CIBCTheir current target is $97.00. GLTA
EQUITY RESEARCH
September 6, 2024 Company Update
STELLA-JONES INC.
On The Road With Stella-Jones
Our Conclusion
We present key takeaways from marketing in Vancouver this week with
Stella-Jones CEO Eric Vachon and CFO Silvana Travaglini. While we see
more compelling risk/reward opportunities elsewhere in our materials
coverage universe (packaging and forestry), we are encouraged by signs
that SJ’s pole realizations may be relatively steady into 2025 (despite
industry capacity additions this year), as well as management’s objective of
sustaining company EBITDA margin north of 16%.
Key Points
Pole Pricing Holding Up Better Than Initially Expected: While SJ initially
thought that its guidance for pole sales to grow organically by an ~15%
CAGR in 2024/25 would have been driven entirely by volumes, the company
now expects the growth to be driven equally by pricing, given that the spot
market has held up better than anticipated. The spot pole market still
provides a ~5% gross margin premium to contract pricing, but CEO Vachon
expects that the premium will moderate over time.
Management highlighted that the spot market for poles (~30% of SJ’s pole
business) is primarily in the South, with SYP representing ~60% of the spot
market. With a greenfield in the South anticipated to start up in Q4 from a
competitor (Bell Pole), the increased capacity may create some regional
softness in spot pricing.
Beyond 2025, management pointed to organic pole sales growing at 6%-7%
annually (mix of volumes and pricing), similar to the growth rate of utilities
capex.
Tie Volumes Up This Year, But Expected To Be Lower In H2: Following
tight inventory levels in 2023, the decrease in hardwood lumber demand has
increased the fiber available to Stella-Jones for tie procurement. The
company has been able to replenish its inventory to cover contracts and sell
in the spot tie market (which provides an ~3% gross margin premium to
contract pricing), increasing SJ’s rail tie volumes for the year. While Class 1s
are generally increasing their maintenance programs or looking to do so in
coming years, one of SJ’s Class 1 customers has reduced its program this
year (for the third year in a row), which will impact volumes in H2 (though the
Class 1 reportedly plans to resume its maintenance program next year).
As Class 1 contract renewals approach, Stella-Jones is open to moving away
from the working capital-intensive black tie model (currently 100% of
contracts) and offering the treating service only (TSO) model for its US Class
1s. This, along with some pricing gains, should help relieve some of the
inflationary pressure on tie margins in recent years.
Res Lumber Business Impacted By Weaker R&R In 2024: SJ has seen
softer volumes (especially in DIY) and weaker pricing this year. Management
expects to see modestly stronger R&R demand in 2025 as interest rates
moderate