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    SJ   CA85853F1053

STELLA-JONES INC.

(SJ)
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Stella Jones : Q2-2021 MD&A

08/03/2021 | 07:43am EST

MANAGEMENT'S DISCUSSION & ANALYSIS

Three-andsix-month periods ended June 30, 2021 compared with the three- and six- month periods ended June 30, 2020

The following is Stella-Jones Inc.'s management discussion and analysis ("MD&A"). Throughout this MD&A, the terms "Company" and "Stella-Jones" shall mean Stella-Jones Inc. with its subsidiaries, either individually or collectively.

This MD&A and the Company's condensed interim unaudited consolidated financial statements were reviewed by the Audit Committee and approved by the Board of Directors on August 2, 2021. The MD&A provides a review of the significant developments, results of operations, financial position and cashflows of the Company during the three-andsix-month periods ended June 30, 2021 compared with the three-andsix-month periods ended June 30, 2020. The MD&A should be read in conjunction with the Company's condensed interim unaudited consolidated financial statements for the periods ended June 30, 2021 and 2020 and the notes thereto, as well as the Company's annual audited consolidated financial statements and MD&A for the year ended December 31, 2020.

This MD&A contains statements that are forward-looking in nature. Forward-looking statements include, without limitation, the financial guidance and other statements contained in the Updated Outlook section below, which are provided for the purpose of assisting the reader in understanding the Company's financial position, results of operations and cash flows and management's current expectations and plans (and may not be appropriate for other purposes). Such statements are based upon a number of assumptions and involve known and unknown risks and uncertainties that may cause the actual results of the Company to be materially different from those expressed or implied by such forward-looking statements. Such items include, among others: general economic and business conditions (including the impact of the coronavirus [COVID-19] pandemic), evolution in customer demand for the Company's products and services, product selling prices, availability and cost of raw materials, changes in foreign currency rates, the ability of the Company to raise capital and factors and assumptions referenced herein and in the Company's continuous disclosure filings. Unless required to do so under applicable securities legislation, the Company's management does not assume any obligation to update or revise forward-looking statements to reflect new information, future events or other changes after the date hereof.

The Company's condensed interim unaudited consolidated financial statements are reported in Canadian dollars and are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS") and Chartered Professional Accountants ("CPA Canada") Handbook Accounting - Part I, applicable to the preparation of interim financial statements, including IAS 34, Interim Financials Reporting. All amounts in this MD&A are in Canadian dollars unless otherwise indicated.

This MD&A also contains financial measures which are not prescribed by IFRS and are not likely to be comparable to similar measures presented by other issuers. These measures are as follows:

  • Gross profit: Sales less cost of sales
  • Gross profit margin: Gross profit divided by sales for the corresponding period
  • EBITDA: Operating income before depreciation of property, plant and equipment, depreciation of right-of- use assets and amortization of intangible assets (also referred to as earnings before interest, taxes, depreciation and amortization)
  • EBITDA margin: EBITDA divided by sales for the corresponding period
  • Operating income margin: Operating income divided by sales for the corresponding period
  • Cash flow from operating activities before changes in non-cash working capital components and interest and income taxes paid
  • Net debt: Sum of long-term debt and lease liabilities (including the current portion), short-term debt less cash and cash equivalents
  • Net debt-to-EBITDA: Net debt divided by the trailing 12-month EBITDA

1

Management considers these non-IFRS measures to be useful information to assist knowledgeable investors to understand the Company's operating results, financial position and cash flows as they provide additional measures about its performance.

Additional information, including the Company's Annual Information Form, quarterly and annual reports, and supplementary information is available on the SEDAR web site at www.sedar.com. Press releases and other information are also available in the Investor Relations section of the Company's web site at

www.stella-jones.com.

OUR BUSINESS

Stella-Jones Inc. is a leading producer and marketer of pressure-treated wood products. The Company supplies North America's electrical utilities and telecommunication companies with utility poles and the continent's railroad operators with railway ties and timbers. Stella-Jones also manufactures and distributes residential lumber and accessories to retailers for outdoor applications, as well as industrial products which include wood for railway bridges and crossings, marine and foundation pilings, construction timbers, laminated poles and coal tar-based products. The Company's common shares are listed on the Toronto Stock Exchange (TSX: SJ).

As at June 30, 2021, the Company operated forty wood treating plants, twelve pole peeling facilities and a coal tar distillery. These facilities are located in six Canadian provinces and nineteen American states and are complemented by an extensive distribution network across North America. As at June 30, 2021, the Company's workforce numbered approximately 2,340 employees.

Stella-Jones possesses numerous key attributes and competitive strengths which should continue to enhance the Company's strategic positioning in the wood treating industry and enable it to generate maximum value for the Company and its stakeholders:

Resilient business model

  • Portfolio of businesses with steady demand
  • Leadership position in product categories served
  • Decentralized organizational structure with the capability to rapidly adjust to changing environments and meet urgent customer requirements
  • Extensive network to service customers from multiple plants across North America
  • Solid and sustained customer relationships
  • Long-standingstable sources of wood supply and a registration to produce the wood preservative, creosote
  • Established track record of delivering solid results

Seasoned management team

  • Extensive industry expertise in all divisions throughout North America
  • Consistent record of successful acquisition integration and synergy capture
  • Entrenched culture of entrepreneurship balanced with a focus on environmentally sound and sustainable practices

Solid financial position

  • Strong cash flow generation and low levels of debt
  • Financial capacity to stockpile and air-season green wood for major contracts
  • Financial strength and flexibility to support growth opportunities.

2

OUR MISSION

Stella-Jones' objective is to be the performance leader in the wood preserving industry and a model corporate citizen, exercising environmental and social responsibility and integrity.

Stella-Jones will achieve these goals by focusing on customer satisfaction, core products, key markets, innovative work practices and the optimal use of its resources.

Stella-Jones is committed to providing a safe, respectful, inclusive and productive environment for its employees, where problem solving, initiative and high standards of performance are rewarded.

OUR STRATEGY

Stella-Jones' strategic vision is focused on enhancing the Company's presence in its core product categories, through network efficiencies, innovation and accretive acquisitions, while seeking other strategic opportunities that leverage the Company's footprint, customer base, fibre sourcing and other competitive strengths. As one of the leading providers of industrial treated wood products, Stella-Jones generates consistent value for shareholders, and recognizes the importance of integrating environmental, social and governance considerations into key decisions and strategies to enhance its business resilience and contribute to long-term value creation.

Capital Management

The Company's capital allocation strategy leverages its consistent and strong cash flow generation while enhancing its long-term stability and shareholder value creation. To maintain the Company's strong financial position and financial flexibility, capital is deployed in a disciplined manner, balancing growth investments and the return of capital to shareholders. The Company will:

  • Invest in capital expenditures in the range of $50 to $60 million annually, to maintain the quality of its assets, the safety of employees and the environment, as well as support organic growth, innovation and productivity;
  • Pursue accretive acquisitions that enhance the Company's strategic positioning and drive future earnings growth;
  • Maintain a durable dividend payout, targeting dividends equivalent to 20% to 30% of the prior year's reported earnings per share; and
  • Return excess free cash flow to shareholders through share repurchases.

As part of its capital allocation approach, Stella-Jones targets a net debt-to-EBITDA ratio between 2.0x and 2.5x, but may deviate from its leverage target to pursue acquisitions and other strategic opportunities, and/or fund its seasonal working capital requirements.

3

The Company's capital allocation since 2016 is summarized below:

COVID-19 PANDEMIC

Critical to the integrity of the supply chain for utility, railroad and the construction industries, all of Stella-Jones' North American facilities have remained operational during the COVID-19 pandemic. The Company continues to reinforce measures to mitigate health risks to its employees, business partners and communities where it operates and to prevent disruptions. To date, the Company has not experienced a material disruption to operations, and it has not incurred significant increases in costs as a result of COVID-19. While the Company's second quarter 2021 results were strong, the impact of the ongoing COVID-19 pandemic on the demand for the Company's products, as well as on the Company's operations and those of its suppliers and customers remains uncertain and cannot currently be predicted. The duration and scope of the COVID-19 pandemic and the varying actions taken by government authorities and other businesses to reduce the spread could directly or indirectly disrupt the Company's operations and/or those of its suppliers or customers, which in turn, could adversely impact the business, financial position, results of operations and cash flows of the Company. Please refer to the Updated Outlook section for further details.

4

HIGHLIGHTS

Overview - Second Quarter of 2021

Sales in the second quarter of 2021 were up 18% to $903 million, compared to $768 million last year, despite a $65 million negative impact from currency conversion. Excluding the impact of the currency conversion, pressure- treated wood sales rose by $136 million and sales of logs and lumber increased by $64 million. The increase in pressure-treated wood sales was driven by growth in the Company's three core product categories: residential lumber benefited from the unprecedented high market prices of lumber, utility poles benefited from increased volumes, upward price adjustments and an improved sales mix while railway ties sales growth stemmed from volume gains. The rise in market lumber prices during the quarter also explains the increase in sales of the logs and lumber product category. Driven by the strong sales growth, EBITDA increased by 50% this quarter to a new record high of $180 million, or a margin of 20%, up from $120 million, or a margin of 15.6% last year.

During the second quarter ended June 30, 2021, Stella-Jones used the cash generated from operations to invest in capital expenditures, reduce the indebtedness related to the seasonal investment in working capital in the first quarter, pay dividends and repurchase shares. As at June 30, 2021, the Company maintained a strong financial position with a net debt to trailing 12-month EBITDA ratio of 1.7x.

Financial Highlights - Second Quarter of 2021

Selected Key Indicators

(in millions of dollars except margins and earnings

Q2-21

Q2-20

Variation ($)

Variation (%)

per share ("EPS"))

Operating results

Sales

903

768

135

18%

Gross profit(1)

197

131

66

50%

Gross profit margin(1)

21.8%

17.1%

n/a

470 bps

EBITDA(1)

180

120

60

50%

EBITDA margin(1)

20.0%

15.6%

n/a

440 bps

Operating income

161

101

60

59%

Net income

115

69

46

67%

EPS - basic & diluted

1.76

1.02

0.74

73%

Cash Flows from (used in)

Operating activities

173

146

27

Financing activities

(156)

(136)

(20)

Investing activities

(17)

(10)

(7)

As at

As at

Financial position

June

December 31,

Variation ($)

30, 2021

2020

Inventories

1,120

1,075

45

Long-term debt(2)

682

606

76

Lease liabilities(2)

138

139

(1)

  1. This is a non-IFRS financial measure which does not have a standardized meaning prescribed by IFRS and may therefore not be comparable to similar measures presented by other issuers.
  2. Including current portion.

5

This is an excerpt of the original content. To continue reading it, access the original document here.

Disclaimer

Stella-Jones Inc. published this content on 03 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 03 August 2021 11:42:04 UTC.


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Sales 2021 2 698 M 2 103 M 2 103 M
Net income 2021 224 M 175 M 175 M
Net Debt 2021 757 M 590 M 590 M
P/E ratio 2021 11,8x
Yield 2021 1,76%
Capitalization 2 636 M 2 059 M 2 054 M
EV / Sales 2021 1,26x
EV / Sales 2022 1,28x
Nbr of Employees 2 330
Free-Float 99,9%
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Number of Analysts 8
Last Close Price 40,88 CAD
Average target price 52,06 CAD
Spread / Average Target 27,4%
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Managers and Directors
╔ric Vachon President, CEO, Director & Media Contact
Silvana Travaglini Chief Financial Officer & Senior Vice President
Katherine A. Lehman Chairman
Gordon Murray Vice President-Research & Development
Mary L. Webster Independent Director
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