What Stella-Jones (SJ) Said on Its Q3 Earnings Call

Key Points

• Sales increased, but profitability weakened: Q3 sales rose to CAD 979 million from CAD 958 million, while adjusted EBITDA fell to CAD 159 million and the margin declined to 16.2%. Higher fuel costs and delayed lumber price increases weighed on results.
• Cost savings are expected to lift margins over time: Stella-Jones expects up to CAD 100 million in cumulative pretax savings over three years, or about CAD 30 million in annual run-rate benefits. Management expects margins to exceed 17% in 2027 and return to its 17.5%–18.5% target range around 2028.
• Utility poles remain a growth driver: Wood pole volumes grew 3% in Q3, and management expects mid-single-digit volume growth in 2027. The company is also expanding steel production, with Candiac fully booked for 2027 and its Tennessee facility scheduled to begin commissioning in late 2027.

Stella-Jones TSE: SJ reported higher third-quarter sales but lower adjusted earnings as fuel costs and a delay in passing higher lumber costs through to customers weighed on margins. Management said demand for wood utility poles remained resilient and outlined a performance program intended to improve profitability over the next three years.

Sales rose to CAD 979 million from CAD 958 million a year earlier, while adjusted EBITDA fell to CAD 159 million from CAD 171 million. The adjusted EBITDA margin declined to 16.2% from 17.8%.

“This quarter once again demonstrated the resilience of demand across our end markets, with wood utility pole volumes continuing to grow,” President and CEO Éric Vachon said. He added that the company was focusing on initiatives intended to improve profitability in 2027 and beyond.

Cost Program and Margin Outlook

Stella-Jones said its Performance Optimization Program combines previously disclosed railway tie and utility pole network initiatives with measures such as production tracking, standardized processes, automation and improved logistics. The company expects up to CAD 100 million in cumulative pretax cost savings and incremental profitability over three years, with benefits building as initiatives are implemented.

Vachon clarified that the figure is cumulative, not an annual benefit of CAD 100 million at the end of the period. The company cited an approximate CAD 30 million annual run rate, equivalent to an EBITDA margin improvement of nearly one percentage point. Its railway tie and wood pole network initiatives alone are expected to generate CAD 20 million to CAD 27 million in annualized savings and incremental profitability.

Vachon said little of the benefit had been captured in the third quarter and cautioned against expecting a meaningful margin boost from the program this year. CFO Silvana Travaglini said most initiatives would not require additional capital spending.

Management maintained its longer-term adjusted EBITDA margin target of 17.5% to 18.5%. Vachon said he expects the margin to exceed 17% in 2027, with a return to the target range more likely around 2028 as efficiencies and cost pass-throughs take effect.

Utility Pole Growth and Steel Expansion

Utility product sales rose 7% to CAD 513 million, supported by CAD 33 million from the Crossarm acquisition and 3% growth in wood utility pole volumes. Lower pricing, largely reflecting a shift toward lower-priced southern yellow pine poles, and softer steel structure sales partly offset those gains.

Vachon said some southern yellow pine customers had stronger demand during the quarter, while other customers had shifted toward the species because it is more cost-efficient. He expects mid-single-digit wood pole volume growth in 2027, despite cost pressures facing utilities.

At the Candiac steel facility, an expansion and modernization project continued to disrupt production. Vachon said the ramp-up had been slower than expected, with one remaining piece of equipment due in December. The company is targeting a full annual production run rate of 20,000 tons by the end of the first quarter of 2027, doubling capacity.

Vachon said Candiac was fully booked for 2027 and that orders for 2028 were filling quickly. A separate U.S. facility in Fayetteville, Tennessee, remains scheduled for commissioning in late 2027 and a phased ramp-up to full production by the end of 2028. The project is expected to add approximately 20,000 tons of annual lattice production capacity.

Railway Ties and Residential Lumber

Railway tie sales slipped to CAD 208 million from CAD 211 million as lower Class 1 demand was offset by commercial activity. Travaglini said the pricing variance largely reflected a higher proportion of treating-services-only shipments, which represented more than 10% of Class 1 shipments during the quarter. Railway tie margin dollars were essentially flat, while the margin percentage improved.

Management expects railway tie activity to decline in the seasonally slower fourth quarter, partly because certain Class 1 programs were substantially complete by the end of September. Vachon said contract renewals and commitments for higher-value products could support growth next year; he also expects growth within the reported railway tie category.

Residential lumber sales declined to CAD 196 million from CAD 201 million, although volumes were in line with the prior year. Travaglini attributed the sales decline to a lag in adjusting prices. Vachon said price increases implemented later in the quarter were largely absent from third-quarter margins but should improve the pricing profile in the fourth quarter and into 2027.

Fuel Costs and Capital Allocation

Higher fuel-related costs reduced third-quarter adjusted EBITDA by approximately CAD 10 million, with preservative costs accounting for most of that impact, Travaglini said. Excluding those costs and the residential lumber pricing lag, the quarterly adjusted EBITDA margin would have exceeded 17%, she said. Management estimated that approximately 75% of the fuel-related cost increase could be passed through to customers.

The company recorded CAD 32 million in asset impairment and restructuring costs during the quarter, primarily related to its wood pole network. Charges for the first nine months totaled CAD 64 million, including CAD 43 million in non-cash impairments. Travaglini said the company does not currently anticipate further significant restructuring and impairment charges.

Stella-Jones generated CAD 158 million in cash from operations during the quarter and reduced net debt by almost CAD 200 million in the first nine months. Leverage stood at 2.4 times, and available liquidity was CAD 836 million at quarter-end.

The company renewed its share repurchase program, but Travaglini said any buyback decision would take account of leverage and acquisition opportunities. Vachon said disciplined acquisitions remain part of the company’s long-term growth strategy.

About Stella-Jones (TSE:SJ)

Stella-Jones Inc TSX: SJ is a leading North American manufacturer of products focused on supporting infrastructure essential to the electrical distribution and transmission network, and the operation and maintenance of railway transportation systems. It supplies the continent's major electrical utility companies with treated wood poles and crossarms, steel lattice towers and steel transmission poles, as well as North America's Class 1, short line and commercial railroad operators with treated wood railway ties.

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