Stella-Jones Q2 2026 Earnings Report

Stella-Jones EPS Results

• Actual EPS: C$1.59
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Stella-Jones Revenue Results

• Actual Revenue: $1.04 billion
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Stella-Jones Announcement Details

• Quarter: Q2 2026
• Date: 8/6/2026
• Time: Before Market Opens
• Conference Call Date: Thursday, August 6, 2026
• Conference Call Time: 10:00AM ET

Stella-Jones (TSE:SJ) Inc produces and sells lumber and wood products. The company operates in two segments: Pressure-treated wood, which includes utility poles, railway ties, residential lumber, and industrial products; and Logs & Lumber segment comprises of the sales of logs harvested in the course of the company's procurement process that is determined to be unsuitable for use as utility poles, it also includes the sale of excess lumber to local home-building markets. The vast majority of its revenue comes from the Pressure-treated wood segment. Its geographical segments are the United States and Canada, of which the majority of its revenue is derived from the United States.

Stella-Jones Q2 2026 Earnings Call Transcript

Key Takeaways

• Negative Sentiment: Second-quarter profitability declined: Adjusted EBITDA fell to CAD 167 million, with margin decreasing to 16% from 18.3% a year earlier. Higher environmental and maintenance costs, fuel expenses, steel-structure expansion inefficiencies, and delayed pricing recovery weighed on results.
• Positive Sentiment: Utility products remained the main growth driver: Sales rose 7% to CAD 510 million, supported by the Crossarms acquisition and continued wood utility pole volume growth. Management maintained its full-year mid-single-digit organic growth outlook for wood utility poles despite weather-related delays in Texas.
• Positive Sentiment: Margin recovery and efficiency initiatives are expected: Management said normalized second-quarter margin would have been approximately 17.5% and expects improvement in the second half as steel-structure inefficiencies and one-time costs ease. Pole and railway-tie network optimization initiatives are expected to generate approximately CAD 10–12 million and CAD 10–15 million, respectively, in annual profitability improvements beginning in 2027.
• Neutral Sentiment: Railway ties faced lower Class I volumes but commercial demand helped offset the decline: First-half sales were down 2%, while management expects full-year volumes to range from flat to down 2%. Treating-services-only, or TSO, volumes are expected to represent 5%–10% of tie sales going forward, improving returns but reducing reported revenue per unit.
• Positive Sentiment: Growth capacity and balance-sheet flexibility remain strong: Candiac’s steel-structure modernization is on track to double capacity to 20,000 tons by the third quarter, with substantial demand secured through 2027, while the planned Fayetteville facility is expected to add another 20,000 tons by 2028. The company also reduced net debt by more than CAD 100 million in the first half and ended the quarter with CAD 759 million of liquidity.

Presentation

[Operator]

Good morning and thank you for standing by. Good morning and thank you for standing by. Welcome to Stella-Jones' second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will hold a question and answer session. To queue up for a question by phone, please press star one and the moderator will contact you. If anyone experiences technical difficulties hearing the conference call, please press star zero for the operator at any time. I would like to remind everyone that this conference call is being recorded on Thursday, August 6th, 2026. I will now turn the call over to David Galison, Vice President of Investor Relations of Stella-Jones.

[David Galison, VP of Investor Relations at Stella-Jones]

Thank you, John, and good morning everyone. Earlier this morning, we issued our press release reporting our results for the second quarter of 2026. 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 CAD unless otherwise stated. Please note that comments made on today's call may contain forward-looking information. 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.

[David Galison, VP of Investor Relations at Stella-Jones]

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 Éric Vachon, President and Chief Executive Officer of Stella-Jones, for a strategic business update, followed by Silvana Travaglini, Senior Vice President and Chief Financial Officer of Stella-Jones, who will provide a more detailed financial overview of the quarter. Éric, over to you.

[Éric Vachon, President and CEO at Stella-Jones]

Thank you, David, and good morning everyone. Today, we reported second-quarter results that reflect continued strength in utility products, supported by positive volume momentum in wood utility poles and a solid contribution from our recently acquired crossarms business. In railway ties, stronger commercial activity provided a significant offset to lower Class I volumes, while our network optimization plan continued to advance and remains on track to support profitability improvement. In residential lumber, pricing and volumes remained below prior year levels, although trends improved towards the end of the quarter and into Q3. While underlying business conditions remain supportive, profitability in the quarter was affected by several near-term cost headwinds, including higher site-specific environmental and maintenance costs, temporary inefficiencies from our steel structure capacity expansion project, increased fuel costs. These pressures were amplified by the lag in recovering certain cost increases through pricing.

[Éric Vachon, President and CEO at Stella-Jones]

Excluding items that are not expected to repeat, margin performance in the quarter would've been closer to 17.5%. Margin improvement is also expected to be driven by a greater contribution from higher-margin businesses, such as crossarms and steel structures, along with a better railway tie sales profile, including more TSO volumes and higher-value rail products. Together, these factors support our expectation that EBITDA margin should improve in the second half of 2026 while remaining below our three-year target range for the full year. In parallel, we continue to advance our continuous improvement and footprint optimization initiatives, which we expect will drive efficiencies, strengthen margins, and enhance profitability over time. Combined with a more supportive business mix and favorable end market fundamentals, these actions reinforce our view that the current level of margin performance does not represent a structural change in the earnings power of the business.

[Éric Vachon, President and CEO at Stella-Jones]

Accordingly, we remain confident in our ability to achieve our stated three-year average adjusted EBITDA margin objectives of 17.5%-18.5%. Turning to a performance and overview of our main product categories. Starting with utility products, we remain encouraged by the strength of the business, which continues to be a key growth driver. In wood utility poles, momentum remained positive in the second quarter, although the volume growth moderated from the strong pace seen in the first quarter. Importantly, on a year-to-date basis, volume growth remained in line with our mid-single-digit outlook, supported by the continued strength in our contract-based business. Spot pricing has also stabilized broadly on a sequential basis. We expect the additional capacity coming online later this year, which we mentioned in our Q1 call, to have only a negligible impact on overall spot pricing.

[Éric Vachon, President and CEO at Stella-Jones]

When fully operational, we believe the new capacity will represent less than 1% of the total North American treating capacity. Turning to our continuous improvement initiatives, we are now planning the next phase of our network optimization, focusing on our wood utility pole facilities. The objective is to consolidate some capacity so we can fully realize the benefits of investments already made, as well as increasing plant specialization. Most of the network is already operating on a single product basis, with only a few facilities left to transition. Another important consideration as we develop our optimization plan is the current preservative availability in Canada, where approval of DCOI, the main oil-based alternative to penta, remains outstanding. We expect these optimization efforts to improve utilization, enhance profitability, and free up capacity to support growth in the wood utility poles.

[Éric Vachon, President and CEO at Stella-Jones]

Beyond the operating and financial benefits of these optimization initiatives, they will also contribute to the broader sustainability strategy. By streamlining our production footprint across both railway ties and utility poles, we're actively improving the GHG emission profile of our network, keeping us on track to meet our long-term sustainability targets. Turning to our latest acquisitions, the integration of our crossarms business continues to go well. The business performed in line with our expectations, providing a solid contribution to the results. We are also seeing strong interest from our existing customer base as the product offers a natural value-added extension to our utility pole offering. To this end, we began recording Canadian sales in the quarter, demonstrating the progress we are making in leveraging our established network and deep customer relationships to broaden our share of customer spend.

[Éric Vachon, President and CEO at Stella-Jones]

For steel structures, sales in the quarter were lower than compared to the prior year, primarily due to temporary lost production time and lower throughput during the equipment changeover related to our capacity expansion program. We continue to make solid progress in the steel structure capacity expansion. In Candiac, the plant modernization remains on track to double capacity to 20,000 tons by Q3 of 2026, with full ramp-up by year-end. Demand for lattice towers remains strong, and the capacity is already substantially allocated through the end of 2027. Our team has also secured one customer contract for approximately one-third of the production capacity in Candiac for the next 10 years. In the U.S., we continue to advance the development of our Fayetteville, Tennessee facility. Our focus to date has been on finalizing key vendor agreements, advancing permit work, and preparing the site and equipment plans needed to move into execution.

[Éric Vachon, President and CEO at Stella-Jones]

As a reminder, the site includes an existing newly constructed building that is suitable for operations, which helps mitigate execution risk. The project remains on track, and we continue to expect this investment of approximately $50 million to add another 20,000 tons to our steel structure production capacity. Commissioning is expected in late 2027, with full production by the end of 2028. We also have received strong initial support from existing U.S. customers that are currently served from Candiac to place order in 2027 with the new facility as part of its ISO and customer certifications and ramp up. These early volumes should help support commissioning and a smoother start-up. We are also seeing increased interest from Canadian customers for steel transmission structures, which over time should give us greater flexibility to shift U.S. demand to Fayetteville while backfilling capacity in Candiac with Canadian demand.

[Éric Vachon, President and CEO at Stella-Jones]

Turning to railway ties, second quarter results reflected similar market conditions to Q1 this year. As expected, Class I volumes remained lower in the quarter. However, we continued to see growth in our commercial business, which was able to offset a meaningful portion of the decline in Class I volumes. During the quarter, we began executing on the network optimization plan outlined in Q1, continuing to consolidate our footprint and reallocating volumes to most efficient facilities to better align business with the current demand. While these actions resulted in some one-time cost in the quarter, we expect these initiatives to improve returns over time. At the same time, we remain focused on growth. During the quarter, we finalized one Class I contract renewal that includes volume growth, and we are seeing interest from that customer in bridge timbers, which could provide incremental upside.

[Éric Vachon, President and CEO at Stella-Jones]

Looking ahead, we are actively negotiating another Class I contract renewal, and we are encouraged by additional volumes that were added to our forecasting starting in 2027, which stem from capital investments expected to conclude this year. We expect to finalize this contract negotiation in Q4. This pipeline of renewals remains an important part of our strategy to strengthen our position and expand our product offering. We also continue to see a constructive funding backdrop in the commercial market. Although CRISI grants are scheduled to expire in 2026, previously awarded funding should continue to support project activity through 2028. Beyond that, proposed enhancements to the Section 45G tax credit could provide an additional source of support for short line investments. Turning to residential lumber.

[Éric Vachon, President and CEO at Stella-Jones]

Results were softer in the quarter. Recent trends in both pricing and volumes have been encouraging, we continue to expect full year sales to remain within our CAD 600 million-CAD 650 million target range. Beyond our operational focus, we remain equally committed to sustainable development of our business. During the quarter, we published our 2025 sustainability report. The report reflects meaningful progress against our priorities, including a reduction in our injury rate frequency, which declined year-over-year, that reflects our continued focus on the safety of our people. We achieved a 23% reduction in Scope 1 and Scope 2 greenhouse gas emissions against our 2022 baseline, driven by operational improvements including waste heat recovery and expanded solar energy use. We also advanced our commitment to Indigenous people, with 96% of our Canadian salaried employees completing Indigenous cultural awareness training.

[Éric Vachon, President and CEO at Stella-Jones]

Ultimately, this report is a reflection of the dedication and effort of our people across the organization, we are proud of what we've accomplished together in 2025. With this, I will turn the call over to Silvana Travaglini, who will provide an update on our financial performance in Q2. Silvana?

[Silvana Travaglini, SVP and CFO at Stella-Jones]

Thank you, Éric. Good morning, everyone. Today, we reported second quarter sales of CAD 1.042 billion, a CAD 8 million increase compared to the same period last year. This growth was led by utility products, where we saw positive volume momentum in wood utility poles and a solid contribution from our crossarm acquisition. These gains were largely offset by softer performance in residential lumber and a decline in activity within our logs and lumber business. On a year-to-date basis, sales were CAD 1.833 billion compared to CAD 1.807 billion in the prior year period. This CAD 26 million increase was driven primarily by contributions from acquisitions and a 4% organic sales growth in wood utility poles. These helped mitigate a CAD 30 million foreign exchange headwind, as well as softer year-to-date sales performance in our railway ties and residential lumber businesses.

[Silvana Travaglini, SVP and CFO at Stella-Jones]

Utility product sales were CAD 510 million in the second quarter, up 7% from CAD 476 million in the same period last year. The increase was driven by a CAD 29 million contribution from crossarms and a modest organic growth in wood utility poles, partly offset by a decline in steel structure sales, which reflected the temporary operational factors mentioned earlier. For wood utility poles, sales increased 1% organically in the quarter, with volumes up 2% entirely from contract business. Underlying demand and customer activity remained healthy. However, unusually wet spring weather in Texas, one of our most active markets, delayed project execution, had a more meaningful impact on performance in the quarter. On a year-to-date basis, utility product sales were CAD 979 million, up 9% from CAD 895 million in the prior year period.

[Silvana Travaglini, SVP and CFO at Stella-Jones]

Excluding the contribution of acquisitions and the impact of foreign exchange, wood utility pole sales were up 4% in the first half of the year. This growth was volume-led, contributing about 7% to the increase. Offsetting in part the volume increase was lower pricing, primarily due to product mix, particularly the unusually favorable transaction recognized in the first quarter of 2025, which involved high-margin racked poles. When we normalize for that specific prior year item, pricing remained relatively stable. From a financial standpoint, the poles network actions Éric outlined are intended to improve network efficiency and better position certain facilities to focus on higher margin products. We estimate that these initiatives could contribute approximately CAD 10 million-CAD 12 million of incremental annual profitability.

[Silvana Travaglini, SVP and CFO at Stella-Jones]

As we continue to assess and advance these actions, we may incur one-time charges, most of which would be non-cash in nature and primarily related to potential asset write-downs. Turning to railway ties, the second quarter sales were CAD 235 million, compared with CAD 240 million in the prior year period. The decline was primarily due to lower Class I volumes, with much of that pressure offset by continued strength in the non-Class I market. Overall, volumes were down 1% in the quarter, while pricing was slightly lower due to a higher proportion of lower priced TSO volumes. Year to date, railway tie sales totaled CAD 433 million, down 2% excluding foreign exchange. This result reflects the same trend observed in the second quarter, with both volumes and pricing contributing modestly to the decline. We continued to advance our railway ties optimization actions in the second quarter.

[Silvana Travaglini, SVP and CFO at Stella-Jones]

As part of these efforts, we recorded CAD 32 million of one-time charges, including CAD 24 million of non-cash asset write-downs. EBITDA was adjusted for these items. We continue to expect annual cost saving from these initiatives of approximately CAD 10 million-CAD 15 million beginning in 2027. Residential lumber sales were CAD 234 million in the second quarter, down 5% from CAD 246 million in the prior year period. The decrease primarily reflected lower pricing, which was down 4%, while volumes were modestly lower, down 1%, due to softer demand and adverse weather conditions. On a year-to-date basis, residential lumber sales were CAD 310 million, down 7% from CAD 334 million in the first half of 2025. The decline reflected both lower volumes, which were down 2%, and a softer pricing environment. Turning to profitability.

[Silvana Travaglini, SVP and CFO at Stella-Jones]

Adjusted EBITDA for the quarter was CAD 167 million or 16%, compared to CAD 189 million or 18.3% in the second quarter of last year. As Éric mentioned, the decrease primarily reflected near-term cost pressures. The main drivers were site-specific environmental and maintenance costs, most of which are not expected to recur, higher fuel costs, temporary inefficiencies associated with the Candiac steel structure expansion, and a lag in recovering certain cost increases through pricing. We expect margin performance in the second half of the year to improve as some of these pressures ease. Moving on to cash flows. During the quarter, we generated CAD 192 million of cash from operations, down from CAD 224 million generated in the second quarter of last year, primarily reflecting lower profitability. That said, cash generation remains strong, supported by favorable working capital performance.

[Silvana Travaglini, SVP and CFO at Stella-Jones]

As is typical at this point in the year, inventory levels declined seasonally, with railway ties inventory seeing a more significant reduction. This reflects a shift in sales mix towards a higher proportion of TSO volumes, consistent with the trend we expect through the balance of the year. During the first six months of the year, we reduced our net debt by more than CAD 100 million, excluding the FX impact. We ended the quarter with CAD 759 million of available liquidity and a leverage ratio of 2.5x. While lower profitability and unfavorable foreign exchange impact kept the leverage at the upper end of our target range, it remains aligned with our capital allocation strategy. In summary, our second quarter results underscore the resilience of our cash generation and the strength of our balance sheet.

[Silvana Travaglini, SVP and CFO at Stella-Jones]

We remain focused on continuous improvement and efficiency initiatives to strengthen the long-term performance of our infrastructure-focused businesses. Despite near-term margin pressure, solid cash flow, stable leverage, and strong liquidity continue to provide flexibility to invest in growth from a position of strength. With that, I will turn the call back to Éric.

[Éric Vachon, President and CEO at Stella-Jones]

Thank you, Silvana. To conclude, the key messages from the quarter are clear. Demand across our infrastructure markets remain healthy, and we continue to advance several growth avenues, including M&A opportunities in support of our long-term strategy. While quarterly profitability was affected by near-term cost pressures, the margin shortfall was largely driven by site-specific non-recurring items and temporary inefficiencies in steel structures. Excluding those factors, margin performance would have been closer to 17.5%. This gives us confidence that margin performance should improve as early as the second half of this year. Looking beyond 2026, we are also advancing optimization initiatives across the business. As these actions progress, together with pricing pass-through mechanisms and a stronger contribution from higher-value products, we expect margin performance to further improve over time.

[Éric Vachon, President and CEO at Stella-Jones]

Overall, this reinforces our confidence in our guidance, in the long-term fundamentals of the business, and in our ability to deliver against our stated objectives. With that, we'll now open the line for questions.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. Our first question comes from the line of James McGarragle from RBC Capital Markets. Please go ahead.

[James McGarragle, Analyst at RBC Capital Markets]

Hey, good morning, and thanks for having me on.

[Éric Vachon, President and CEO at Stella-Jones]

Thank you, James.

[James McGarragle, Analyst at RBC Capital Markets]

I just wanted to ask about some of the cost pressures. You mentioned they're near-term. Can you just provide the specific visibility and the timeline for each of the major drivers, like the environmental and the maintenance costs, fuel, steel structure and efficiencies, and how you expect those to potentially improve through the back half of the year?

[Éric Vachon, President and CEO at Stella-Jones]

Certainly. Thank you, James, for highlighting that. You mentioned four key items in your question. I'll start with the inefficiencies in the steel structure business. As you know, we're revamping the entire shop floor at our Candiac facility, I guess in the second quarter, the change-out created more pressure on our production capacity, therefore creating a quarterly slowdown if you want. This is pretty much behind us. We're pretty much done with the renovation. We still have some things to finish up here in the month of August, I would say after the July shutdown that we had at the plant, we're very well advanced on the project. Definitely that is behind us, we should be ramping up here towards higher volumes than last year. Last year we had maybe 10,000 tons available.

[Éric Vachon, President and CEO at Stella-Jones]

We should definitely see, let's say, somewhere around a 14,000 ton availability, annualized on the back half of the year. That's going extremely well and behind us. The fuel costs, everybody has observed fuel costs are up across North America. That impacts our freight and distribution activities. It also impacts, to some extent, our oil-borne preservatives, which are obviously oil-based and are seeing the impact. The lag there is that we will need to wait for the anniversary of the contracts to be able to adjust pricing. It's a lag because we do have mechanisms to adjust for that. It just didn't happen in the same quarter that we saw the cost increase. It'll come over time, I guess I want to say mostly starting next year.

[Éric Vachon, President and CEO at Stella-Jones]

We might see some adjustments this year, a lot of our anniversaries of our contracts are in the first six months of a given year. Lastly, we had, I want to say in the bucket I described as one-time expenses, you mentioned them, which is environmental management activities I want to say unplanned maintenance. The environmental management activities are really associated to permitting renewals and activities where we know or are expecting changes in our permits, which we're getting ahead of by hiring consultants, renting some equipment, in anticipation of certain CapEx that we need to do throughout the year to make sure that we will be compliant when those permits are given to us with stricter requirements. Unplanned maintenance, I have to say we did have unusual activities with boiler maintenance, kilns, and tank repairs. All to say, those impacted our quarterly results.

[Éric Vachon, President and CEO at Stella-Jones]

If we look at our forecast for the balance of the year, I feel pretty comfortable that those were one time and they were needed. Obviously we want to keep our assets well-maintained and functional. Those explain those two last items.

[James McGarragle, Analyst at RBC Capital Markets]

I appreciate the color there. I wanted to ask on the pricing as well. You kind of alluded to that in your answer, but can you just walk through the mechanics of how these pricing recoveries are going to flow through? You kind of said that these are mostly going to be on the contractual resets in the first half of the year. Would that include the bulk of the pricing? Is there anything else that you need to pass through on pricing? Would that be primarily in the poles or in the railway tie business?

[Éric Vachon, President and CEO at Stella-Jones]

I want to say heavily weighted to the poles. Definitely we do have some in railway ties. On the rail side, the railway tie side, we do have some trucking activities, so obviously that has an impact. I want to say a bit more heavily weighted on utility poles simply because we have the oil-borne preservatives. That being said, residential lumber will also have some headwinds. If I look at those three markets, we are adjusting pricing in the third quarter to our customers for fuel costs and residential lumbers. That is going to be taken care of here in the next few weeks, if it's in some cases already done. For the utility pole business, it's really driven by the annual contracts. We don't have that leverage unless a customer wants to attenuate the one-time impact when we have the price increases.

[Éric Vachon, President and CEO at Stella-Jones]

We do have some customers that are saying, "Hey, could we do something now because I want to avoid a significant impact when the anniversary comes." That is a possibility. Obviously on the railway tie side, those are pass-throughs that happen through just annual adjustments for inflation and things of the like.

[James McGarragle, Analyst at RBC Capital Markets]

Okay, I appreciate it, I'll turn the line over. Thank you.

[Éric Vachon, President and CEO at Stella-Jones]

Thank you, James.

[Operator]

Your next question comes from the line of Hamir Patel from CIBC Capital Markets. Please go ahead.

[Hamir Patel, Analyst at CIBC Capital Markets]

Hi, good morning. Éric, I think on the last call you were pointing to tie sales being flat this year. It looks like you're tracking down 2% in the first half. Are you still aiming to be flat this year in ties? And if you could maybe just clarify in terms of the Class I contracts that were being renewed in 2026. I believe you mentioned one was just renewed, but just the status of the remaining ones.

[Éric Vachon, President and CEO at Stella-Jones]

Yep. Certainly. With regards to the Class I, I'll start with the Class I contracts. Yes. As I stated, one was renewed starting in 2027. We have secured volume increases there, and we're currently negotiating on bridge timber, that should definitely be some upside there. Second contract, well underway. We have secured extra volume for next year. I have mentioned this in certain investor meetings. Pending some CapEx investments, some customers are inclined to support us and give us extra business. For the second contract I'm referring to, that's already in play, and then we're also, as the general renewal, looking at potentially future increases, but that contract would probably conclude at negotiations mid Q4 or in October. There's a third one that is maturing at the end of the year in December, we're early stages of discussions. Again, discussions on additional volumes.

[Éric Vachon, President and CEO at Stella-Jones]

As I mentioned, our strategy is to ensure that we have business growth, definitely looking into that. The fourth one is pretty much done. It's relatively stable, maybe a slight decline in that. We referred to that back in the quarter, earlier last quarter, where we're talking about some pricing considerations. With regards to your question on total volumes for the year, you are correct. We had stated a flat approach for the year. We're trending -2%. I think we'll probably be somewhere between the flat to the -2%. One thing I want to highlight is we're seeing a heavier volume or more activity from the treating services piece. Obviously that has a lower price, if you want, because it's just the treating services. The wood component is not in there.

[Éric Vachon, President and CEO at Stella-Jones]

I'll remind you from a margin percentage, it's actually an improvement versus our tie business, and also we're not carrying the working capital. 0% to -2%, let's say, but definitely a heavier proportion of TSO in the back half compared to the first half.

[Hamir Patel, Analyst at CIBC Capital Markets]

Okay. Éric, given you've got some of these contracts renewing, is it fair to assume that we might see a greater transition to TSO? What does that suggest for perhaps that revenue comp in 2027 for ties? Because I think historically it had been sort of low single digit positive growth, but I'm just wondering if maybe there's a one-year-

[Éric Vachon, President and CEO at Stella-Jones]

Yeah

[Hamir Patel, Analyst at CIBC Capital Markets]

...adjustment there with the TSO.

[Éric Vachon, President and CEO at Stella-Jones]

Right. TSO is attractive to us because we don't have to carry the working capital. There's obviously lesser investment, returns are better, and the profitability is similar, I want to say definitely better percentage. Some customers are really open to the conversation, and others have shut the door. We'll be going into next year to a greater proportion of that. Silvana, you want to give any colors on the maybe H1 versus H2 proportions of TSO?

[Silvana Travaglini, SVP and CFO at Stella-Jones]

Yeah. In the first half of the year, we would say half of that sort of 2% decrease was related to the TSO volumes. The expectation in the second half of the year is that we could be seeing those TSO volumes increase and maybe represent anywhere between 5% and 10% of our total ties sales. That probably is what we would be expecting going forward beyond 2026. In terms of impact on the overall sales, I guess, not giving a specific number, but just maybe highlighting to you that it could be representing up to 10% of our total volumes going forward.

[Hamir Patel, Analyst at CIBC Capital Markets]

Great. Thanks, Silvana. Just the last question I had, I know the focus now is on growing the steel structures business. Éric, do you still see potential opportunities over the coming year to augment your position in either wooden utility poles or ties through M&A?

[Éric Vachon, President and CEO at Stella-Jones]

Answer is yes. Definitely, there is potentially some targets on the railway tie side that are still of interest to us. As I look at the landscape of Class I's, potential mergers on the horizon and how that could influence the market, I'm mindful of how our footprint looks today and how it needs to adjust. Definitely some of these competitors today, I guess, are definitely in sight and I would appreciate some conversations with these targets. On the utility pole side, there's still a couple of businesses, I want to say, in the Southeast U.S. that have some interest, businesses owned by families that we've gotten to know over the years. It's really a question of timing and their transition or their exit strategy, but I think there's some potential there.

[Éric Vachon, President and CEO at Stella-Jones]

That's on the M&A front, I have to mention for utility poles that there's also the potential, not the potential, but our expectation of continued organic growth. We've adjusted our footprint for that. We're actually taking initiatives right now to ensure that we're ready for that future growth. Our M&A is definitely part of the strategy for the wood ties and wood poles, and on the wood poles, we're definitely expecting continued growth, and we're adjusting our network and we're ready for it.

[Hamir Patel, Analyst at CIBC Capital Markets]

Great. Thanks. That's all I had. I'll turn it over.

[Éric Vachon, President and CEO at Stella-Jones]

Thank you, Hamir.

[Operator]

Your next question comes from the line of Benoit Poirier for Desjardins. Please go ahead.

[Benoit Poirier, Analyst at Desjardins]

Thank you very much. Good morning, Silvana and Éric. Just to come back on the utility pole, I was curious if you could break down the 1% organic growth between volume and pricing.

[Éric Vachon, President and CEO at Stella-Jones]

Silvana, do you want?

[Silvana Travaglini, SVP and CFO at Stella-Jones]

Yeah

[Éric Vachon, President and CEO at Stella-Jones]

Tackle that, please?

[Silvana Travaglini, SVP and CFO at Stella-Jones]

We mentioned it, I believe in the earnings script, but basically for the wood utility poles, it's a 2% increase in volume and a 1% decline in pricing.

[Éric Vachon, President and CEO at Stella-Jones]

Benoit, I want to add, we had a call out in the script about the Texas market. It's typically not in our style to find excuses, but there was some heavy rains in the northern part of Texas through the spring, which slowed down several projects. I do think we will catch up some of that later in the year, maybe not all. I think we were a bit depressed on the volume in relation to those events.

[Benoit Poirier, Analyst at Desjardins]

Okay. In terms of spot pricing, my understanding, it's been pretty stable in the last three to four quarters. How is July shaping up on the utility pole side, on the volume side, organic growth? Have you been able to ramp up following the heavy rain event?

[Éric Vachon, President and CEO at Stella-Jones]

Thank you, Benoit. I think I led you into that question a bit, but thank you for asking it. Yeah. No, definitely, we're seeing some adjustments in our customer forecasting. I don't know if they'll have enough time in the Texas area to catch up all the work because of the lost time, but we're definitely seeing some momentum there so far this year. I don't like to comment on Q3 because obviously we reported Q2 today, but we are seeing some positive activity. You'll have to excuse me, Benoit, I forgot the first part of your question.

[Benoit Poirier, Analyst at Desjardins]

Oh, just about the expectation in terms of-

[Éric Vachon, President and CEO at Stella-Jones]

Oh, sorry.

[Benoit Poirier, Analyst at Desjardins]

...volume-

[Éric Vachon, President and CEO at Stella-Jones]

It was the pricing. Yeah.

[Benoit Poirier, Analyst at Desjardins]

...utility pole in Q3 and Q4.

[Éric Vachon, President and CEO at Stella-Jones]

Yeah. It was for the spot pricing. I'm sorry. Yes, you're completely right. We've seen four quarters of pretty stable pricing on the spot side. Pleased with that. We'll be lapping ourselves here with the pricing pressures and hopefully that is behind us.

[Benoit Poirier, Analyst at Desjardins]

Okay, perfect. That's it for me. Thank you.

[Éric Vachon, President and CEO at Stella-Jones]

Thank you, Benoit.

[Operator]

As a reminder, if you have any questions or follow-up, please press star one. Our next question comes from the line of Michael Tupholme from TD Securities. Please go ahead.

[Michael Tupholme, Analyst at TD Securities]

Thank you. Just Éric, back on the headwinds in the Southeast and the U.S. in the quarter. Had you had a more normal, typical weather in that area and seen more typical demand, what would utility poles organic growth have looked like in the quarter?

[Éric Vachon, President and CEO at Stella-Jones]

Yeah. Silvana did a lot of discussions and questions with our sales team. Silvana, if you want to.

[Silvana Travaglini, SVP and CFO at Stella-Jones]

Yeah. The estimate is that the expectation would've been that we would've been at closer to sort of that mid-single-digit growth, but probably the lower end, probably between 4% and 5% is where the expectation would've been if the activity would've been as expected in that area.

[Michael Tupholme, Analyst at TD Securities]

Okay. It sounds like that headwind's now been overcome and maybe you get some of the volumes that you lost out on back, maybe not fully, but some of those recovered in the second half, plus what you would ordinarily do. Is the idea that the second half we're back onto that sort of mid-single-digit organic growth for poles where you had been targeting for the year, not withstanding the Q2 issues?

[Éric Vachon, President and CEO at Stella-Jones]

Yeah. The plan is, I believe I mentioned it in my script, is we're still guiding to that mid-single digit. I think it's a good assumption.

[Michael Tupholme, Analyst at TD Securities]

Sorry, for the second half or?

[Éric Vachon, President and CEO at Stella-Jones]

For full year. I'm sorry, Michael. Yeah. For the full year we'd be mid-single digit.

[Michael Tupholme, Analyst at TD Securities]

Okay. This Q2 dynamic doesn't materially change where you wind up for the year.

[Éric Vachon, President and CEO at Stella-Jones]

Agreed.

[Michael Tupholme, Analyst at TD Securities]

Okay. Just on the operational efficiency initiatives in the poles business. I think Silvana, you said CAD 10 million-CAD 12 million of targeted annual cost savings, or profitability improvements, pardon me. When would we expect to see those start to come through and when would you get that full benefit? I'm thinking about the initiatives on the tie side. I think you said the full benefit there isn't until next year. How does it look for poles?

[Silvana Travaglini, SVP and CFO at Stella-Jones]

Yeah, the expectation would be the same. It would be difficult this year to expect any of them. Most of the work will be undertaken in Q3 into Q4. The expectation isn't as of 2027.

[Michael Tupholme, Analyst at TD Securities]

Okay. You could get them on, like the full benefit is coming through.

[Silvana Travaglini, SVP and CFO at Stella-Jones]

In the first quarter. Yeah.

[Éric Vachon, President and CEO at Stella-Jones]

Yeah. No, I agree with that.

[Michael Tupholme, Analyst at TD Securities]

Okay. On the steel structures sort of headwinds that you saw in the quarter, just due to the equipment transition and given the facility expansion that's undergoing, you're seeing at Candiac. Does that impact you again in Q3? It sounded like maybe there's still some impact in the early part of the quarter, but I'm just trying to understand the impact there if, I'm not totally clear, the mid-single-digit organic growth you talked about for poles still being, looking at that for the year, is that just wood utility poles? Or is that inclusive of the steel structures dynamics?

[Éric Vachon, President and CEO at Stella-Jones]

Yeah. No. That's only for wood utility poles. I guess the changeover of the equipment we're seeing has still created longer delays of moving equipment and installing the new equipment. That's pretty much behind us. In Quebec, we have construction holiday, which is usually a good time for plant shutdown. We did have the whole maintenance crews in the facility. Two weeks of no operations just helps just move things along. We've progressed very well here. What's left here in August is just tidying things up. That slowdown is, I want to say, entirely behind us and we'd be resuming the regular activity with enhanced capacity. Actually, I want to add the good news.

[Éric Vachon, President and CEO at Stella-Jones]

If there's a good news, it's that everything we've learned in the last four months in this equipment change-out is going to be beneficial for our Tennessee facility, because we're doing a copy-paste of the shop floor. Same equipment, same supplier. Everything we had to do as to programming some software interfaces for CNC equipment programming and things like, everything is just going to be used for a second time. This investment is definitely going to be beneficial for a smoother startup in Tennessee.

[Michael Tupholme, Analyst at TD Securities]

Okay, just lastly on the margins. Obviously some factors that weighed on margins this quarter. It sounds like you see improvement in the back half, you haven't changed your three-year outlook. I assume that means by next year you're back in your range. Do these operational improvement initiatives you're undertaking, were those already factored into the 17.5%-18.5% range, or was that where you'd expect to be without those and these initiatives could kind of push you up either to the top end or maybe even through that? Just trying to understand how those specific initiatives and ties and pulls on the operational improvement side play into the margin.

[Éric Vachon, President and CEO at Stella-Jones]

No, good. It's a good observation. It was not included in our initial guidance. As we had the question several times in previous quarters of like, "Well, what happens for you to be at the low end and what needs to happen for you to be at the top end?" Well, these initiatives, those would be actions that we're taking to be at the higher end of our guidance.

[Michael Tupholme, Analyst at TD Securities]

Okay. That's great. Thank you.

[Éric Vachon, President and CEO at Stella-Jones]

Thank you, Michael.

[Operator]

There are no further questions at this time. I will now turn the call over to Éric Vachon for closing comments.

[Éric Vachon, President and CEO at Stella-Jones]

Thank you, John, and thank you everyone for joining us today. We look forward to updating you when we release our third quarter results in the fall. Until then, have a safe and enjoyable summer.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Participants

Executives

• David Galison, VP of Investor Relations
• Éric Vachon, President and CEO
• Silvana Travaglini, SVP and CFO

Analysts

• James McGarragle, Analyst at RBC Capital Markets
• Hamir Patel, Analyst at CIBC Capital Markets
• Benoit Poirier, Analyst at Desjardins
• Michael Tupholme, Analyst at TD Securities