Connecting The Dots: SJ flash read-through - Koppers' Q2 highlights strong tie and pole pricing
TSX: SJ | CAD 65.45 | Outperform | Price Target CAD 69.00
Sentiment: Positive
Our take. Stella Jones’ US peer Koppers today reported Q2 results with adjusted EBITDA of $70MM coming in ahead of consensus $60MM on higher sales. Our initial read on the results as it pertains to Stella-Jones is positive as Koppers' tie and pole segment came in ahead on the back of strong pricing. On the outlook, Koppers highlighted that the "utility pole market remains as strong as ever, and our customer base is anticipating that the demand strength will continue for the next few years, at minimum" - a positive indication that demand trends in poles are robust. Koppers also noted that it expects "residential treated wood volumes to remain resilient" suggesting in our view upside to SJ's residential lumber guidance. SJ shares are up meaningfully in the last year, but we still see upside on the back of infrastructure spending, which we note is not baked into SJ's guidance. Key is that US steel producers noted last week during reporting (details here) that they are currently seeing the design and budgetary work being done on [infrastructure] projects and that they expect to benefit from this spending in H2/23 and early 2024, a positive for SJ in our view. Key therefore on Koppers' conference call later this morning will be colour on infrastructure spending and any impact to Koppers' longer-term outlook.
What happened? Stella Jones’ US peer Koppers today reported Q2 results with further detail below:
• Outlook: Koppers reaffirmed 2023 guidance for sales of approximately $2.1B (cons. $2.1B), compared with $1.98B in the prior year, and adjusted EBITDA of $250MM (cons. $250MM), compared with $228MM in 2022. Koppers CEO commented "In the near term, we expect residential treated wood volumes to remain resilient and buck the softening trends seen in most other building products categories. The utility pole market remains as strong as ever, and our customer base is anticipating that the demand strength will continue for the next few years, at minimum. The railroad industry must maintain its infrastructure for safety and reliability; therefore, we are building our inventories and expect to benefit from operational efficiencies associated with higher crosstie treatment volumes.".
• The Railroad and Utility Products and Services (RUPS) business delivered record quarter sales of $234MM (cons. $221MM), an increase of $31MM, or +15% y/y. The Railroad and Utility Products and Services (RUPS) business delivered record quarter sales and higher year-over-year profitability as a result of pricing increases and volume increases for crossties and utility poles, partially offset by higher raw material and operating costs.
• The Performance Chemicals (PC) segment generated record Q2 sales of $181MM (cons. $158MM), an increase of $34MM, or +22% y/y. The Performance Chemicals (PC) segment generated record quarter sales and higher year-over-year profitability driven by pricing increases from renegotiated customer contracts to offset higher costs experienced in the prior year and volume increases on a net basis globally.