Stella-Jones Inc.

Brian McManus - President and CEO Éric Vachon - CFO

Mona Nazir - Laurentian Bank Securities Sarah O’Brien - RBC Capital Markets Mark Neville - Scotiabank Michael Tupholme - TD Securities Brian Pow - Accumen Capital Frederic Tremblay - National Bank

Thank you. Good afternoon.

I’m here with Éric Vachon, Chief Financial Officer of Stella-Jones. Thank you for joining us for this discussion of the financial and operating results for the company’s first quarter ended March 31, 2015.

Our press release reporting Q1 results was published earlier this morning. Our MD&A for the first quarter has been posted on our website at www.stella-jones.com and will be available on CEDAR.

Let me remind you that all figures expressed on today’s call are in Canadian dollars unless otherwise stated. Stella-Jones experienced a strong first quarter with healthy demand in its core market.

Internally, we move forward with network optimization initiatives which improve operating efficiency. We also saw adjustments applied to our railway ties prices - selling prices in response to higher input cost for untreated ties.

As a result of these factors, our growth profit margin improved in comparison with recent quarters. The company generated revenue of $340.7 million during the quarter, a 32.3% increase over the comparable period last year.

The contribution from the facilities of Boatright Railroad Products which we acquired in May of 2014 was $21.1 million. As a result of the conversion effect from the fluctuations in the value of the Canadian dollar, our reporting currency, we registered a positive impact of $29.4 million on U.S.

dollar denominated sales. If we exclude the contribution of acquired facilities and the conversion effect, sales increased by approximately $32.7 million or 12.7%.

Net income for the quarter amounts to $30.1 million or 33.7% from last year. Earnings per share fully diluted rose to $0.43, an increase of $0.10 per share compared to the first quarter a year ago.

Looking at our results by product category, strong demand in the railway ties market resulted in sales of $166.8 million, up 53.5% over the first quarter of last year. If we exclude sales from Boatright and the currency conversion effect, railway ties sales rose approximately 21.7%.

The increase was primarily driven by adjusted selling prices. I should note that during the quarter, the availability of untreated railway ties returned to customary levels.

As a result, we took advantage of the strength of our procurement network to accelerate our seasonal inventory buildup in anticipation of traditional high demand in the second and third quarters. Turning to the utility pole category, sales amounted to $119.2 million, a 10.9% increase over the first quarter of last year.

Excluding the currency conversion effect, sales were up 1.9%. We saw a steady rise in the sale of distribution pole as a result of regular maintenance projects.

That improvement was partially offset by slightly lower sales in transmission pole due to the timing of orders for special projects. In the residential lumber category, sales reached $28.4 million, a 64% increase over last year.

This increase stemmed from higher activity in the United States where residential lumber product sales continue to have significant momentum. We also saw higher sales in Western Canada as we expanded our market reach into British Columbia.

In the industrial product category, sales amounted to $19.9 million, a 25.9% increase over last year. This result was largely derived from the contribution of Boatright and the currency conversion effect.

During the quarter, as part of our ongoing expansion program, Stella-Jones entered into a non-binding letter of intent to acquire the shares of Ram Forest Group, Inc. and Ramfor Lumber, Inc.

Ram Forest Group manufactures and sells pressure treated wood products for the retail building materials industry. It operates wood treating facilities in Gormley and Peterborough, Ontario.

We regard this opportunity has an excellent means of expanding Stella-Jones’ wood treating capabilities within the North American residential lumber market. Ram Forest Group is highly respected and has built long term relationships with key customers.

Consolidated sales of the group for the fiscal year ended September 30, 2014 amounted to approximately $90.2 million. If the agreement is finalized, we expect it to close in October of this year and we plan to finance the transaction to our existing revolving credit facility.

Eric will now provide additional details on our first quarter financial results as well as our financial position. Eric?

Thank you, Brian. As previously mentioned, Stella-Jones has adjusted selling prices in the railway ties category in response to higher input costs for untreated ties.

In fact, adjusted pricing for railway ties has matched the 2014 cost increase of untreated ties. This contributed in part to lift gross profit as a percentage of sales to 19.5% in the first quarter of 2015, similar to the same period a year earlier.

As a result of higher gross profit, operating income increased 37.2% to $47.6 million or 14% of sales, up from $34.7 million or 13.5% of sales last year. Net income totaled $30.1 million or $0.43 per share fully diluted, up 33.7% from $22.5 million or $0.33 per share fully diluted a year earlier.

Reflecting higher net income, cash flow from operating activities before changes in non-cash working capital components and interests and income taxes paid was $55.6 million for the quarter compared with $40.3 million for the same period in 2014. In regards to our financial position, Stella-Jones’ long term debt, including the current portion, stood at $517.2 million as of March 31, 2015, up from $444.6 million three months ago.

This increase mainly reflects normal seasonal working capital requirements and the effects of foreign exchange currency converted on our U.S. dollar denominated debt.

These working capital requirements include the seasonal inventory buildup ahead of the peak demand season in the second and third quarters. This buildup was more important this year as we were taking advantage of untreated railway ties availability returning to more customary levels to rebuild inventories.

Finally, the Board of Directors of Stella-Jones has approved a quarterly dividend of $0.08 per common share payable on June 26, 2015 to shareholders of record at the close of business on June 2, 2015. Now over to Brian for the outlook.

Thank you, Éric. These coming quarters, our focus at Stella-Jones will remain one - steady buildup of shareholder value through organic sales growth, expansion through acquisition and margin enhancement by way of efficiency gains.

In light of the ongoing momentum in the North American economy, particularly in the U.S., we believe there will be strong and growing demand for our core products. As I said at this morning’s annual meeting of shareholders, we foresee continued investment by railway operators and sustained demand for ties.

In the year ahead, we also expect solid demand for both distribution and transmission poles at the function of the national replacement cycle of aging poles, and that new projects come on stream. At the same time, we will continue to stress efficiency and optimize the production capacity of our network.

Éric and I would be pleased at this point to answer any questions you may have.

Good afternoon and congrats on some great results.

Thank you, Mona.

Thank you, Mona.

So, firstly, I’m just going to talk about the Ram acquisition. I don’t know how much you can say at this point in time but I was wondering if you could comment on the revenue growth over the last few years.

And is it fair to say that the margin profile may be lower than your consolidated margins just given the sector? And then lastly just on the time that you expect to take for the transaction to close, it’s a pretty lengthy period.

Is it because there’s a lot of due diligence or you’re pretty comfortable with what you know?

I’m pretty restricted on what I can say, Mona. But in terms of the time, which is the only part of your question I’m comfortable answering, the decision on the close on October, we’ve performed quite a bit of due diligence up until this point.

We’re very confident that we’ll be able to see this completed. The idea behind the October close is really to avoid any disruption of really their key customers, employees and even suppliers.

So as you know, it’s very seasonal the consumer lumber part of our business. And we’re right into the peak season, so we thought it best for both parties that an October close would be the most prudent.

And this is the third consecutive quarter of very strong organic growth on the ties side. I know you mentioned a lot of that was coming from price increases which have all been put through as of now.

So should we expect organic growth to stabilize going forward?

Yes, especially once we pick up to get into quarters where last year we had prices that already started to adjust. You’ll see a bit of a slowdown, if you want to say, of that organic growth.

Right. And I know you’ve previously guided to kind of volume growth on the kind of GDP growth level area or range.

Are you still comfortable with that?

Yes.

Okay. And lastly, I’m just wondering if you could talk about the wood supply currently.

I know there was a bit of a slowdown last year and tie inventory levels currently remain a bit below historical levels. Is the supply stable currently?

Yes. Actually, over the last several months we’ve seen a very strong return in terms of availability which, as Éric mentioned during his part of the discussion, is helping us to rebuild our inventories.

So we’re pleased actually with our procurement activities right now.

Okay, perfect. Thank you.

Thanks, Mona.

Thank you, Mona.

Hi, good afternoon.

Hi, Sarah.

Can you guys comment a little bit about working capital seasonal build in Q1 but should we expect more of an inventory build from here or will free cash flow turn positive from working capital going forward?

I would say we’re going to see some free cash flow turning positive as we get into the second and third quarter. We still have some make up to do on the tide to get into what I - so we can get ourselves back to the ability to have completely dry - or not completely, but almost completely dry, tight inventory for our needs going forward.

So we shared I would say - yes, we’re going to start hitting the positive. Would you agree with that Éric?

Yes.

Okay, great. And then can you talk about any margin pressure you may feel in the vulcanizing [ph] process going forward from here?

Or is Q1 representative of what you would expect going forward?

Q1 is pretty representative.

And then I wondered if we could talk a little bit about post-organic growth on the volume side. I know there’s always a mix issue in there.

But it sounds like organic growth was around 2% just on the volume side. Is that sort of the range you would look at for F15?

I’m just wondering if the capacity builds you’re doing now is more for ’16 and beyond? Or do you see it kicking in in 2015?

I expect we’re going to see it kicking in in 2015. Some of it too, Sarah, is the - as you pointed out, if the mix to the poles, even the mix within the subgroups, if you want to call it, within the distribution and transmission, the number of poles was seeing larger increases than what that percentage would represent.

So we’re confident that the rebuild programs that we’re seeing a number of our clients take on will start to see the increases go through in 2015, I would expect above what you’ve seen so far.

Okay. And then mix, would you expect that to shift also in favor of higher pricing?

Yes. We’re larger sizes.

It’s just the first quarter tended to be a mix towards some of the more the smaller sizes if you want to say. That’s much more difficult to predict.

It’s going to depend on a lot of what our plants are doing. I think we’ll see some softening on some projects that some of the larger transmission poles will have a use for that may be attached to some of the better related any of the oil projects that would be going on.

But I’m still confident we’re going to see some good organic growth.

Okay. And then maybe just - things seems to be going very well in terms of margin expansion and given the price escalation through the demand side, what’s your biggest concern, Brian, like going into the rest of F15?

What would be something that kind of just top of mind to keep an eye on?

Just the breaks coming on on the economy and just the potential for our suddenly a slight downturn on demand from some of our clients. I’m not suggesting we’re seeing that, but that would be perhaps the, I might say, the only concern, one that would be top of my mind, I would say.

Okay, so just the volume. And is that mainly related to oil project or just in general, the U.S.

economy not quite as robust as expected?

Yes, I think maybe more in general. Maybe also driven off of the decrease on the oil side.

Okay. That’s it for me.

Thanks.

Thanks, Sarah.

Hi. Good morning, guys.

Hi, Mark.

Hi, Mark.

The 20% growth in ties, and it is largely pricing, but could you give us an indication how much is volume in the quarter?

It was largely pricing.

Okay.

It is for the most part. It is combination of pricing and it’s also a combination of the mix of black tie versus TSO or the treatment services only because we would have been higher rated towards the backside in the previous quarter of last year.

The selling price of a black tie is higher than when you’re just doing the treatment services only on it. So that’s a part of it as well.

So you’ve got that two mixed in there and that’s why we’re seeing this.

All right.

Pretty much oil price related. But it’s not necessarily a price increase on right across on all the black ties.

It’s the mix that we’re in between black and TSO.

Okay. And Éric, at least the price increase is not matched the cost increase last year.

So does that mean that the pricing adjustments are - are they fully complete now? I guess we were taking that sort of structures into Q2 of it.

Well, in most parts they’re done. I mean we’ll see smaller adjustments trickle perhaps, not perhaps, trickle through to Q2.

But [indiscernible] your upwards product cost increases [indiscernible] late last year as some adjustments flow through. But then most of them have done that.

Okay. And just on the FX, I can obviously see the translation gains.

But is there margin benefit or area impact from the stronger U.S. dollar?

It’s quite minor because pretty much, everything that we sell in the U.S. is manufactured in the U.S.

We have some products we moved from Canada into the U.S. where you would see some gain on, but we’re also purchasing [indiscernible] materials from the U.S.

So our total sort of call it net exposure on an annual basis is below $20 million.

Yes.

You’re not talking a big material difference.

Okay. All right.

Thanks, guys.

Thanks, Mark.

Thanks.

Hi, guys. Good afternoon.

Just on the utility poor sight, can you give us a sense as to what the distribution pool growth would have looked like this quarter absent the transition pool timing issue you talked about?

Yes. It was running about 5%

Okay. And then can you talk about within your existing business, what the margins in your residential lumber category look like compared to your consolidated margins?

We don’t disclose individual margins by product category. But the role is fairly tight between the [indiscernible] categories, you could say within about a 5% to 6% growth margin rate.

Okay. And then just - I know you didn’t want to say much about the Ram acquisition.

But just perhaps you can talk to the - you mentioned that regulatory clearance that’s require, is that - I mean it that just a routine process and you’re just striking that or is there something there we should be kind of watching in terms of some risk around that.

No. We see it as pretty routine.

Okay. And then can you.

You gave a little bit of color around the growth in the residential lumber category in Q1, so I think organically [indiscernible] you talked about a factor. Can you just elaborate a little bit on that and maybe specifically this comment about increasing your market reach in BC.

Yes. Remember too, I mean the percentages are always impressive when you’re dealing with a quarter that historically is not that big to start with in terms of that profit category.

When you get into a nice - which for us in the East is really hard to think of, but in the West, we saw some nice early start to the spring which helped drive some of the sales out there. And the [indiscernible] you’re referring to was one of our customers became a new market for us as of this year that we expanded into.

So that’s going to drive [indiscernible] as well.

Okay. And then just lastly, can you talk a little bit about the acquisition pipeline as it relates to other opportunities?

You’ve obviously the one [indiscernible] today. But can you just talk generally about what else is out there?

There’s certainly other opportunities. And you know, Michael, we’re always looking for opportunities.

And so there’s still number out there in the pipeline, I guess is the best way to answer that or the safest way to answer that.

The environment hasn’t changed one way or the other [indiscernible] quarters on that front?

Yes. Yes.

All right. Thanks.

Great.

Good afternoon, guys.

Hey, Brian.

Maybe juts back on the railway ties. If you can just try to help me understand or just relate your quarter to the reference of the industry performance of 11.7% in terms of tie sales or actual tie volumes in the quarter.

From the standpoint of what was --

Well, it was 11.7% growth; 11.7% growth year-over-year growth of ties in the industry. That’s what the industry reported.

So how does that relate to your comment that it was really more price increase? And then again just sort of help me understand a little bit about the TSO volumes and where they are today and where you think they’re going.

Well, I’ll answer the second part of the question. The TSO volumes, in terms from our standpoint has come down quite a bit as our overall sales percentage, would be probably close about 90% now would be black tie.

In regards to the industry. The industry would, also in those time, include white tie purchases that would be happening for [indiscernible] TSO as well.

It’s I believe the one you’re quoting is not just the sale of the finished tie.

Okay.

So that would make perfect sense to give them the availability of the ties in the market now or embed as getting back. Everybody is trying to [indiscernible].

Right. And then just on the TSO sides.

And you figure that both 9% black tie, so where do you see that going forward?

I think it’s going to hold there fairly consistent right now based on sort of our clients’ desires.

Okay. Great.

Thanks, guys.

Thanks, Brian.

You’re welcome.

Thanks. Good afternoon.

On the acquisition, at $90 million in revenue, this seems like a pretty sizeable transaction versus your most recent residential lumber sales. Can you just discuss like market dynamics in residential lumber, what’s leading you to increase materially the size of that segment and if you expect that to be a focus for M&A going forward as well?

I would say this one sits very well with our current mix within the residential lumber sector that we currently have. It’s a nice fit with, quite honestly, just with the client, our major client that we service.

And this is really - well, it’s something that we’ve looked at for several years. And it was opportunity to represent it.

So I would not say we’re going to be necessarily focused on more additional residential lumber opportunities out there. But in this case, this one is a good fit with our existing facility.

Okay. Can you tell us if they sell mainly in Canada or do they sell to the U.S.

also?

No. It’s only entirely in Canada.

Okay. And then on the last call, you mentioned your EBITDA margin output.

I believe it was 15.5% to 16% with high order mark of 16.5%. Is that still in about what to expect for the year?

Yes. It is 15.5% to 16%, absolutely comfortable with that for the year.

Okay. Thank you very much.

Thank you.

Well, thank you everyone for joining us on this call. And we look forward to speaking with you again at our next quarterly call.

Have a nice day.