Earnings call: Stella-Jones reports a 4% decrease in sales year-over-year

Stella-Jones Inc. (TSX:SJ), a leading producer of pressure-treated wood products, reported a 4% decrease in sales year-over-year in its third-quarter earnings call on November 6, 2024. The company announced sales of CAD 915 million, with a decline in operating income to CAD 130 million. Despite a decrease in sales volumes across all product categories, Stella-Jones maintained a solid EBITDA margin of 17.7%. Year-to-date sales increased by 4% to CAD 2.7 billion, and the EBITDA margin expanded to 18.9%. CEO Eric Vachon updated the company's three-year sales target, emphasizing long-term growth potential and a commitment to strategic acquisitions.

Key Takeaways

• Q3 sales declined by 4% year-over-year to CAD 915 million.
• Operating income decreased to CAD 130 million, with EBITDA at CAD 162 million.
• Year-to-date sales rose to CAD 2.7 billion, a 4% increase.
• The company updated its three-year sales target to approximately CAD 3.6 billion by 2025.
• Utility pole sales grew by CAD 10 million despite a 6% volume decline.
• Railway tie sales and residential lumber sales experienced decreases.
• A new NCIB was authorized to repurchase up to 2.5 million shares.
• The company completed a CAD 400 million bond offering at a rate of 4.3%.
• Updated EBITDA margin targets are set at over 17%.

Company Outlook

• 2025 sales targets for utility poles set at CAD 3.6 billion, with anticipated growth of 6% to 7%.
• Railway tie business projected to grow in low single digits, residential lumber sales forecasted between CAD 600 million and CAD 650 million.
• The company expects stable pricing in 2024, with slight softness in the spot market offset by contract increases.
• Margin guidance for 2025 is over 17%, with a new floor for margins at 17%.
• CapEx for 2025 expected to be CAD 75 million to CAD 80 million, focusing on maintenance.

Bearish Highlights

• Sales volumes decreased across all product categories.
• Project demand slowdown and cautiousness from long-term customers impacted order flow.
• Project activity in Q3 was significantly lower compared to historical levels.

Bullish Highlights

• Despite volume decline, utility pole sales increased due to favorable pricing.
• Strong operating cash flows of CAD 186 million in Q3.
• The company is in a healthy position for non-Class 1 projects and infrastructure markets.

Misses

• The company lowered its three-year sales target from earlier projections.
• Anticipates a lag of 2 to 3 quarters before seeing positive effects from lower interest rates.

Q&A Highlights

• The company plans to leverage strategic acquisitions for expansion.
• Recent storms in the southeastern U.S. highlighted the company's commitment to supporting utility customers in emergencies.
• Minimal impact expected from potential U.S. tariffs on Canadian imports.

Stella-Jones' third-quarter results reflect a challenging market environment, yet the company remains focused on maintaining a disciplined capital allocation strategy and supporting its utility customers. With strategic plans in place for growth and profitability, Stella-Jones is positioning itself to meet the evolving demands of the infrastructure market. The next update from the company is expected in February 2024.

Full transcript - None (STLJF) Q3 2024:

Operator: Good morning, and thank you for standing by. Welcome to the Stella-Jones Third Quarter of 2024 Earnings Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Wednesday, November 26, 2024. [sic] [November 6, 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, James. Good morning, everyone, and thank you for joining us today. I'm here with Silvana Travaglini, our Senior Vice President and Chief Financial Officer of Stella-Jones. Earlier this morning, we issued our press release reporting the results for the third 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. Stella-Jones' strategy, as always, is rooted in the long-term growth of our resilient infrastructure businesses, and we are confident in the strong long-term demand drivers of the industries we service. The growth in Q3 sales, however, was lower than anticipated, and this was driven by lower sales volume for utility poles. As we keep our focus on our goal to deliver profitable growth, we are pleased with the continued solid margin and strong operating cash flows generated this quarter. The demand for utility poles remains very compelling. But over the last year, we have witnessed a slower pace of purchases and deferral in the execution of certain projects by utilities. While our customers continue to [Technical difficulty] increase their investments to replace aging infrastructure and increase grid resiliency, utilities are working through what we understand are various challenges impacting the timing of some capital expenditures. This includes inflation and utility supply chain constraints as well as timing of funding based on rate case filings. As such, our utility customers are currently investing in pole maintenance at a slower rate than their initial projections, and we have seen less project-based activity than we typically would in the third quarter. Based on our visibility on these current purchasing trends, we are updating our 3-year sales target to approximately $3.6 billion by 2025. This compares to the above $3.6 billion organic sales objective set in May 2023. From an EBITDA margin perspective, our performance to date has exceeded our profitability objective. Since 2022, we have expanded our EBITDA margin by over 300 basis points, and we are confident that we can sustain an expanded EBITDA margin of over 17% compared to our original 16% target. This represents an EBITDA CAGR of 11% for the 2023 to 2025 period compared to our initial CAGR of 9%. As we remain focused on value creation for shareholders, our aim is to continuously grow sales and profitability, as evidenced by our established track record of performance. Turning now to each of our product categories. For utility poles, as I noted, we are experiencing what we believe is a period of deferred spending on certain maintenance and projects across the utility industry. That said, aging infrastructure, our customers' forecasted capital expenditures, and the long-term sales contract that we continue to secure help underscore our continued confidence in the long-term demand growth. To this end, it is noteworthy to highlight that sales of our utility pole product category even prior to the significant increases in 2022 and 2023 have grown on average in the mid to high single-digit range. When compared to the industry's increase in transmission and distribution capital expenditures, our organic sales growth has outpaced this increase. According to industry reports, the transmission and distribution spend on utilities is expected to sustain an average historic growth rate of 6% to 7%, supporting our views on the revised forecast for utility pole sales growth. Now let's turn to the performance of railway ties. As we talked about in the last call, we expected lower sales volumes for railway ties in the second half of the year. As anticipated, third quarter sales were lower, and this was driven by the reduction in the maintenance program of certain Class 1 customers and the timing of shipments. On a year-to-date basis, sales of railway ties were up, largely due to the ongoing strong non-Class 1 demand, which we have serviced well in 2024, given our replenished levels of inventory. We remain confident in the stable source of revenue from railway tie and in this product category's ability to consistently deliver a low single-digit sales growth. For residential lumber, sales continued to be lower versus last year, but we are encouraged to see lumber prices trending upward as well as preliminary signs of increase in demand. According to various industry reports, the remodeling downturn is expected to reverse by the middle of 2025, and renovation and remodeling spending is expected to benefit from improvement in new home construction and existing home sales. We continue to forecast sales for residential lumber in the $600 million to $650 million target range. With that, I will now ask Silvana to provide a more detailed overview of our third quarter financial results.

Silvana Travaglini: Thank you, Eric, and good morning, everyone. Sales in the third quarter of $915 million decreased 4% year-over-year, driven by lower volumes for all product categories. This decrease in sales largely explained the lower operating income to $130 million and the decrease in EBITDA to $162 million. Though sales and EBITDA were lower compared to Q3 last year, we continued to deliver a solid EBITDA margin of 17.7%. Year-to-date, sales were up 4% to $2.7 billion with increased EBITDA to $518 million and expanded the EBITDA margin to 18.9%. Now turning to the product category. Utility pole sales were up $10 million this quarter to $448 million, driven by favorable pricing in response to cost increases, offsetting impact of higher pricing with a decrease in volumes. Volumes were down 6% compared to Q3 of last year and was mainly attributable to spot business as we witnessed a slowdown in project-based activity. Railway tie sales decreased by $25 million, largely driven by lower volumes. In addition to the expected reduction in the maintenance program of certain Class 1 customers, the lower sales this quarter were also explained by timing as the annual maintenance program of some customers were completed earlier this year. Residential lumber sales decreased 5% to $191 million due to lower volumes. Despite the weaker market price of lumber, year-over-year residential lumber pricing has remained relatively stable. During the quarter, we generated strong operating cash flows of $186 million, bringing our year-to-date operating cash flow to $301 million. During the quarter, we had a favorable noncash working capital movement, including a drawdown in inventory. With the lower-than-expected sales volumes for utilities this quarter, the inventory balance at the end of the quarter of $1.6 billion was higher than anticipated. Considering the typical build of inventory for the other product categories in the fourth quarter of the year, we are forecasting our year-end inventory to be higher than the balance at the beginning of the year. In terms of working capital movement in the fourth quarter, the investment in inventory is expected to be largely offset by the seasonal decrease in accounts receivable. A key focus for the organization is to maintain a capital allocation approach with an investment-grade profile. We are committed to a balanced capital allocation strategy, investing towards growth of our business and returning capital to shareholders while maintaining a prudent leverage ratio. During the first 9 months of the year, we returned $112 million to shareholders through dividends and share repurchases. Since the beginning of the normal course issuer bid last November, we repurchased over 1 million shares in consideration of $85 million. Our business is highly cash generative, which is why our Board of Directors had the confidence to authorize a new NCIB for the upcoming year, which we announced in a dedicated press release earlier today. Stella-Jones is authorized to repurchase up to 2.5 million shares, representing approximately 4.5% of the common shares outstanding. As of the end of September, we were on track on our commitment to shareholders, having returned almost $310 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. At September 30, we had $342 million available under our existing credit facility and a net debt-to-EBITDA ratio of 2.5 times. As we head into 2025, we are pleased with our strong financial position and flexibility, which we were able to bolster on October 1 with an inaugural bond offering of $400 million for 7 years at a rate of 4.3%. We used the proceeds from this offering to repay the amount outstanding on our revolving credit facilities. As of October 1, we had almost $750 million of available capital. The successful completion of this offering at attractive terms speaks to the confidence our lenders have in our underlying business and future prospects. With that, I will now pass it back to Eric for his concluding remarks.

Eric Vachon: Thank you. As Silvana mentioned, the note offerings provide us with additional financial flexibilities heading into 2025, and this is especially important as we actively pursue acquisitions. Growing our business through acquisitions continues to be a cornerstone of our growth strategy. Our focus for acquisitions is to leverage our infrastructure customer base, unique North American footprint, and distribution network to better meet our customers' needs. We have dedicated significant resources towards identifying opportunities that we deem to be a good fit for our business. And we are confident that in 2025, we can realize accretive acquisition that will drive higher sales and profitability. We are enthusiastic about the long-term growth prospects and strong market trends across all product categories. If I can leave you with the following takeaways before we conclude today's call: first, it is our expectation, as has been the case historically, that sales continue to grow based on strong demand drivers of the infrastructure markets that we serve. On the profitability front, our updated margin targets of over 17% represents a significant expansion over our 15% historical average. We expect to maintain this and continue to work improving it over time. For 2024, as mentioned in our Q2 conference call, we continue to forecast a margin closer to 18%. In addition, we continue to leverage acquisitions as a conduit to expand our business. Strategically selected accretive acquisitions will enable us to further meet our infrastructure customers' needs and pursue growth. And lastly, by remaining committed to an investment-grade leverage ratio and disciplined capital allocation strategy, we are able to maintain a healthy balance sheet, which provides the flexibility to seize growth opportunities. In closing and in the weight of recent devastating storm events in the southeastern United States, I would like to say a word to recognize ours and our customers' emergency response operations. Stella-Jones is always fully committed to supporting its utility customers and is ready to help bring power back to our communities. I want to thank our teams for their tireless efforts and dedication. Your commitment serves as a testament to the strength and solidarity of our organization. I will now open the line to questions.

Operator: Thank you, Eric.[Operator Instructions] Our first question is from James McGarragle from RBC Capital Markets. Please go ahead.

James McGarragle: Yes, good morning Eric and Silvana. Thanks for having me on. On the updated consolidated guidance, I know you've put out the new targets for 2025. But can you just provide some additional color there on the pole and tie segment a little more specifically?

Eric Vachon: Certainly. So as I mentioned, we adjusted our goals, targets for the end of 2025 for sales for over -- or actually to be at $3.6 billion. Our view is there is, and I'll get into some details in a second, but our view there is that, as I mentioned, our pole sales growth will be closer to industry growth for this year and next year, that being 6% to 7%. Our railway tie business would maintain the low single digit. And obviously, the residential lumber, we maintain our views on the -- sorry, on that sales range of $600 million to $650 million. The big change comes from our thoughts on utility pole sales volumes. If I think about our first half of 2024, we saw an improving trend in volumes from -- going from Q1 to Q2 but not as strong as our expectations. Going into the second half of the year, we validated our customers' expectations and we shipped our products on schedule, and here we are today in Q3 with lesser volumes. A couple of drivers there. I mentioned that we've seen less project demand and less spot demand in the quarter than we usually see historically. And we're also seeing customers, long-term customers being a bit more cautious in confirming orders. So although our customers in general are still indicating strong demand for their needs, and we see the headlines in the media maybe for generating assets or transmission projects, there's the same interest and excitement around distribution maintenance projects, those POs are not flowing through. So we need to sort of reset our views on it and say, well, our view will be more in line with what the industry is indicating so that 6% to 7%. Our customers in the end are faced with, I would say, a few challenges. Cost of materials have been increasing, the labor costs have been increasing. And they have a given pool of funds to allocate to different projects and different buckets that we continually hear about. And in the end, you need to make some decisions and select some priorities. I do think that as we see rate base cases get more scrutiny but eventually get approval, they'll be able to catch up and change their allocation in funds. So those are our views essentially there. It's where we sort of determine as we're listening to what our customers say, what our experts are telling us, what the channel checking is doing. And we felt that today, it was an appropriate time to reset the expectation, it is a responsible approach. Still very happy in the growth that we're showing. As I said, it's a long-term perspective on our business. I do think we will see growth in the long-term. But this might be just a period in time where there's a bit of a slower pace but still forecasting growth for this year and next year.

James McGarragle: I appreciate the color. And then 1 follow-up on the pole pricing. I know in Q2, you'd flagged the pricing is holding up pretty well. It seems to be that, that still looks like the case. But with some of these near-term headwinds to demand and some of the capacity that's coming on across the industry, do you still expect pricing on the spot side of the business to hold up? Or any color you can provide there? And after that, I can turn the line over. Thank you.

Eric Vachon: Certainly. So for this year, as we talked about on the last call, the pricing is relatively stable. There's some softness in certain areas but nothing significant that we've observed, that I keep observing. Going into next year, you're completely right that the spot market might see some slight softness, not significant, but you're right, there's more capacity and we have proof of that capacity being online today. But we do think that it will be offset with just our regular contract increases. Obviously, as certain of our own costs, maybe labor or material cost, increase and our contracts allow us to pass it through, we should see some increases that would offset it. So for next year, I would say, call it slightly flattish for pricing next year.

Operator: Our next question is from Michael Tupholme from TD Securities. Please go ahead.

Michael Tupholme: Thank you. Good morning. Maybe I can just start by clarifying the last comment there, Eric. When you talk about slightly flattish pricing next year, are you talking about just in the spot poles market? Or are you talking about within this 6% to 7% organic growth, it's flat pricing? It's just not clear there.

Eric Vachon: Yes. It's in the total growth, Michael. As we get closer to the end of the year, we will assess our cost increases. We will look at what the different inflation indexes that our reference and our contracts look like. And we'll have a better understanding of what that cost or pricing adjustment will be as we pass on those cost increases to our customers. We have an idea, hard to predict, but I do think that it will be, in part, offset with the spot market. So you can call it flattish for the entire growth for the whole product category.

Michael Tupholme: Okay. And sorry, just to be totally clear here, the expectation now for organic growth within the utility poles product category for both full year 2024 and full year 2025 is 6% to 7%?

Eric Vachon: Correct.

Michael Tupholme: Okay. And in 2025, it sounds like essentially all of that would be volume, and we're very close to all of that, is volume-driven and pricing is not really playing a role in next year's growth?

Eric Vachon: Yes. I would say for now, that's the visibility we have.

Michael Tupholme: Okay. Just the sort of the deferrals and the factors that led to your commentary about utilities pulling back or deferring some of the projects and not seeing the order flow come through as you would have expected. Have you seen any improvement in any of these areas yet or is that all still yet to come? And you had also previously talked about seeing the possibility of lower interest rates getting some activity, spurring some activity among utilities. We have seen obviously rates come down. We'll see what happens later this week in the U.S. But just kind of trying to understand if the factors that pressured results in the third quarter, are they all still at play? Or are you seeing any indications that things are actually kind of starting to move a little bit?

Eric Vachon: So they're still all at play, and I guess that justifies a bit why we felt we had to adjust our guidance. And we will actually see some of that early next year. To your question on interest rates, by the time the rates drop and projects get put back on the table and approved, you've got a lag. Hard for me to say, I would call it 2, 3 quarters before we see that positive effect. So that's one thing. The other thing is I do think there is, I would say, a slowness in approval of rate base cases. There's more scrutiny and more administration around them. Last year was a record year for rate case increased demand. And obviously, it's putting a bigger strain on the end users. So there's more questions and more scrutiny being put to those. So there's sort of a bit of a slowness in the funding, and that's my perspective or my understanding. So obviously, that sort of explains the slower rate that we're referring to, the slower rate of purchases.

Michael Tupholme: Next (LON:NXT) question is just about the margin outlook, which you've updated for 2025 talking about over 17%, which is up from the prior level of 16%. But you did 18.3% full year 2023 EBITDA margin. You're talking about closer to 18% in 2024. Even with the downshift in your expectations for organic growth in poles, that still sounds like it's your fastest-growing product category, and it's, correct me if I'm wrong, still your highest margins. So what is it that would cause EBITDA margins to decline year-over-year in 2025 relative to what you've seen in the last couple of years?

Eric Vachon: Yes. Well, first, I wanted to point out, we indicated greater than 17%. But I still understand very well your question. I guess I'll provide two clarifications. So this year, we're seeing a residential lumber product category being at the lower end of our range. I do believe it will be at a, well, better or at the higher end next year, so I do think the mix will impact the margins. And secondly, we're seeing cost increases across our organization may be under the direct margin line on SG&A and so on. And to your point, our biggest product category seems to be flattish a bit on pricing. So there might be some -- a bit of headwind there. So I'm getting myself a good wiggle room here to see how things are going to pan out. We're scrubbing our budget in the next four weeks, and I have a meeting with my senior team to better understand where we're going with our year 2025. But happy to say and confidently saying we're increasing that target to greater than 17%. You and your peers have questioned us a lot about 16% seems low. You guys are outperforming and now we feel comfortable inching it up to 17% or greater than. And we're very confident we can hold this over time so it's something that's sustainable. So very, very happy to bring that forward today.

Michael Tupholme: I will leave it there and get back in the queue. Thank you.

Eric Vachon: Thank you, Michael.

Operator: Our next caller is from CIBC (TSX:CM) Capital Markets, Hamir Patel. Please go ahead.

Hamir Patel: Hi good morning. Eric, I just want to follow up on the margin question. Based on that sort of 17%-plus for the 3-year guide, I mean, that kind of sets an implied floor of maybe 15% next year. But just I mean, it sounds like you're saying you think 17% is a long-term number that you can sustain. I just wanted to clarify that.

Eric Vachon: No. I'm sorry, Hamir. I mean, thank you for the question. So just to clarify for our listeners, we're seeing 17% in our floor. So we've been comparing to our historical that before 2022, 15% was the goal and we came close. We've hit it. We missed it. And our new guidance had the 16%, but today, we're saying that we believe that our new floor is the 17%.

Hamir Patel: Okay, that's helpful. And then, Eric, just in terms of the pole capacity additions that have come on across the industry this year, do you have a sense as to whether these plants are operating or at what sort of level? And are there still plants that have yet to come on that then may further weigh on the spot market?

Eric Vachon: So I do. My understanding, there is one facility that has gone online in the last few months and they're definitely operating. I can't talk obviously about their sales or what's going on there. So that's going on for sure. So yes, and there's a couple of facilities that are increasing some untreated pole capacity in the market, so we have noticed that as well. So I think we're well on our way to see that capacity being actually present end of Q3 or definitely in Q4.

Hamir Patel: Okay, fair enough. And just turning to the tie side of the business, I know the RTA had their annual conference a couple of weeks ago. Do you have a sense yet as to what the various Class 1s are planning for 2025?

Eric Vachon: So in general, the programs are similar year-over-year, I would say. I guess the only, I guess, call-out I'd like to -- I guess I'll make is we do understand that the [indiscernible] is going to be leveraging the assets that we acquired through their merger, so we do understand that asset is going to be fully utilized. So we still need to appreciate what that will do for the -- where that customer will be on the general markets. Other than that, the maintenance programs seem relatively stable year-over-year. The demand on the non-Class 1, however, seems to -- continue to be healthy. We had some good gains this year, and our team is putting together a strategy to be able to leverage that business sub segment a bit stronger next year.

Hamir Patel: Okay, great. Eric, that's helpful. And just last question I had was just thinking about obviously the election results in the U.S. If we see potential tariffs on Canadian imports, how do you see the potential impact across your 3 main categories?

Eric Vachon: Very little impact. So our -- the general theme for all product categories is what we produce in a country we sell in that given country. We have very little cross-border sales. We do ship into the U.S. some untreated poles from British Columbia. That has not been subject to tariffs to date and we don't expect it to be the case. It is just -- it is an intrical sale for us as we would treat some of that wood for the U.S. market in the U.S., but it's a very small percentage. So very little export. We have no export today, and I don't see that or has no signs of that impacting us going forward.

Hamir Patel: Great. That’s all I had. Thanks.

Eric Vachon: Thank you, Hamir.

Operator: Our next question is from Roman Pshenychnyi from National Bank Financial. Please go ahead.

Roman Pshenychnyi: Good morning. Thank you. Just wondering, you rolled out the guidance through 2025. And I was wondering if you'd be able to provide any kind of insight or visibility on what's going to be happening beyond that, especially in the poles market in regards to pricing and really the long-term volume demand from utilities. Thank you.

Eric Vachon: Thank you, Roman. So the exhibit that we showed on the web that shows the demand for the industry for poles goes up out in time and, I believe, to 2030. So if I have to give today a view, I do think we would be following that trend, some 6% to 7% going out. And for the other product categories, we remain to have the same views. We look forward at some point to come out and have an Investor Day next year to have a further discussion on the dynamics of our product categories. The date is yet to be set. But for now, that's the color I can provide.

Roman Pshenychnyi: Okay, thanks so much, Eric.

Eric Vachon: Thank you, Roman.

Operator: Our next question is from Benoit Poirier, Desjardins Securities.

Benoit Poirier: Hi guys, thank you very much. Good morning, Silvana, good morning, Eric. Just you mentioned some color about the outlook for Class 1 going into 2025 with some feedback from the RTA conference. Could you maybe share some color about the outlook for short lines given the latest record crazy funding awards that came in just a few days ago?

Eric Vachon: Yes. So well, thank you, Benoit. So as I mentioned, the commercial business or the non-Class 1 definition is the same is very healthy and it's well supported by different funding. And it historically has always been the case. When the funding is made available to the short lines or for commercial projects, we do see an uplift in demand. So I think it's healthy for the industry in general. Now we need to see what those bids are going to look like. The funds are available, which is great. The project needs to get structured. So I expect that we will see, in the coming weeks and months, some request for proposals because that's how that business works with regards to the different projects. So looking forward to see that. That's about what we have at this point.

Benoit Poirier: Yes. Perfect. And just with Hydro-Quebec, obviously, there's a big requirement. They need about 1,600 piles for transmission with 850 kilometers of line. They are going to spend between $150 billion to $180 billion. So just wondering if there's any way for you to size those opportunity longer term.

Eric Vachon: Yes, definitely. So I mean, there is part of our product offering that today is transmission. I do realize we're talking about more piling. And that is part of our M&A considerations, if you, where we're studying different opportunities for us to benefit from that network. We have a strong presence in Quebec with our facilities and our distribution network. We have a great relationship with that given customer. And we know all the other players/suppliers in Quebec, so that's definitely something that we're looking at closely.

Benoit Poirier: Okay. And with respect to the election, the U.S. election, did you get a sense from the utilities that there was some utilities that were on the sideline awaiting for election? So do you feel that there's a case that maybe there was some sideline people waiting on the sideline? Or any color with respect to the U.S. election, Eric?

Eric Vachon: That's an interesting question, and honestly, a difficult one to navigate because I don't want to do politics. So what you're referring to has been suggested to us by different third parties. But I think in the end, no matter what the color the state turned out to be, maybe red or blue, the customer that we had in those states all have the same needs, all have the same need for financing, need for product structure and need for the grid hardening. So I do think that it will play out what needs to get solved, where is that in the leadership position and needs to acknowledge that we need to get funding out to our customers to help them realize the grid hardening and the expansion of the networks, we all know. Thanks.

Benoit Poirier: Okay. And just in terms of leverage ratio or capital allocation, you ended the quarter at 2.5 times, so closer to the higher end of your guidance. Obviously, when you renewed your NCIB, you're talking about M&As going into 2025. So just wondering, any change in terms of priority with respect to capital allocation? And maybe if you could provide more details around M&A, what kind of envelope could we expect next year and maybe about the segment or products offering, you would like to offer down the road?

Eric Vachon: Well, thank you, Benoit. A lot to unpack there. I'll let Silvana sort of cover off the first part of your question with capital allocation and our priorities, and I'll follow up with the M&A piece.

Silvana Travaglini: Yes. So Benoit, in terms of our capital allocation really, I mean, the priorities remain the same. Obviously, we continue to make sure that we invest in our business, in our current network, and we still have that commitment to return capital to shareholders, and that's why we renewed our NCIB. But always remember that our NCIB is really the excess capital that we have, that we use to return capital to the shareholders, obviously keeping in mind the leverage. And so we do pace that NCIB based on potential M&A. So maybe I'll let Eric elaborate on that but that's the way we view it. So in terms of leverage, it's still very important for us to be able to remain within that 2 to 2.5 times. We have remained at 2.5 times at the end of September. Our expectation was for it to be lower. But because of the higher inventory levels that we had and the lower sales, we weren't able to bring it down within the range but still at the upper end of that range is that -- is something that we're going to look to try to bring down.

Eric Vachon: Thank you, Silvana. And so to answer the second part of your question, Benoit, as I started my concluding remarks, we're very happy to conclude our note offering on October 1. So we have CAD400 million that is now set at a very attractive price. Today, 70% of our debt is fixed for the long-term, and that gives us availability of over $700 million or $750 million to give us self-flexibility for acquisitions. So to answer your question of the size of the envelope, I'm not saying we're going to spend that next year. But what I'm saying is that we've definitely given ourselves the ability to execute on different opportunities that are -- that will -- that we're considering or that will be presented to us. With regards to what we're looking at, I think you sort of alluded to that in your earlier questions. Would steel be a good fit for Stella-Jones or servicing our utility customers? And the answer is yes. Our customers are saying like we would love Stella-Jones to be able to service more, leverage our distribution network and be, I guess, a partner that's more in depth or more intertwined in their activities. So definitely looking at that. And same thing for the railway tie business. I think there are some opportunities for us to expand the product offering and answer to certain of our customer needs that in certain cases, wood is effective, but I think in certain applications, other products would have a better performance. We just need to find -- we need to keep working on finding that right partner that enables us to do a good acquisition and a good multiple as we've done historically.

Benoit Poirier: Okay. And maybe just a quick one for Silvana. Going into 2025, is there -- should we expect any big movement in terms of working cap? And given now that you have enough capacity on utility pole, just wondering about CapEx expectation as well for 2025.

Silvana Travaglini: Yes. So in terms of the CapEx expectation, we pretty much have completed all the growth CapEx. So next year will be just sort of a regular CapEx program for probably in the $75 million to $80 million for CapEx next year. And in terms of working capital, like I've mentioned in the past, it's really a function of the growth in sales. So we are always pretty much at about a 40% investment in additional working capital for any incremental sales that we kind of are expecting next year. But we would expect probably in the $60 million to $70 million investment in inventory, given the $3.6 billion of sales that we're forecasting.

Benoit Poirier: That’s great color. Thank you very much for the time.

Eric Vachon: Thank you, Benoit.

Operator: Our next question is from Martin Pradier of Veritas. Please go ahead.

Martin Pradier: Okay, thank you. In terms of the impact of tariffs, you said that it's a very small portion that is coming from British Columbia from the poles. Will that be less than 10% or how can I think about that?

Eric Vachon: Actually, it doesn't even show in sales, right, because it's a transfer of raw material to be treated in the U.S. So it's really an integral transaction. We don't sell it directly from Canada into the U.S. So that's very negligible. So what I was referring to is that we do harvest Douglas Fir in British Columbia or Vancouver Island. And once we get the logs and we feel them, we typically would ship them by rail or truck to a facility in the U.S. to be treated. So it's not a big volume because -- but I can't even give a percentage because it's not a percentage of sales. It's really our raw material flow internally.

Martin Pradier: Okay. But put it another way, what percentage of the total poles that you sell are exported, if you want to combine...

Eric Vachon: Yes, call it maybe 5%.

Martin Pradier: And so you don't see much impact of any tariff increase in any of the other categories, like in the ties or all the...

Eric Vachon: No. We've never been impacted, yes.

Martin Pradier: Okay, I got you. Thanks.

Operator: We have a follow-up question from Michael Tupholme, TD Securities. Please go ahead.

Michael Tupholme: Hi, thank you. Eric, I just wanted to go back to some of the drivers of the factors you called out as negatively impacting the growth in the quarter for the utility pole segment. And specifically, I just wanted you to clarify, when you talk about site or you site utilities seeing supply chain constraints, can you expand on what you mean by that?

Eric Vachon: Yes, certainly. I mean, our customers procure a great variety of products to be able to execute on their projects. So if transformer supply is a bit tighter, we sometimes see delays in projects by a few months or quarters just because our customers can make sure they have everything they need for a given project. So that would impact delays for us. So it's more in that sense. I mean we have the confidence and we pride ourselves in shipping our products to our customers on time and so on. But I guess we manage our inventory to have less constraints internally, but other suppliers for other types of products other than the wood pole might have different challenges on their own and to deliver on time. So we hear from time to time those challenges come up and we're asked to delay projects or to hold on to some inventory or change our delivery dates. So that is something that we've also seen. I guess I'll refer back also to our comment on projects for this quarter. Projects were significantly low for the third quarter compared to historical years for the same period. So that would be part of that phenomenon also.

Michael Tupholme: Perfect. And then just thinking about the reduction in the sales expectation for 2025 to approximately $3.6 billion from over $3.6 billion and the downshift in organic growth expectations for poles. I mean I imagine when you decide to make an adjustment like that, you're going to look at the numbers very carefully. You're going to probably try to incorporate a degree of conservatism as you presumably don't want to have to make further adjustments. And then thinking about some of these factors that are -- that have weighed on demand recently, but still a very positive sounding longer-term outlook, not really factoring in the impact, if any, of lower interest rates, like -- is there now a greater degree of conservatism built into this number than in your old guidance? And are there certain factors that could push you above the 6% to 7% if certain things come together? Is that kind of the right way to think about the sort of the dynamic here that you've presented?

Eric Vachon: Well, thank you, Michael. So our 60% is, I guess, an average growth. I would -- to answer your question on conservatism, I would say no. What we've -- so we've reset from over $3.6 billion to $3.6 billion. So the $3.6 billion now is a bit of a cap, if you want. So that's our goal. Could anything influence that? I mean, it's not on our radar today. Could feel federal funds in U.S. or Canada be made available to support the strong need for our customers to help them structure projects? But we can speculate on a lot of opportunities. But at this point, I think it's -- our $3.6 billion is a realistic goal, and we're -- and it's going to require a lot of work from us to get there. There's different dynamics that we're working through. But I don't think it's conservative.

Michael Tupholme: Okay, thank you.

Operator: We have no further questions.

Eric Vachon: Well, thank you, James. And thank you, everyone, for joining us today. We look forward to updating you on our fourth quarter call later in February next year. Until then, we wish you all a pleasant year-end.

Operator: Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect your lines.

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