): Utility poles sales amounted to $383-million, up from $326-million for the same period last year. Excluding the contribution from acquisitions, sales increased 13 per cent, driven by pricing gains. The lower sales volume in the quarter was largely explained by the softer pace of utility pole purchases, mostly attributable to capital budget constraints of certain customers.
• Railway ties (24 per cent of Q4 2023 sales): Sales of railway ties amounted to $165-million, compared with $161-million last year. Railway ties sales rose 2 per cent, as improved pricing for both Class 1 and non-Class 1 business was largely offset by lower non-Class 1 volumes.
• Residential lumber (12 per cent of Q4 2023 sales): Residential lumber sales totalled $82-million, down from $100-million of sales generated in the same period in 2022. The decrease in residential lumber sales stemmed from lower pricing attributable to the decrease in the market price of lumber, as well as lower sales volumes.
• Industrial products (4 per cent of Q4 2023 sales): Industrial product sales amounted to $27-million, down from $32-million last year, mainly due to the timing of projects related to railway bridges and crossings.

Logs and lumber:

• Logs and lumber (4 per cent of Q4 2023 sales): Logs and lumber sales totalled $31-million, down 33 per cent compared with the same period last year, driven by a decrease in the market price of logs and lumber, partially offset by higher log sales activity, compared with the fourth quarter last year.

Gross profit was $137-million in the fourth quarter of 2023, versus $112-million in the fourth quarter of 2022, representing a margin of 19.9 per cent and 16.8 per cent, respectively. The increase in absolute dollars was largely attributable to the margin expansion for utility poles and railway ties, offset in part by lower sales volumes and a decrease in the gross profit of residential lumber. As a percentage of sales, the gross profit also benefited from a better product mix.

Similarly, operating income totalled $89-million in 2023 versus operating income of $61-million in the corresponding period of 2022, while EBITDA (earnings before interest, taxes, depreciation and amortization) increased to $120-million, or a margin of 17.4 per cent, compared with $87-million, or a margin of 13.1 per cent reported in the fourth quarter of 2022.

Net income for the fourth quarter of 2023 was $56-million, or 98 cents per share, compared with net income of $36-million, or 61 cents per share, in the corresponding period of 2022.

2023 results

Sales in 2023 were up 8 per cent to $3,319-million, compared with $3,065-million last year. Excluding the contribution from acquisitions of $75-million and the positive effect of currency conversion of $84-million, pressure-treated wood sales rose $169-million, or 6 per cent. Infrastructure sales grew organically by $274-million, or 13 per cent, while residential lumber sales dropped by $105-million. All the infrastructure product categories benefited from higher year-over-year sales prices, partially offset by lower volumes, while residential lumber sales were impacted by the decrease in the market price of lumber when compared with the prior year. This lower pricing more than offset the increase in residential lumber volumes.

Pressure-treated wood products:

• Utility poles (47 per cent of 2023 sales): Utility poles sales increased to $1,571-million in 2023, compared with sales of $1,227-million in 2022. Excluding the contribution from the acquisition of assets of TEC and Baldwin, and the currency conversion effect, utility poles sales increased by $222-million, or 18 per cent, driven by pricing gains. While production volumes benefited in 2023 from growth projects, sales volumes were lower compared with the prior year. Sales volumes in 2023 were impacted by the deferred maintenance of California utilities due to extreme weather events in the first half of the year and the softer pace of utility pole purchases of certain customers in the latter part of the year.
• Railway ties (25 per cent of 2023 sales): Railway ties sales were $828-million in 2023, compared with sales of $750-million in 2022. Excluding the currency conversion effect, railway ties sales increased $52-million, or 7 per cent, largely attributable to sales price increases, in response to higher costs, and higher Class 1 volumes. Over all, sales volumes were lower year-over-year due to the non-Class 1 business, which was impacted by the company's reduced level of treated ties inventory following the limited fibre supply availability in 2022.
• Residential lumber (19 per cent of 2023 sales): Sales in the residential lumber category decreased to $645-million in 2023, compared with sales of $744-million in 2022. Excluding the currency conversion effect, residential lumber sales decreased $105-million, or 14 per cent, driven by a decrease in pricing attributable to the lower market price of lumber when compared with 2022.
• Better consumer demand and the resulting higher sales volumes in 2023 was not sufficient to offset the lower pricing.
• Industrial products (5 per cent of 2023 sales): Industrial product sales increased to $148-million in 2023 compared with sales of $143-million in 2022. Excluding the currency conversion effect, industrial product sales remained stable compared with last year.

Logs and lumber:

• Logs and lumber (4 per cent of 2023 sales): Sales in the logs and lumber product category were $127-million in 2023, down from $201-million in 2022. The decrease in sales was largely due to a decline in the market price of lumber and less lumber trading activity compared with last year. Logs sales remained stable as higher log sales activity was offset by the lower market price of logs.

Gross profit was $688-million in 2023 compared with $524-million in 2022, representing a margin of 20.7 per cent and 17.1 per cent, respectively. The increase in gross profit in absolute dollars was largely due to the margin expansion of the company's infrastructure businesses, particularly stemming from utility poles, partially offset by lower sales volumes and a decrease in the gross profit of residential lumber. The acquisition of the wood utility pole manufacturing businesses in late 2022 and in 2023, and the positive impact of the currency conversion, further contributed to the higher gross profit for the year ended Dec. 31, 2023. As a percentage of sales, the gross profit also benefited from a better product mix, led by the strong growth of utility poles sales and the lower relative proportion of residential lumber sales.

Operating income totalled $499-million in 2023 versus operating income of $359-million in 2022, while EBITDA increased 36 per cent to $608-million in 2023, compared with $448-million in 2022. Benefiting from the strong organic sales growth and a better product mix, EBITDA margin expanded from 14.6 per cent in 2022 to 18.3 per cent in 2023.

Net income in 2023 was $326-million, versus net income of $241-million in 2022. Earnings per share in 2023 were $5.62, compared with earnings per share of $3.93 in 2022.

Liquidity and capital resources

During the year ended Dec. 31, 2023, Stella-Jones used the cash generated from operations of $107-million and available credit to maintain and upgrade its assets, expand and secure production capacity, including acquiring three businesses, as well as return $195-million of capital to shareholders. In 2023, the dividend paid amounted to 92 cents per share, representing a 15-per-cent increase compared with 2022.

As at Dec. 31, 2023, the net debt-to-EBITDA ratio increased above the target range, at 2.6 times, largely explained by the investment in strategic growth opportunities totalling $152-million in 2023.

Subsequent to year-end, the company amended and restated the syndicated credit agreement in order to increase the amount available under the unsecured revolving credit facility to $600-million (U.S.) and extend the term of the $475-million (U.S.) tranche to Feb. 27, 2028, and the $125-million (U.S.) tranche to Feb. 27, 2026.

Normal course issuer bid

On Nov. 6, 2023, the Toronto Stock Exchange accepted the company's notice of intention to make a normal course issuer bid (NCIB) to purchase for cancellation up to 2.5 million common shares during the 12-month period commencing Nov. 14, 2023, and ending Nov. 13, 2024, representing approximately 5 per cent of the public float of its common shares.

In 2023, the company repurchased 2,286,484 common shares for cancellation in consideration of $142-million, under its NCIBs then in effect.

Quarterly dividend increased 22 per cent to 28 cents per share

On Feb. 28, 2024, the board of directors declared a quarterly dividend of 28 cents per common share payable on April 19, 2024, to shareholders of record at the close of business on April 1, 2024. This dividend is designated to be an eligible dividend.

2023 to 2025 financial objectives: progress in 2023

In the first year of its 2023 to 2025 financial plan, the company delivered a strong performance and made significant progress toward the achievement of its financial objectives, as summarized in the attached table. Based on 2023 financial metrics, the company is on track to meet its 2025 objectives.

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 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. EBITDA margin of 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 Feb. 29, 2024, at 10 a.m. Eastern Standard 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, on the investor relations section's homepage. This recording will be available on Thursday, Feb. 29, 2024, as of 1 p.m. until 11:59 p.m. on Thursday, March 7, 2024.

About Stella-Jones Inc.

Stella-Jones is a leading North American 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 Canadian customers through its national manufacturing and distribution network. The company's common shares are listed on the Toronto Stock Exchange.

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