Stella-Jones Inc. (TSX:SJ), a leading producer of pressure-treated wood products, reported robust financial and operational performance in the second quarter of 2024.
The company saw an 8% increase in sales, surpassing the $1 billion mark, driven by strong performance in utility poles, railway ties, and industrial products. Net income for the quarter was reported at $110 million, translating to $1.94 per share.
Despite a downturn in residential lumber sales due to lower consumer demand and market prices, Stella-Jones is optimistic about achieving an EBITDA margin close to 18% by the end of the year, bolstered by stable utility pole sales and growth in complementary products.
Key Takeaways
- Stella-Jones experienced an 8% increase in sales, reaching over $1 billion.
- Operating income and EBITDA for the quarter stood at $168 million and $200 million, respectively.
- Utility poles remain a strong category, contributing to 45% of total sales.
- Railway tie sales increased due to higher volumes and improved pricing.
- Residential lumber sales were lower due to decreased demand and weak market prices.
- The company expects a compound annual growth rate of 15% for utility pole sales in 2024 and 2025.
- Stella-Jones is exploring expansion into steel or composite materials for railway ties and utility poles.
Company Outlook
- Stella-Jones is on track to meet or exceed its financial objectives for the year.
- The company anticipates surpassing its targets and achieving an EBITDA margin close to 18% by year-end.
- Expansion into complementary products is being considered as part of the growth strategy.
Bearish Highlights
- A Class 1 customer's changes to its maintenance program will likely lead to a reduction in volume gains for utility poles in the second half of 2024.
- Residential lumber sales face weaker pricing and demand, with sales projected at the lower end of the $600 million to $650 million range.
Bullish Highlights
- Utility pole sales are expected to grow substantially, with a 15% compound annual growth rate for 2024 and 2025.
- New customer acquisitions are anticipated to positively impact volume.
- The risk of pricing pressure in the utility poles market has diminished, with prices holding firm.
Misses
- The company may see a decline in railway tie sales in the second half due to front-loaded demand from Class 1 customers.
Q&A Highlights
- CapEx increase for the pole category is attributed to inflationary costs, not capacity expansion.
- Lower interest rates are seen as positive for customers and the demand for utility poles.
- The mix of volume and price for utility poles in 2025 is expected to be balanced, with pricing as a significant driver.
- Stable pricing in residential real estate despite a volume decline, with potential for recovery in the latter half of the year.
- Stella-Jones has a robust emergency response system to handle events such as fires and storms, which have not significantly impacted the business.
- A drawdown in working capital is expected in the second half of the year due to increased volumes.
Stella-Jones has demonstrated resilience and strategic growth in a fluctuating market, with its strong second-quarter performance signaling continued success.
The company's focus on utility poles and railway ties, alongside its exploration of new materials and products, positions it well for future growth.
While the residential lumber segment faces challenges, the firm's overall outlook remains positive, with expectations to outperform its financial targets for 2024. Stella-Jones will provide further updates in their third quarter earnings call scheduled for November.
Full transcript - None (STLJF) Q2 2024:
Operator: Good morning and thank you for standing by. Welcome to Stella-Jones’ Second Quarter of 2024 Earnings Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Wednesday, August 7, 2024. Please note that comments made on today’s call may contain forward-looking information, and this information, by its nature, is subject to risks and uncertainties. Actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company’s relevant filings on SEDAR+. These documents are also available in the Investor Relations section of Stella-Jones’ website at www.stella-jones.com. Additionally, during this conference call, the company may refer to non-GAAP measures, which have no standardized meaning under GAAP and are not likely to be comparable to similar measures presented by other issuers. For more information, please refer to the company’s latest MD&A available on Stella-Jones’ website and on SEDAR+. Lastly, we have prepared a corresponding presentation, which we encourage you to follow along with during this call. I’ll now hand the call over to Eric Vachon, President and Chief Executive Officer of Stella-Jones. Eric?
Eric Vachon: Thank you, Matthew. Good morning, everyone, and thank you for joining us today. I’m here with Silvana Travaglini, Senior Vice President and Chief Financial Officer of Stella-Jones. Earlier this morning, we issued a press release reporting our results for the second quarter of 2024. Along with our MD&A, it can be found in the Investor Relations section of our website at www.stella-jones.com as well as on SEDAR+. As a reminder, all figures expressed on today’s call are in Canadian dollars unless otherwise stated. Our financial and operating performance during the second quarter was characterized by the continued strong organic growth in sales and increase in profitability. Our Q2 results reflect our proven strategy to consistently meet customer demand and leverage the breadth of our operations to solidify our long-term proposition. Standing at the halfway mark of our 3-year financial plan, we are well-positioned to meet or exceed the targets we set out last year. As part of our growth strategy, we undertook a significant CapEx program over 2 years ago, focused on increasing our utility poles capacity. This additional capacity allowed us to solidify our existing customer relationships as well as secure new commitments. Though we continue to note a slower pace of incremental purchases from some of our customers, their ongoing focus on strengthening the electrical grid to support heavier loads instill confidence in our long-term prospects. The projected increase in the use of electric vehicles and data centers for artificial intelligence and sustained demand for broadband projects are all catalysts for our business growth. Our utility pole CapEx program, which will be largely completed later this year, represents the combination of our approach to plan for long-term demand. Much of our success in recent years is a direct result of our operational expertise, solid customer relationships, and acute industry intelligence, and I’m very pleased with what we continue to accomplish as a business. Turning to an update on each of our product categories. Utility poles continued on its growth trajectory in the second quarter, with sales benefiting from both favorable pricing and improved volumes. With the second quarter marking the start of a more active maintenance season, we were pleased to see the expected uptick in utility pole volume, including the addition of new contractual customer business. For the non-contractual business, we have started to see some pricing normalization, but it is sparse and localized to regional markets. As a result, it is now our expectation it will not significantly impact our results in the second half of the year. With the utility pole product category being anchored in strong fundamentals, we remain confident in the outlook for this category heading into the second half of 2024. While we are still witnessing some conservatism from utilities in terms of project spending, Stella-Jones has benefited from volume gains, thanks to our expansive network and established customer base. We continue to see a growing shift with both new and existing customers towards longer-term sales agreements, which aligns with our business philosophy of ensuring that we can cater to long-term needs. Sales from our railway tie product category increased from last year, largely due to higher volumes, a trend that has persisted since the beginning of 2024. We are better able to service our non-Class 1 client base given the ample supply and financial resources available to replenish our inventory levels. While sales growth of our non-Class 1 business is a positive catalyst for the railway tie product category, we also continue to focus on servicing our Class 1 customers with whom we maintain strong relationships. These railway operators provide a stable source of revenue for the company, and this contributes to the inherent consistency in terms of growth and results of this product category. Turning now to residential lumber. Sales were down relatively to the second quarter of last year, driven largely by lower consumer demand. The price of lumber has also remained lower than expected due to several factors impacting market demand, including a slowdown in housing and construction projects as well as reduced activity from sawmills. Our focus for the residential lumber product category remains to ensure our customers stay stocked in premium quality products so that when retail customers decide to move ahead with their decking and fencing projects, we will be there for them as a supplier of choice. In line with our ongoing focus to be a partner of choice to all stakeholders, Stella-Jones prioritizes meaningful action across all facets of its organization and value chain to ensure its long-term sustainability. As part of this commitment, on August 1, we publish our annual Environmental, Social and Governance Report, which articulates our ESG performance against our strategy and achievements over the past year. For the first time in our company’s history, we have completed a company-wide climate transition risk and opportunities assessment aligning with the TCFD and ISSB and including Scope 3 emissions amongst our overall greenhouse gas reporting. These were significant undertaking in an industry and business such as ours, and I’m very proud of our collective accomplishments over the last year. I encourage you to refer to our website to review our 2023 ESG Report and learn more about our sustainability approach. I will now hand it over to Silvana, who will provide a more detailed overview of our second quarter financial results.
Silvana Travaglini: Thank you, Eric, and good morning, everyone. We are very pleased with our strong second quarter financial performance, which translated into notable increases across all of our key metrics. Sales for the quarter increased by 8% to over $1 billion. This increase was largely attributed to higher utility poles, railway ties, and industrial product sales, which grew by 17%. These infrastructure supporting product categories benefited from volume gains and favorable pricing compared to the same period last year as well as from the contribution of the Baldwin acquisition. On the heels of our strong sales growth, operating income increased to $168 million from $149 million in Q2 last year. Similarly, EBITDA grew by 14% to $200 million this quarter, following a similar 14% increase in Q2 of last year. We expanded the EBITDA margin from 18% in 2023 to 19.1% in the second quarter of this year. Compared to the first quarter, all product categories generated similar margins as a percentage of sales. The sequential decrease in EBITDA margin was largely a result of the product mix, given that residential lumber typically represents a higher relative proportion of sales in the seasonally strong second quarter. We ended the quarter with net income of $110 million, or $1.94 per share, versus $100 million, or $1.72 per share, in the second quarter of last year. Now, let’s take a closer look at the performance of our product categories. Sales of utility poles increased to $470 million compared to $388 million for the same period in 2023, a robust growth of over 20%. Utility pole sales benefited from our accretive Baldwin acquisition and a strong organic increase of 16%. This ongoing growth was driven by price adjustments and additional volumes stemming from existing and new sales commitments. The volume gains this quarter represented about 40% of the total increase. Sales of utility poles accounted for 45% of total sales for the quarter and almost 50% on a year-to-date basis. Sales of railway ties grew by $27 million for a total of $265 million compared to the second quarter of 2023. This increase was largely attributed to higher volumes for non-Class 1 customers, which, as Eric noted, is a trend that has persisted since the first quarter. Better pricing also contributed to the sales growth. Railway tie sales accounted for 25% of overall sales for the quarter. Residential lumber sales were $243 million, a decrease of $28 million compared to sales of $271 million during the comparable period last year. While the market price of lumber has remained weak, most of the decrease quarter-over-quarter came from lower sales volume due to slower consumer demand. Given the seasonally strong second quarter volumes for residential lumber, this product category accounted for 23% of total sales in the second quarter. Our company is highly cash-generative, which enables us to finance our growth plans and maintain a strong financial position. In the second quarter, we generated cash from operating activities of $177 million and used this cash to invest in our network, reduce leverage following the typical build in working capital in Q1, as well as return capital to shareholders. We ended the quarter with a net debt-to-EBITDA ratio of 2.5x, which is within our target range. As part of our normal course issuer bid, we purchased $20 million of shares and paid $32 million of dividend in the second quarter. As of the end of June, we are on track on our commitment to returning capital to shareholders, having returned over $260 million out of the $500 million committed for the 2023 to 2025 period. And yesterday, our Board of Directors approved a quarterly dividend of $0.28 per share. We ended the quarter with inventories of $1.7 billion, relatively in line with the $1.6 billion of inventory as of December 31, 2023. We continue to expect inventory at year-end to be annoying with levels at the beginning of the year. This investment in inventory places the company in a good position to continue to service its customers on a timely basis. In the second half of 2024, we are focused on continuing to deliver strong performance and growth while returning capital to shareholders. In summary, with the financial strength of the business and the solid market fundamentals of our product categories, we remain well-positioned for continued success. With that, I will now pass it on to Eric for his concluding remarks.
Eric Vachon: Thank you, Silvana. Our results from the first half of the year position us favorably to end 2024 on a high note, and we remain on track to meet or exceed our financial objectives for the 2023 to 2025 period. Our positive outlook is rooted in the strong industry trends underpinning our product categories, particularly for utility poles, our largest product category. We continue to expect utility pole sales to grow at a compound annual growth rate of 15% for 2024 and 2025, now fueled by a mix of both volume and pricing. Though we have recorded strong rail rate type performance in the first half of the year, volume gains realized so far are expected to taper off in the second half of 2024 on account of changes made by a Class 1 customer to its maintenance program this year. We remain confident in the product category as a stable source of revenue and its ability to deliver low-single-digit sales growth as stated in our 3-year outlook. Looking forward, we expect that weaker pricing and the demand observed for residential lumber in Q2 will place the product category sales at the lower end of the $600 million to $650 million range target set in our objectives. Based on our strong EBITDA margin performance in the first half of the year, we expect to surpass our targets for this year despite the lower sales activity anticipated for railway ties and residential lumber in the second half of the year. As a result, we are forecasting to end 2024 with a margin closer to 18%. I started this call by mentioning how our strong customer relationships help contribute to our great financial performance for the second quarter, but there’s more than that. All of our employees are significant contributors to our company’s success, and I want to thank everyone for your ongoing dedication and commitment to Stella-Jones. With that, I will now open the line to questions.
Operator: Thank you, Eric. [Operator Instructions] Our first question is from Jonathan Goldman from Scotia Capital. Please go ahead.
Jonathan Goldman: Hi, good morning. Thank you for taking my questions. I wanted to start off with a housekeeping question. Eric, in terms of the organic sales growth and poles, can you give us a breakdown of how much of that was volume-driven versus price?
Eric Vachon: Yes. So for the quarter, volume was approximately 40% growth. And obviously, 60% is the pricing piece.
Jonathan Goldman: Perfect. Thanks for that. And then I guess the second one is if you can elaborate on the factors underlying the change in view from previously expecting pricing pressure in the second half to now not expecting it significantly impacting results? And I guess like the follow-up would be is, why would we not assume that the current margin levels are the new normal?
Eric Vachon: Yes. So when we started out the year cautioning with extra capacity and some potential softness in the spot market, there is some softness in the spot market actually, but we are seeing pricing hold relatively well. So with that, after 6 months under our belts, our observation is that we feel quite confident that we will not see a significant headwind from those dynamics for the balance of the year. With regards to your question on EBITDA margin, well, a few comments. First, a reminder, our Q4 is always a softer quarter. It’s a lower maintenance season. There’s a bit of less activity. So typically, if you look at our cycle, Q4 is typically a bit lower. So that would average us down slightly. And then obviously, I commented on less railway tie sales in the second half of the year. Our fixed costs don’t necessarily go away. So it would impact margin to some extent. But still confident that we can achieve, as I stated, closer to 18% margin for the year.
Jonathan Goldman: And the current market dynamics that you’re observing in poles, do you see those dynamics changing in 2025, whether it’s increase in competitive intensity, more capacity?
Eric Vachon: Yes. It’s a bit early to speculate on ‘25. We still need to sit down as a management team and take a harder look at it. But I still feel very optimistic about what the next 12, 18 months will bring. We’re currently being after several significant projects very attractive projects that are looking for very unique size and length profile of inventory, which we do have to sell. So obviously, we do hope of strong inventory position. So I feel very confident that we are well-positioned to service the market needs as they’re evolving to larger-sized products, and that – we will keep seeing that growth in volume going forward as we have it in our guidance until the end of ‘25.
Jonathan Goldman: Okay, thanks for taking my questions.
Eric Vachon: My pleasure.
Operator: Thank you. Our next question is from James McGarragle from RBC (TSX:RY) Capital Markets. Please go ahead.
James McGarragle: Congrats on the quarter, and I appreciate you having me on.
Eric Vachon: Thank you, James.
James McGarragle: Just one for me on infrastructure spending. We heard during U.S. reporting from a company, they flagged only 15% of infrastructure funds from the U.S. IRAs are spending that’s been spent. And that kind of points to a very long run rate for growth that is obviously going to be potentially pretty positive for your company. So is that consistent with the long-term conversations you’re having with your customers? And I’m not asking for guidance post 2025, but just kind of any color you can provide to help frame that type of longer-term opportunity?
Eric Vachon: Yes. Good question. And I think the key word there is long term. So I think it is most likely a post-2025 impact. So our customers are indicating that projects are getting structured and the funding is available. It is surprisingly taking a long time between the time the bill was passed and actually seeing the impact of those funds supporting new projects. But yes, you’re completely right. It’s – we – from what I understand, we could see some of those effects post ‘25, but it is still there as a tailwind, if you want for demand for our products.
James McGarragle: Okay, thanks for the color. And then on M&A, can you just comment on the pipeline right now? And any additional color you can provide on potentially expanding into adjacent type of areas of business, something like crossties, composite poles? Any updates just to flag there? And I can turn the line over after. Thank you.
Eric Vachon: Yes, certainly. So thank you for that. So I’m happy to report, I have mentioned this, I believe, in individual meetings that we do now have a Vice President responsible for business development. He also has treasury reporting into him. And we’ve been actually very structured now and very active in investigating different avenues. We – obviously, we start at the core. We remain focused on seizing good opportunities, quality assets in the wood-treating business. But we have been exploring and getting ourselves very well educated on complementary products or other types of products, maybe steel or composites in both railway ties and utility poles. So in the last 6 months, we’ve grown significantly internally as far as knowledge goes. We are exploring certain avenues and obviously looking for that right stepping stone to start expanding our offering to our customers, which, by the way, is something that our customers keep indicating that they would be happy to see us venture into. So I guess that’s the update for now. Stay tuned for future updates.
Operator: Thank you. Our next question is from Hamir Patel from CIBC (TSX:CM) Capital Markets. Please go ahead.
Hamir Patel: Hi, good morning. Eric, it looks like in Q2, your coal prices, I guess, were up 10%. I think in Q1, they’re up 12%. The quarter before that, 18%. So clearly, the comps are decelerating but still positive comps. So just given your commentary earlier about you are seeing some signs of softness in spot. How do we think about maybe for the next couple of quarters, your overall price gain in pulls because clearly, you still got some contractual business that’s continuing to get repriced positively?
Eric Vachon: Yes. So going forward – so you’re right, my comment was that the spot market has shown some softness. It’s not necessarily generalized. So let’s call it stable for the balance of the year. But going forward, I do believe that our pricing gains will continue, to your point, to be a bit lesser, call it 20% to 30% and the balance would actually come from volumes. As I mentioned earlier, we have – are looking at a lot of opportunities. Obviously, year-over-year gains with new customers, which is obviously very positive for us, and also new projects that we’re being shown that will extend over several years that we’re presently quoting could start later in the year, but definitely into early next year. And as I said, well-positioned with our inventory profile to service those new projects.
Hamir Patel: Okay, great. And Eric, how do you think about when the company would look to update the multi-year guidance? Because if you’re looking pointing to 18% this year, right now, that 16% 3-year average basically implies margins kind of plunge delay, with 11% next year, clearly, that doesn’t appear to be the case. So when should we expect an update to the multi-year guide?
Eric Vachon: Yes. So thank you for the question. I think that question came up actually last quarter. So I had a few criterias when I wanted to see how we work through half of this year and better understand the pricing pressure in the second half of the year. I think we’re sitting there at this point. I want to say that with my management team and better understand our 5-year plan on our budget for next year. But I think you’re completely right. We’re very optimistic of how we’re going to finish the year. We should be very close to several of the metrics we put out in our financial guidance. So we’re actually studying that possibility, if you want early in the year to meet with the investment community to discuss about our next 3 years and where that could look like for Stella-Jones.
Hamir Patel: Okay. Fair enough. But I mean, Eric, is it fair to say right now, just if you’re kind of tracking towards 18% for the year based on what you’re seeing in the pull market, does that look sustainable into ‘25?
Eric Vachon: Hard to tell at this point. I guess I won’t commit to that at this point. But obviously, if our utility pole business continues to be that strong product category and obviously has the healthier margin profile. One thing, our 16% now seems an easy target to achieve. So I wouldn’t disagree with what you said. But before commiting to a number, I think we really need to sit down and come up with our new guidance.
Hamir Patel: Fair enough. And just a last question for Silvana. It looks like the commentary on CapEx with respect to the investment in the pole category, maybe $10 million higher, now $35 million in ‘24/’25. Is that just maybe some capital cost inflation, or does that reflect maybe additional capacity expansion?
Silvana Travaglini: No additional capacity. It’s all related to higher inflationary costs that, I guess, we had not all factored in when we started when we put out the program in 2022.
Hamir Patel: Thanks, fair enough. Thanks, I will turn it over.
Eric Vachon: Thank you, Hamir.
Operator: Thank you. Our next question is from Benoit Poirier from Desjardins Securities. Please go ahead.
Benoit Poirier: Good morning, Eric. Just to come back on the utilities, when you discuss with customers, what’s the overall mood when it comes to CapEx, especially as we are adding into a lower interest rate environment in the U.S.? Are they looking to beef up CapEx for utility poles?
Eric Vachon: So well, two parts to the answer. One is, when we talk to customers in general, they’re really upbeat about their projects, their needs and what they want to realize and accomplish in the next 2 to 5, 6 years. So that’s why we remain very confident in the fundamentals of our pole business and believe in continued sustained demand for products and even volume growth. But definitely, to your point, a lower interest rate environment would definitely be a positive. So I get – I do think some of our customers, especially for project-driven initiatives, lower interest rates obviously makes the returns more attractive for our customers. So I do believe that, that would be very positive.
Benoit Poirier: Okay. And just on the railway ties, obviously, a very strong first half that’s coming from non-Class 1 customers. You mentioned in the opening remarks, there will be some taper off coming from Class 1 customers in the back half. But just curious on 2025, if we – if you could provide any color about the demand from Class 1, but also the non-class one, it seems that the outlook is still robust. So could we see, let’s say, a double-digit organic growth for railway ties in 2025 given the earlier comments you made about both subsegments?
Eric Vachon: Yes. So Benoit, we’re holding our views of the low-single-digit growth, probably more on volume than the pricing because I think we’re sort of – we’re seeing pricing gains this year compared to last year as we were adjusting pricing. I do see that stabilizing now going forward, and I do think the growth is coming from volume. So to your point, there are some projects that are out there for bid, which we’re obviously actively seeking to win. I think our – I believe our Class 1 customers remain dedicated to maintaining their networks and that demand keeps flowing through. And we do have a few conversations with some of our Class 1 customers on certain projects, which seem very appealing to us. So, there is very healthy dynamics in the discussions. I would be very surprised to see the demand taper off, in this case, as an overall industry common. But I guess we still remain with our views of that low-single digit growth.
Benoit Poirier: Okay. And last one for me. You mentioned the 18% target in terms of EBITDA margin for 2024. But given what you have delivered in the first half and given the positive comments about pricing demand, the overall mix coming more on the utility side, less exposed to residential and also favorable mix on the railway ties, could we see even EBITDA margins to expand in the second half versus last year and finish upward to the 18% target that you mentioned earlier on the call?
Eric Vachon: So typically, Benoit, H2 has a lower average EBITDA margin than well last year now than the first half, and Q4 is always a bit of an unknown. It’s always a softer quarter. It’s always hard to predict if Class 1 will pre or a certain Class 1s will preorder for 2025. So, obviously, lower volumes with the current network just increases that average cost, just on the fixed cost rate, if you want. So, I think we are very comfortable and happy to up our views on our margin this quarter. But I think it will be reasonable to achieve the number we put forward.
Benoit Poirier: Okay. Thank you very much for the color.
Eric Vachon: Thanks. My pleasure, Benoit.
Operator: Thank you. Our next question is from Michael Tupholme from TD (TSX:TD) Securities. Please go ahead.
Michael Tupholme: Thank you. Good morning.
Eric Vachon: Good morning Mike.
Michael Tupholme: Good morning. So, just to clarify, Eric, for the second half of this year, as far as the mix of the drivers to organic growth for utility poles, you are saying sort of 20% to 30% of the expected organic growth should come from pricing. Is that how you are now thinking about it?
Eric Vachon: Yes, correct.
Michael Tupholme: Okay. And as we look out to 2025, you reiterated earlier on the call, your expectation for utility poles organic growth of 15% for both this year and 2025. Just in terms of that mix of volume versus price in 2025, would it be similar to what you are thinking about for the second half of this year, where there is sort of a 20% to 30% price component, or is it something different as we think about 2025’s mix?
Eric Vachon: We think, Mike, it can actually hit it stronger. So, it’s probably half and half, or at least 40% on pricing.
Michael Tupholme: And then you have talked about and have been asked about the previous risk of pricing pressure in by utility poles market. Is it fair to say then, I mean I think the comments were mainly around not expecting really to see those pressures materialize in the second half of this year. But as we look out to 2025, is it fair to say you are not really – like that risk is sort of off the table at this point, you are not seeing that as a risk into next year for the spot market? Is that fair to say?
Eric Vachon: It’s fair to say. We are taking it off at the table because the pricing is holding and part of the driver is those requests that are coming out are asking for specific size and length of the pieces of wood. And it’s a product that we maintain an inventory on an ongoing basis, and it seems that we are able to cater to those needs, I guess more easily. So – and we are still commanding some healthy pricing there versus I guess some of these customers not finding exactly the profile where they are looking for elsewhere in the market.
Michael Tupholme: Okay. And then just as we think about next year, again, you reiterated the proposed, the 15% organic growth expectation. It sounds to me, maybe you can just confirm, like you haven’t really started to see lower rates begin to drive additional volumes in poles, notwithstanding a couple of bonds by the Bank of Canada, and I guess bond yields moving down in the U.S. notwithstanding, it decides to cut. But as you think about 2025, is that 15% organic growth guidance for poles in 2025, is that assuming benefits from lower rates, or would lower rates be incremental if that drove some further volume?
Eric Vachon: So, I don’t like to speculate on economic dynamics. So, yes, for next year’s growth is not assuming a significant change in the interest rate. To your earlier comments, there is a drop in Canada, but the biggest driver for utility spend related to the rate is heavily weighted to the U.S., which we haven’t seen drop yet. But I guess back to what I was saying is that our guidance does not take into account, I guess tailwinds from lower rates and seeing more activity.
Michael Tupholme: Okay. Perfect. And then just lastly, I mean you have sort of touched on it a little bit here in a couple of your comments, but can you just provide an update on – any details on new client wins and how you are thinking about the potential growth that could come from that side of things beyond just the existing customers ramping up?
Eric Vachon: Right. Well, if I specifically look at 2024, so we did sign on a few new customers. And it took a while for them to sort of start picking up inventory and building the relationship. So, I think we saw some positive effects of that in Q2, and I continue believing that we will see even more positive effects of that with these same customers for the back half of the year. So, obviously, that sort of supports our views on volume. And going into next year or future years, we are always porting new customers and bidding on projects and looking for long-term agreements. As I have said in my comments, more and more customers or potential customers are seeking a long-term relationship with a supplier that has the proper profile, has a proper network in North America to support their needs. So, we keep opening those doors if you want and looking for new business, but I am not ready to comment yet for 2025.
Michael Tupholme: Okay. That’s helpful. I will get back. Thank you.
Eric Vachon: Thank you, Mike.
Operator: Thank you. Our next question is from Martin Pradier from Veritas Investments. Please go ahead.
Martin Pradier: Thank you, Eric. Thank you for taking my questions. In terms of railway ties, we have seen very, very strong volumes. And the guidance is like 3% for the year. So, are we going to see negative numbers in the second half? I know you said that they will be lower, but will they be negative, or will it have more than the 3% for the year?
Eric Vachon: No. So, yes, it would be year-over-year negative. As one Class 1 reduced their program this year, they took most of their volume in the first half of the year. If I look at Class 1 demand, we know what their expectation is for, let’s say, 2024. Then they will use up, I guess their requirements at different paces. Some of them will do it in the first six months of the year. A lot of them are done usually by the end of September as far as buying ties and finishing up the install in early Q4. So, in this particular case, yes, we have seen a bit of a switch or front-loaded for one or two Class 1s earlier in the year, which does mean that we will have a bit lesser in the second half. So, we really need to look at it on an annual basis just because depending on the availability of cars, the availability of the crew of the Class 1s will shift around their demand. And that’s where we need to be on our game to service them well, have the product ready when they need them. That would be part of the features that we need to put forward in order to maintain the relationships with our customers and hopefully get larger pieces of their maintenance programs going forward.
Martin Pradier: Great. And in terms of residential real estate, we have seen a decline that was perhaps a little bit stronger than I expected. Can you comment on how much was volume versus price? And how does that look going forward for the second half?
Eric Vachon: Yes. It was like all volume, I would say, like 90% volume. So, pricing has been relatively stable. If you look at lumber prices, so we tracked the 2x6 on random length. It’s been hovering between 600,000, 650,000 board foot, so it’s been – sort of sales price have been relatively stable to the market. So, it’s really all about volume discussions with our customers. They believe that we could still catch up part of that in the second half of the year that our customers’ view we have been a bit more conservative and said, look, we will look at the lower end of our guidance for now. And if they do manage to wrap up some volume, it will be a pleasant surprise for us going through the end of the year. But I think our guidance right now is reasonable.
Martin Pradier: Great. Thank you very much.
Eric Vachon: My pleasure.
Operator: [Operator Instructions] Our next question is from Benoit Poirier from Desjardins Securities. Please go ahead.
Benoit Poirier: There was some very unfortunate events that took place obviously in Florida where we have seen Jasper not too long ago, California. So, any thoughts about whether it has been a headwind, a tailwind and the potential implication going forward for you?
Eric Vachon: Well, Benoit, every year, we have unfortunate fire events, windstorms, different events that impact different regions in North America. So, we take a lot of pride in our emergency response and servicing our customers and making sure that we get the power back into communities and supporting obviously emergency services. It’s never been a big tailwind. We have never seen a big uptick. I think I have explained a few times in the past that when one region suffers and more efforts are put into changing out some poles and putting some infrastructure, a lot of nearby communities, their utilities will go out and help out. So, if there is an event in Texas, you will see utilities from Louisiana, for example, go and help out. So, when that happens, there is less work happening in Louisiana. So, it’s – there could be small upticks. It’s never significant enough for us to call out, if at all, sometimes. But I guess, again, the value that we bring is being able to service our customers because they don’t have to worry about are we going to get poles. They know they are going to get them. We have the fleet of trucks, we have the employees, we have the service, when we add the inventory, and we have 24-hour availability when storm response is concerned. So, I think that’s where we show the strength of our network and the strength of our inventory position to support our customers.
Benoit Poirier: Okay. That’s great. And maybe just a quick one for Silvana, given all the comments made on the call out, how should we be looking at the working capital movements in Q3 and Q4 and maybe for the full year?
Silvana Travaglini: Yes. So, we still – we do expect in the second half of the year with the volumes picking up as we mentioned for poles. We do expect a drawdown there. So, year-over-year, we are, as we have said, still expecting the inventory levels to be flat, so a drawdown in the second half in order to end up with that flat year-over-year working capital movement.
Benoit Poirier: Okay. Thank you very much.
Eric Vachon: Thank you, Benoit.
Operator: We have no further questions in the queue. Thank you.
Eric Vachon: Thank you, Matthew. And thank you everyone for joining us today. We look forward to updating you on our third quarter call in November. Until then, have an enjoyable end of summer and be safe. Thank you.
Operator: Ladies and gentlemen, this concludes today’s call. Thank you for participating. You may now disconnect your lines.
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