Stella-Jones Inc.

Brian McManus - President and CEO Éric Vachon - CFO

Mona Nazir - Laurentian Bank Benoit Poirier - Desjardins Capital Markets Michael Tupholme - TD Securities Leon Agazarian - National Bank Financial Mark Neville - Scotiabank

Thank you. Good afternoon, ladies and gentlemen.

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 second quarter ended June 30, 2015.

Our press release reporting our Q2 results was published earlier today and our MD&A for the second quarter was just 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.

During the second quarter, we saw healthy demand in our core markets and we also further expanded our reach in the residential lumber category. The company’s margins improved as evolving conditions in the untreated railway tie market allowed for price adjustments.

Our margins benefited as well from our continuous focus on enhancing network efficiency. All these factors contributed to a strong operating cash flow, which we mainly invested in working capital to support expected growth.

The company generated revenue of CAD428.1 million during the quarter, a 24.2% increase over the second quarter of last year. The additional contribution from the facilities of Boatright Railroad Products, which we acquired in May of 2014, was CAD27.3 million.

As a result of the conversion effect from fluctuations in the value of the Canadian dollar, we registered a positive impact of CAD38.1 million on our US dollar denominated sales. If we exclude the contributions from Boatright and the currency conversion effect, sales increased by approximately CAD17.9 million or 5.2%.

Looking at our results by product category, market demand remained solid in the railway tie category. Sales reached CAD194.8 million, an increase of 37.7% over the second quarter of last year.

If we exclude the contributions from Boatright and the currency conversion effect, railway tie sales rose by approximately CAD9.6 million or 6.8%. The increase came primarily from selling price adjustments.

Turning to the utility pole category, sales amounted to CAD136.7 million, a 12.4% increase over the comparable period last year. Excluding the currency conversion effect, sales went up CAD2.7 million or 2.2% [ph].

This result can be attributed to a steady rise in the sale of distribution poles as regular maintenance projects preceded. The category’s performance was partially offset by lower sales of transmission poles due to reduced demand for special projects as a result of the weakness in the oil and gas as well as mining industries.

In residential lumber, Stella-Jones continued to expand its market reach. Sales in this category totaled CAD60.9 million, a 23.2% increase over last year.

The improvement results from higher sales in both the US and Western Canada, most particularly in British Columbia as well as from the higher conversion rate on US dollar denominated sales. Turning to the industrial products, sales amounted to CAD25.4 million in the quarter.

This figure represents a slight increase over last year. However, if we exclude the contribution of Boatright and the year-over-year currency conversion effect on US dollar denominated sales, industrial products sales decreased due to lower demand for the railway related products.

Éric will now discuss the financial performance of the company in greater detail. Éric?

Thank you, Brian. Second quarter gross profit reached CAD84.1 million or 19.7% of sales, up from CAD68.1 million or 17.4% of sales last year.

As Brian mentioned, the increase as a percentage of sales mainly results from adjusted pricing for railway ties. It also reflects greater efficiencies throughout our network.

As a result of higher gross profit, our operating income rose 46.9% to CAD61.1 million or 14.3% of sales versus CAD41.6 million or 12.1% of sales last year. Net income amounted CAD38.9 million or CAD0.56 per share fully diluted, up 35.1% from CAD28.8 million or CAD0.42 per share fully diluted a year ago.

Reflecting higher net income, cash flow from operating activities before changes in non-cash working capital components and interest and income taxes paid was CAD69.6 million for the quarter versus CAD48.5 million last year. For the six months of 2015, sales amounted to CAD768.8 million, up 27.6% from CAD602.3 million in the first six months of 2014.

Excluding the additional Boatright contribution and the currency conversion effect, sales rose 8.4% mainly due to railway ties selling price adjustments. Operating income reached CAD108.8 million or 14.2% of sales compared with CAD76.4 million or 12.7% of sales a year ago.

Net income amounted to CAD69 million or CAD1 per share fully diluted up from CAD51.3 million or CAD0.74 per share fully diluted last year. Cash flow from operating activities before changes in non-cash working capital components and interest and income taxes paid was CAD125.3 million for the quarter versus CAD88.8 million last year.

Stella-Jones’ tax rate was higher this year, reaching 31.8% in the second quarter of 2015 and 31.4% in the first six months of the year. This compares with tax rates of 24.7% and 27.1% respectively for the three and six months period ended June 30, 2014.

The higher tax rates for 2015 reflects the less favorable allocation of taxable income within the company’s different tax jurisdictions. For the remainder of this year, we believe it is fair to assume a tax rate of approximately 31%.

In regards to our financial position, Stella-Jones’s long term debt including the current portion stood at CAD538.1 million, up from CAD517.2 million three months earlier. This increase reflects working capital requirements mainly attributable to the gradual rebuilding of inventory.

Finally, the board of directors of Stella-Jones approved a quarterly dividend of CAD0.08 per common share payable on September 25, 2015 to shareholders of record at the close of business on September 4, 2015. Now, over to Brian for the outlook.

Thank you, Éric. As we look ahead at the remaining quarters of 2015 and into 2016, we anticipate ongoing healthy demand for our core products.

In regard to the railway ties, we see solid basic practice in the North American economy leading to continued investments by railway operators in their networks. In the untreated railway tie market, product availability has improved in most regions.

A consistent supply in the coming months will be a necessary factor in rebuilding inventory. The depth of Stella-Jones’ procurement network and our current inventory position should allow the company to meet demand at the most optimal cost.

In the utility pole market, regular maintenance demand should continue to grow at a steady pace. The lower resource prices have resulted in lower demand for special projects.

Over the midterm, utility pole demand should improve as an increasing number of poles are approaching the end of their service life and will need to be replaced. Increased forecasted demand by some of the larger utility pole customers supports this belief and we’ve invested in additional capacity to meet this anticipated demand.

Stella-Jones will continue to focus on cash generation and on maintaining a prudent use of leverage. Our growth plan supported by the strength of our financial position allows for further network expansion through acquisition.

We will act whenever opportunities arise that complements our strategic vision. Meanwhile we remain intend on enhancing the productivity of our network and streamlining our cost base, all in the interest of building further shareholder value.

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

Good afternoon.

Good afternoon Mona.

Good afternoon Mona.

Hi, so just a couple of questions from me. On the utility pole side, I’m just wondering the percentage of revenues that come from specialty transmission projects and if it was possible to quantify the magnitude of the decline in sales or perhaps if specialty transmission projects were flat, what would organic growth rate been on the utility pole side?

I think it will be easier to answer the latter part of your question, which would be, we probably would have been more around a 5% to 6% organic growth rate.

And do you expect that to remain soft for the balance of the year and perhaps into 2016 or too early to say?

Probably too early to say, I mean, frankly in the last -- just the last couple of weeks we’ve seen some additional request come in. So I expect it to be a little lumpy and really a lot will depend on how the resource factors sort of ticks back but we’re pleased with the, the maintenance demand is remaining strong and actually increasing.

Okay. And secondly, still staying within the utility pole segment, in the last few quarters, you’ve stated that the replacement cycle for aging poles is expected to start this year but when reading the MD&A in the press release, I’m seeing terminology referring to the mid-term timeframe, is there a change there in regard to timing of the cycle or am I overlooking into this?

Yeah, I would say maybe you’re reading too much into it a bit, it’s hard to pinpoint when the exact period is starting, I think, going five years forward, it will be probably easier to look back and say ah, ah, that was where the spot was that it really started to increase but we have seen the momentum picking up.

Okay, and just lastly. I’ve been seeing or reading in a number of articles that spoke about increasing trends and demand for treated ties, are you seeing this more among customers and I’m not sure if you could give any color on percentage of customers transitioning to the black tie model and how much work is still left there, if any?

I would say most of that is taken place in the marketplace.

Okay, that’s it. Thank you.

Thank you, Mona.

Good afternoon gentlemen. Just to come back on the previous question, what would be your exposure on the utility side to oil and gas, and mining, Brain?

I’m sorry, in terms of --?

For utility pole, what would be your exposure to mining and kind of the oil and gas?

It’s really -- it’s more -- it’s a difficult question to answer because it’s hard to predict what would have been in the pipeline, there is no pun intended in terms of the special projects, but I would say somewhere between 3% and 5% of our sales in the utility pole category would be related to that sort of that resource sector, if that’s a --.

Yeah, okay, it helps yeah for sure. And just on the railway ties, so organic growth 7%, very solid.

I’m just wondering, black tie, where you still benefiting from some conversion or everything was mostly completed in Q1. And if you look at organic growth, how much was driven by pricing?

First part of your question, everything sort of completed in terms of tie price adjustments and any conversions or any clients that would have been running black tie. In terms of the organic growth, I would say, pretty much all -- well not all of it, but a good part of it really is related to the price adjustments.

Okay, very good, and just in terms of working capital, obviously a big consumption in Q1. Was wondering and you’ve been clear in the past that you wanted to build up the inventory this year to replenish the inventory.

Do you still expect to -- how would you compare the working capital usage this year versus last year and also, how this will translate into free cash flow this year?

I think a good part of our free cash flow this year will be going of course towards once we close the Ram acquisition in early October and but also it has and will probably continue through the rest of the year probably at a slightly reduced rate -- well not probably, but it will be at a reduced rate in terms of funding working capital as we continue to rebuild our inventories to be in a good dry inventory position for 2016.

Okay. So, basically you will still continue to consume working cap throughout the year?

Correct, but at less of a level that we have in the first half of the year.

Okay. And free cash flow, would you still expect to make above the $100 million to $120 million for 2015 or given the working capital adjustment that that will be going down?

Yeah, that will probably down compared to -- because last year we didn’t -- we were unable to get what we need -- it’s a bit of a catch up here.

Yeah, okay, perfect. Okay, thanks for the time.

Thanks, Benoit.

Thank you.

Hi, guys, it’s Julian for Sara. My first question is on the passing of the -- potential passing of the short line tax credit in the U.S.

and whether or not that has any beneficial reduce for Stella?

It really -- it’s been a continued benefit for us and I guess we would assume it will continue going forward. Really, that’s a simplest answer I can give you.

Okay, no problem. And then my second question, with the -- how is the acquisition pipeline, is it still healthy and if you could comment anything on pricing, that would be really nice?

Pricing in relations to the acquisitions or pricing in relations to the overall market pricing of our product? I’ll answer the pipeline question first and then maybe you can clarify the pricing question.

In terms of the acquisition pipeline, yes, there is definitely as we continue to look at opportunities in the Southern Yellow Pine market, we are definitely seeing opportunities come forward and we’re continuing to investigate. So, pipeline is healthy.

And just maybe clarify your prices question.

It’s pricing regarding the acquisitions like are the multiples in the reasonable range or is there -- are they lower in anyway?

They would be very consistent to what we’ve historically done. I mean, we’re very discipline when it comes to that and that’s the range we stay within.

Pricing hasn’t moved I guess is the best way to say.

Thanks so much for your help guys.

You’re welcome. Thank you.

Thanks. Just one question for me.

Brian, when I look at the organic growth in the railways ties business, 6.8% this quarter, it was close to 22% in Q1, is that just -- is that coming down just because you’re now lapping the price increases that you instituted or is there anything going on in the volume side that would partly explain that reduction in the rate of growth there?

No, you answered your first question. The first part of your question answered it for itself.

It’s just really as we are moving through those price adjustments we are – on a year-over-year basis, we are getting less of an effect. Our volumes are holding very consistent, in fact marginally up.

I mean, they are up quite a bit including Boatright and pulling back the Boatright.

Right, from an organic perspective.

From an organic.

Okay. And as we get into Q3 and Q4, what – can you just help me understand what happens with as it relates to prior year comps and when pricing gains or pricing increases were instituted, like how much more does your organic rates growth slow as you move through the year because of lapping those pricing gains?

It will decelerate a bit, but I think we are still going to see continued organic growth in a number of our product categories. We are still based on what we see till the end of the year.

Okay, that’s great. Thank you.

Thanks, Michael.

Hi, good afternoon guys. Quick question, just a follow-up on the inventory question, you’re mentioning ramping up inventory levels and you’re seeing more and more demand out there.

I just want to understand what is your comfort level with the inventory level that you’re looking for, is there a certain balance that you need between your inventory levels and what you’re seeing in the order book or you have to actually – how far long – how far ahead are you looking in terms of ramping up inventory?

We generally target both and this would probably apply – I mean, probably it does apply both coals and railway ties, we are looking for about a sort of eight to nine month inventory level on our white stock, which is in autumn to allow for optimum drying cycle to place and we are closing in on that. I would say, we are pretty much there on the coal side and really it’s the tie side that’s still playing a bit of catch up, which is good.

I mean, part of the reason it’s catching up is because demand continues to be very strong and we are still chasing after it, but we are getting there. And bear in mind as well, of course, the prices of that raw material moved last year up, so your overall inventory balance of course have increased as well on a average cost of inventory as we have moved through the periods.

Okay, great. And you had mentioned in your prepared remarks that the product availability is quite strong for the ties, is that still the same case for coals as well?

Yeah, it’s just – coal has never quite had the same impact that we saw in the ties and that’s really why I specifically mentioned railway ties.

Okay, great. And a final one for me is, you mentioned in the ties about guidance for your EBITDA margin around the 16% range, is that still the case?

Yeah, I’d say given some of the pressure we are seeing on the transmission pools, where we are running right now, which is fairly close to the 16%, I am comfortable at that level now for the balance of the year.

Great. Thanks for your help.

Hey, guys. Maybe I am going to try to go at Mike’s organic growth question another way.

Just on the pricing, were the increases fully implemented Q3 last year or sort of when were they fully sort of pushed through? Just trying to get a sense as to, is there still some pricing gains to be had in the second half of this year that will show off obviously.

They were actually fully put through at the end of the year.

2014?

Yes. All right, getting 2015 to be effective.

[ph]

Like, it’s a still little flow through to come, okay. And again on the transmission, I think you just said it actually, but I guess would we able to put a downward pressure on margins or maybe consistent with sort of Q2 levels at least near term?

Correct. And really, a lot will be based on overall mix as well.

We are a bit – we saw a bit little heavier weighting of lumbar in Q2 and so product mix will play into it as well. But I think we are comfortable guiding somewhere between that 15.5% and 16%.

Okay. And just maybe one last question on the balance sheet, you’re talking investing in inventory, healthy pipeline for acquisitions, maybe just remind us sort of comfort level with debt -- whether debt to EBITDA or debt to cap sort of where you like to sort of be sort of on the high end or?

I think on the high end, really and taking in to account sort of acquisition, if you want to call it, putting in there. We’d like to try to keep it at its upper, upper limit, it would certainly be below sort of a 3.25 type thing, but definitely on an ongoing -- excluding an acquisition is -- we would like to see it get closer to 2.

We’re certainly getting there and the other thing of course that’s starting to work is our closing rate of our exchange is getting closer to our average 12-month running average. So that -- our numerator and denominator are slowly getting closer in terms of the exchange rates, given that a large portion of our debt is in US dollars.

Okay. Thank you very much guys.

Thank you.

Thank you. Well, I’d like to thank everyone for joining us on this call.

We look forward to speaking with you again in our next quarterly call. Have a nice weekend.