Stella-Jones (TSX:SJ) Q3 2026 Earnings Call

0:00 Good morning and thank you for standing by. Welcome to Stella Jones' third quarter 2026 earnings 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 questions by phone, please press star 1. If anyone experiences difficulties hearing the conference call, please press star 0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Wednesday, November 4th, 2026. I will now turn it over to David Galison, Vice President, Investor Relations of Stella Jones.

0:44 Thank you, Vincent, and good morning, everyone. Earlier this morning, we issued a press release reporting our results for the third 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 CDAR+. As a reminder, all figures expressed on today's call are in Canadian dollars unless otherwise stated. Please note that comments made on today's call may contain forward-looking information, and 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 contact the company's relevant filings on CDAR+.

1:34 These documents are also available in the investor relations sections of Stella Jones website at www.stella-jones.com. Additionally, during this call, the company may refer to non-GAAP measures. which have no standardized meeting 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 CDAR+. Lastly, we have prepared a corresponding presentation which we encourage you to follow along with during this call. I'll now turn the call over to Eric 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. Eric, over to you.

2:31 Thank you, David, and good morning, everyone. This quarter once again demonstrated the resilience of demand across our end markets, with wood utility pole volumes continuing to grow. While results were impacted by elevated fuel costs, we remain focused on what we control, executing on strategic priorities that establish a foundation for improved profitability in 2027 and beyond. As we outlined at our Investor Day last year, 2026 has been about building a more scalable and efficient operating platform. In the third quarter, that meant sharpening our focus on three key priorities. First, pursuing continuous improvement initiatives to reinforce operational excellence.

3:19 Second, advancing class one contract renewals and deepening long-term customer partnerships. And third, scaling our steel business to capture the significant opportunity we see ahead. These three priorities provide us with a clear strategic direction to build on the underlying strengths of our business. I will now touch on each. Across our operations, we continue to pursue improvement. Over the course of 2025 and 2026, we have been advancing a number of initiatives aimed at strengthening our business. These initiatives and workstreams are all centered around optimizing our operating platform and driving margin expansion.

4:04 Today, we're bringing these efforts together under a single coordinated performance optimization program with clear initiatives and measurable targets. The program combines our previously disclosed railway ties and wood utility pole network optimization initiatives where execution is already underway with additional cost saving measures aimed at enhancing operational performance and efficiency. The railway ties and wood utility pole initiatives alone are expected to generate 20 to $27 million in annualized savings and incremental profitability. These additional measures include deploying continuous improvement practices, implementing real-time production tracking, standardizing work processes, and daily operational reviews to increase equipment throughput and labor productivity.

4:59 Also included are the continued application of automation and artificial intelligence into operation production planning, logistics, and maintenance processes. Taken together, we expect the program to deliver up to $100 million in cumulative cost savings and incremental profitability over the next three years, combined with the benefits building progressively each year as initiatives are implemented. Based on an annual run rate of approximately $30 million, this represents an improvement in the bid on margin of almost 1%. In Q2, We indicated that we were planning the next phase of optimizing across our utility pole network.

5:45 In Q3, we advanced from planning into execution, taking targeted actions to consolidate wood utility pole production into single product facilities and shift production to higher efficiency facilities to fully capitalize on recent capital investments. These actions are advancing our transition towards a more streamlined operating model designed to increase productivity, capture meaningful annual efficiencies, and support margin expansion. While these initiatives involve near-term transition activities, they free up effective capacity and position our business to capture higher margins and enhance returns as volume continues growth. With regards to contract renewals and deepening long-term customer relationships, we continue to make good progress across our Class 1 contract renewals.

6:39 Building on the contract win we discussed last quarter, we have secured additional multi-year commitments and continue to advance renewals with other key customers. These discussions are supporting our core cross-tie business while creating opportunities to increase our participation in higher value products and services such as bridge structures, switch timbers, pre-plated ties, and treated services. Importantly, we are well positioned to capture these opportunities. Investments in automation and our broader product capabilities allow us to efficiently serve a greater share of our customers' needs and support profitable growth. Overall, the contract renewal cycle is strengthening our long-term customer relationships and advancing our strategy to grow the railway-type business through more profitable product mix and product services.

7:36 And in steel structures, our order book continues to build, providing a strong volume visibility to fill our expanded capacity. Beyond the long-term contracts secured earlier this year, which alone accounts for approximately one-third of Kanjak's capacity over the next decade, we continue to secure additional customer orders that heavily commit our production schedule well into 2027 and 2028. Furthermore, our capacity expansion in Candiac continues to advance to meet strong transmission demand and we achieved several key milestones in our U.S. greenfield development during the third quarter. Work at our future production facility in Fayetteville, Tennessee, advanced from design and engineering to prepare the existing on-site structure.

8:27 We are advancing recruitment for plant management to have a team in place before the end of the year. The project remains on schedule for commissioning in late 2027 with a phased ramp-up to full production by the end of 2028. Commercial interest continues to be strong. Existing US customers remain aligned to place pilot qualifying orders ahead of the commercial ramp-up. In addition, growing Canadian transmission demand ensures we have long-term flexibility to optimize production allocation between Kandyak and Fayetteville. When completed, Fayetteville will add approximately 20,000 tons of high capacity lattice production, positioning Stella Jones as a leading domestic supplier to U.S.

9:15 utilities, expanding our presence in the North American lattice tower market and supporting profitable growth in our steel structure business. As we invest to support our long-term growth, we remain equally focused on driving stronger performance across our existing operations. With our contract renewals progressing well, the steel structure expansion in Canada nearly complete, and the actions we've taken over the course of the year, we are well positioned to drive higher returns as we enter 2027. I will now turn to a performance overview of our main product categories, starting with utility products. Performance in the quarter was anchored by sustained momentum in wood utility bowls and another solid contribution from our cross arms business where we have found success with our expanded product offering.

10:10 In wood utility poles, volume growth remains solid in the third quarter, with a positive gain in the period, keeping our year-to-date performance in line with our mid-single-digit volume outlook. Importantly, this resilient demand comes despite a challenging broader macroeconomic backdrop. Utilities are navigating elevated costs across their wider procurement baskets alongside higher interest rates, fuel costs, and general inflation, which can weigh on overall utility capital allocation. This environment notwithstanding, wood utility poles continue to represent an essential non-discretionary component of ongoing maintenance, reliability, and storm hardening programs demonstrating the structural resilience of our core business.

10:59 Turning to pricing, the market conditions remain broadly stable across our customer base. Variation in pricing continued to be driven primarily by regional species and product mix, reflecting a higher proportion of southern yellow pine poles. This shift largely reflects customer species preferences and capital allocation decisions as utilities continue to navigate a broader rise in costs across their operations. Turning to steel structures, third quarter performance continued to be impacted by lower throughput and a more gradual ramp up associated with our capacity expansion and modernization program at the Candiac facility. We reached the peak of the plant overhaul during the quarter and we are seeing steady tangible improvements across the shop floor as new automated lines are released into production. We are actively working through the final stages of commissioning and we remain focused on ramping our daily throughput towards our doubled run rate of 20,000 tons by late Q1 2027.

12:09 Most importantly, customer demand for lattice transmission towers remains strong. And the strategic rationale for this investment is fully supported by our commercial success, including leveraging our customer base to deliver top line synergies. Turning to railway ties, third quarter market dynamics were consistent with trends seen earlier this year. Lower Class I volumes continued to be largely offset by continued strength and healthy project activity in the commercial market, supported by US government funding, with the contract renewal cycle continuing to yield significant progress in Q3. We secured our core baseline, locked in higher commitments for higher margin products, and invested in automation to drive profitable volume growth over the multi-year horizon.

13:02 From a profitability standpoint, a more supportive business and product mix and our ongoing efficiency initiatives drove an improvement in railway time margins both in the third quarter and on a year-to-date basis. In parallel, our network optimization initiatives for railway ties continue to advance on schedule, ensuring our operational footprint remains cost efficient, properly balanced and well positioned to support sustainable margin improvement heading into 2027. And finally, turning to residential lumber, sales volume in the third quarter were in line with prior year levels, while pricing was lower. During the quarter, the market price of lumber rose, and consistent with what we said back in August, we implemented price increases later in the quarter, which were largely not reflected in Q3 margins.

13:55 With these higher selling prices now established, our pricing and margin profile are better positioned as we move into Q4 and into 2027. And with that, I will turn the call over to Silvana, who will provide an update on our financial performance in Q3. Silvana?

14:12 Thank you, Eric, and good morning, everyone. Today, we reported third quarter sales of $979 million, a $21 million increase compared to the same period last year. This growth was led by utility products, which benefited from the continued volume gains in wood utility poles and a solid contribution from our cross-arm acquisition. These increases were partially offset by a shift in wood utility pole product mix and temporary downtime related to the ramp-up of the steel structure capacity expansion project in Candiac. Our railway type business demonstrated resilience as solid commercial volumes offset the lower Class 1 demand. The decrease in our Q3 railway type sales was largely explained by relatively higher TSO volumes.

15:06 And in residential lumber, demand remained steady, but sales were impacted by the lag in adjusting sales price to the rising lumber and fuel costs during the quarter. Year to date? Sales were $2,812,000,000 compared to $2,765,000,000 in the prior year period. This $47,000,000 increase was primarily driven by the accretive contribution from our 2025 acquisition and the continued strength in wood utility poles, where volumes were up 5% year to date. These positive contributors help mitigate a $20 million foreign exchange translation headwind, the decrease in the market price of lumber, and lower Class 1 railway ties activity.

15:58 In our wood utility business, solid volume expansion was partially moderated by lower spot pricing and product mix. Turning to utility products. Third quarter sales reached $513 million, up 7% compared to the same period last year. The increase was driven by a $33 million contribution from the CrossArm acquisition and a 3% volume growth in wood utility poles, achieved against a tougher comparison as wood pole volumes began accelerating in the second half of last year. Partially offsetting this growth was lower pricing in wood poles largely due to a product mix shift towards lower priced SYP poles and softer sales in steel structures.

16:48 Throughput at our Candiac steel structure facility continued to be impacted by the capacity expansion project. The expansion is nearly complete with only one machine to be received in December. As a result, we expect to see an operational improvement in the fourth quarter, with the facility now targeting to achieve its full run rate and double its capacity by the end of Q1 2027. In railway ties, the third quarter sales reached $208 million compared to $211 million in the prior year period. Similar to trends seen earlier this year, lower Class 1 demand was offset by continued solid activity in the non-Class 1 market.

17:38 The pricing variance in the quarter was almost entirely explained by a higher weighting of TSO volumes, representing over 10% of our Class 1 shipments during the quarter. While railway tie sales were down slightly in the quarter, margin dollars were essentially flat to last year and up year-to-date, resulting in an expansion of margin percentage. Beyond the impact of TSO, the profitability of railway ties continued to benefit from a better product mix as well as ongoing operational efficiency across the ties network. As we head into the fourth quarter, it is worth noting that activity is expected to decline, as certain Class 1 programs were substantially complete by the end of Q3 and we anticipate less commercial activity during a seasonally lower period.

18:33 Turning to residential lumber. Our third quarter sales were $196 million compared to $201 million in the third quarter last year. Demand remained solid, with volumes tracking in line with prior year levels. The $5 million decrease in sales was driven by pricing, reflecting a temporary timing lag in adjusting sales price. Turning to profitability. Adjusted EBITDA for the third quarter was $159 million or 16.2% of sales compared to $171 million or 17.8% last year. The margin decrease was driven primarily by higher fuel costs of approximately $10 million and the timing lag in residential lumber where we implemented price increases later in the quarter in response to rising market lumber costs. Excluding the impact of higher fuel costs and residential lumber pricing lags, our third quarter adjusted EBITDA margin would have exceeded 17%.

19:44 On a year-to-date basis, excluding the same items along with the site-specific costs noted in Q2, our margin would have been at the lower end of our target range. Within utility products, the margin impact from a higher weighting of SYP was more than offset by the solid volume gains in polls and the incremental earnings from Brooks. While SYP carries a lower average selling price, demand was especially solid. With over 60% of our treating capacity dedicated to SYP pulls, our extensive network uniquely equips us to capture this volume and service utilities across all the major species.

20:29 During the quarter, we recorded $32 million of asset impairment and restructuring costs, mainly as a result of actions we took to optimize our wood utility poles network and better position the business for long-term operational efficiency and improved profitability. Including the measures taken in Q2, total network optimization and restructuring charges for the first nine months of the year reached $64 million, of which $43 million represents non-cash asset impairments. Consistent with our non-GAAP definitions, these one-time charges were excluded from adjusted EBITDA. Looking ahead, we do not anticipate any further significant impairment and restructuring charges at this time.

21:19 Moving on to cash flows. During the quarter, we generated solid cash from operations of $158 million supported by favorable working capital performance. Inventory levels declined seasonally with a more pronounced reduction in railway ties reflecting a shift in sales mix towards a higher proportion of PSO volumes, consistent with the trend seen in Q2. We reduced our net debt by almost $200 million during the first nine months of the year, bringing leverage down to 2.4 times despite lower profitability. This debt reduction increased our available liquidity and we ended the quarter with $836 million on hand. Consistent with the capital allocation framework we outlined at our investor day, we announced the renewal of an RNCIB program, preserving flexibility to repurchase shares. We will continue to assess repurchases alongside our broader capital priorities, including our leverage position and investment in long-term growth.

22:29 Overall, our third quarter results underscore the resilience of our cash generation and the strength of our balance sheet. We remain focused on continuous improvement and efficiency initiatives that will strengthen the long-term performance of our infrastructure-focused businesses. Solid cash generation, stable leverage, and strong liquidity continue to provide us with the flexibility to invest in growth and pursue our strategic priorities. With that, I will turn it back to Eric for his concluding remarks.

23:02 Thank you, Silvana. We're pleased with the progress we continue to make to further position Stella Jones as a provider of critical infrastructure products. Our focus remains firmly on the areas within our control, serving our customers, pursuing continuous improvement initiatives to reinforce our operational excellence, and maintaining the disciplined approach to capital allocation that has supported our success over time. M&A has long been an important part of Stella Jones's growth, and we have a strong track record of expanding our business through disciplined acquisitions. The two acquisitions completed in 2025 build on this foundation, leveraging our existing capabilities and customer relationships to broaden our offering and increase our relevance to utility customers.

23:55 As we continue to deploy efforts to generate strong cash flow and reduce leverage, we expect to create additional capacity to pursue attractive M&A opportunities, which will remain an important part of our long-term growth strategy. We will remain focused on realizing these growth opportunities while strengthening the efficiency and profitability of the existing business. To conclude, our key messages are clear. Demand across our infrastructure markets remains healthy. We are building a more streamlined operating platform and our financial flexibility continues to strengthen, providing capacity to advance multiple avenues for growth, including disciplined M&A that support our long-term strategy.

24:42 Looking beyond 2026, the ongoing benefits of our performance optimization program combined with our ability to implement pricing pass-throughs and expand contributions for higher value products and scale our steel business are expected to enhance margins to support return to our targeted range of 17.5 to 18.5% over our three-year outlook period. We are proud of our team and the commitment, discipline and excellence in execution they continue to demonstrate across the business. Their relentless focus on serving our customers while continuously finding ways to improve how we operate and execute has been a driving force behind our success.

25:33 Their efforts have positioned us well to build on this momentum, capitalize on the opportunities ahead, and continue delivering sustainable value for our customers and shareholders. And with that, I will now open the line for questions. Thank you, Eric. As a reminder, to queue up for questions by phone, please press star one. We have your first question. It comes from James McGargle from RBC. Please go ahead.

26:09 Hey, I appreciate you having me on. Can you just provide a little bit more detail on the performance optimization program? So you quantified the $30 million per year, but can you just provide a little bit more detail on the specific initiatives that are going to make up that $30 million per year? And then as a quick follow up to that, you know, I guess is the right way to think about this now, you know, a 20% EBITDA margin in 2029. You know, if we kind of look at where consensus is for top line in 2029, that kind of implies greater than $800 million of EBITDA. Is that kind of like the informal target that we should be thinking about toward the end of the decade?

26:57 James, so I want to start with your first question and providing more details on our performance optimization program. But first, I would like you to help me understand your comment on the 20% margin in 2029.

27:15 Yeah, so, you know, $30 million per year implies roughly, you know, 1% improvement in margin. if we look at a 17.5% EBITDA margin, X all the issues you have in 26, and just add 1% onto that each year, that would imply, call it a 20, 21% EBITDA margin in 2029.

27:41 I see. Okay. Thank you for clarifying that. So essentially, let's clarify that point. Essentially, what we're communicating is it's a recurring saving every year. So it's like... If you think about 27, 28, 29 in this example, it would be 30, 30, 30 with a total of 100 after three year, but it's not 100 in the last year. I don't know if that helps you, if that clarifies the point for you.

28:11 Yes, that clarifies that question.

28:15 Now, let me go back to the first part of your question to give you a bit of context. Last year at the Investor Day, we introduced continuous improvement as well as creating an engineering and project management office within Stella Jones. That also combined with the fact that we completed our ERP implementation last year, putting Stellar Jones on one unique platform across the organization to help us better monitor and create KPIs and metrics. So if we think about where we're at today, that has led us to one of our key initiatives, which we initiated discussions earlier in the year, which is our network optimization for the ties and poles, which gives us that range of 20 to 27. So if you think about the 30 we talked about, you probably have a, call it a 25, 22, 20, 25 out of that.

29:09 and then other initiatives are coming along. The fact that we have a better system in place. So we definitely have continuous improvement activities going on at our facilities. For example, we did some exercises at some of our Thai treating facilities to increase throughput at our planning activities. We're also leveraging our system now to find efficiencies in our transportation logistics system as to how can we better move are products between facilities to finish good yards to customers in a more efficient and more cost-effective way. So these are a few examples of how we're putting together a lot of initiatives under this performance optimization program to convey the message today.

29:54 So we're sort of obviously branding it to give us a chance to talk about it and socialize it, but that's how we're thinking about it. Hopefully that's helpful for you.

30:03 Yeah, that is appreciated. And then just on utility pools, can you just talk about the shift to SYP? Is that something that you're viewing as temporary or is that something more structural as utilities look for potentially lower priced pool volumes? And after that, I can turn the line over. Thank you. Thank you, James.

30:25 Maybe two items to think about when you reflect about our sales mix. One is we did see this quarter certain yellow pine customers be more active so be you know have greater demand or great or greater growth demand than what we see in in our in our outer wood species so that would be a part of the explanation of the mix uh but we're also seeing certain of our customers preferring sudden yellow pine uh as you know it's it's a it's a good product it performs well but it is a bit more cost efficient for our customers to, if you think about their capital allocation and how they're thinking about their cost structures. So we have seen a shift of some customers preferring the Southern Yellow Pine versus other species.

31:18 Thank you.

31:19 My pleasure. Next question comes from Hamir Patel from CIBC Capital Markets. Please go ahead.

31:29 Hi, good morning. Eric, just wanted to follow up on that Southern Yellow Pine comment there. If volumes for woodpoles are still growing mid-single digits, what might that imply for the categories sales growth comps in Q4 and 27 as well, if you have that dynamic of negative mix maybe persisting for a couple quarters?

31:57 So I guess, thank you, Amir. If I think about the previous question, your question focuses on the same elements, but you're talking about our sales. So in there, what I would like to add when you talk about our sales metrics is the fact that On a year-over-year basis, we have been comparing ourselves to some pricing that has more pressure compared to, let's say, 26 to 25. That has subsided, so we have discussed seeing our spot market for Sun Yellow Pine. from a pricing perspective, be stable, I want to say, for the last three, four quarters. We've pretty much lapped ourselves now with the pricing pressures year over year. So when I think about Q4, I think that that pricing pressure will have gone away in the sense that we would benefit from the volume growth, assuming, of course, that we're going to hold that 5% volume growth for the balance of the year.

32:57 Okay, but that negative mix to Southern Yellow Pine, would that offset the volumes? Or it still sees some low single-digit growth?

33:09 It would still be mid-single-digit growth, because we need to maintain that 5% if you want.

33:15 Right, okay. That's helpful. And then with respect to the multi-year EBITDA margin range, the 17.5% to 18.5%, would you expect to be in that range for 2027?

33:30 So if I think about our performance optimization program and the cadence at which we're implementing some of these initiatives. And if you've noticed that the last slide sort of gave us a bit of the roadmap of how we get back to that range. I think it'll be a progression in 2027. I think we should be over the 17% mark, but it'll be a progression over time to get back in that range and probably a bit more towards towards 2028. The other factor I guess I want to make sure that I want to highlight is the fact that you know we've seen these fuel cost increases manifest themselves I want to say as of Q2 and they're ongoing year over year we have not seen them in Q1 so assuming Fuel costs, prices remain at the same level.

34:25 We should see similar headwinds in Q1. As you know very well, our business has the opportunity for pass-throughs and we have closets with our customers. but it's a slower moving target, right? It's an annual renewal. So what we'll get to adjust next year were, you know, cost pressures that we're seeing in 26, cost pressures from 27 will get adjusted in 28. So that also contributes to the cadence at which we could reach our target range percentage.

34:57 And Eric, with respect to the fuel costs, you highlighted it as sort of, you know, 10 million headwind in Q3. I realize there's these pass-throughs, but is there a portion of that that You know, you likely are not able to pass through just given the way the contracts are structured.

35:14 So obviously 75% of our total pole sales are under long-term contracts where we do have these pass-through clauses. And so we'll be able to have discussions with our customers next year. 25% is on the spot market, and that'll be definitely a market dynamic. Will it be 100% of it? We want to remain competitive in the market. It's going to depend on what our competitors do. I believe we'll be able to pass through a portion of those cost increases, but my sense today is most likely not 100% of that cost increase.

35:46 Okay, fair enough. And just the last question before I turn it over, with respect to the 100 million cost program, I think you sort of referenced over the next three years, is that sort of by the end of 2028, you would hit that run rate? And how much has already been captured through Q3?

36:04 So very little Q3, maybe a bit in Q4 as we restructured and making those adjustments and we're getting into the fourth quarter, which is lower volumes, especially for the railway type business. So I would not bake in any potential upside on margin for this year. Definitely next year we would have A good proportion out of that, if I want to think of a cadence under 100 million, could it be, making an example up, could it be a 25, 27 million next year, a 30, 32 the year after, hitting a 35 in the third year?

36:49 Something along those lines.

36:52 Great. Thanks, Tully Haddle. I'll turn it over. Thank you. Your next question comes from Michael Tufome from TD Cohen. Please go ahead.

37:08 Thank you. Good morning. Maybe, Eric, just to pick up on that last comment there about the cadence for the optimization-related savings, the figures you gave, 2025, 2027, for example, next year, 3032, and then 35, is that the amount you would expect to realize within the year or is that by the end of the year you're at that run rate?

37:34 Well, Obviously, we're rolling out the programs. We've done a lot of meaningful work on the railway tie part. Utility poles is being deployed in Q3 and Q4. I want to say we would hit that run rate in the back half of next year, Michael.

37:59 Okay so like not trying to get too too precise here but if you hit it in the back half the full year's benefit would be a little bit less than those figures you just quoted within each of those years is that the right way to think about it?

38:13 Could be slightly lower, yes. I think, you know, and as we wrap up, it'll pick up. But since we've done some meaningful work, the team has been very focused on this over the last five, six months. So I think it's a cautious assumption, I guess.

38:33 Okay, got it, thank you. And sorry, this maybe could have been the first question, but just to be 100% clear, these are pre-tax, this is $100 million of pre-tax savings that you're targeting?

38:45 Yes, it is.

38:47 Yeah, okay, thanks. I wanted to understand the Candiac expansion a little bit more. So it sounds like the benefit of the additional volumes has been significantly I guess that'd be the first question just to kind of confirm that and then maybe if you can sort of help us understand like what should we expect in terms of additional contribution from that expanded capacity in the fourth quarter and I think you said like fully up and running by the end of the first quarter so is Q2 the first quarter where you get the full benefit throughout the entire quarter?

39:38 all the equipment has been received and is in place on the shop floor of the facility except for one piece of equipment that is you know getting delayed and will receive uh early december so we you know the wrap-up has been slower than expected as we're installing machines and making sure there's proper uh interfaces with our i.t systems because the equipment is quite sophisticated and gathers a lot of data and metrics, which is actually very good for us to for KPIs and to monitor operational performance. But today, I want to say as of the end of September, we've been consistently ramping up volume with the existing equipment and training the employees on all shifts.

40:28 So to your question, the last piece of or part of your question, the last piece of equipment received in December will be installed in December, commissioned early in the year. So we would be at full cadence of operations by the end of Q1. That would be my understanding. But we'll be very well on our way by the end of this year. I do expect November, December to be at a much higher cadence. understanding that we're aiming 20 000 tons a year cadence would be will be will be very close to that full potential cadence but obviously this one piece of equipment is is preventing us at this point okay got it and then you had mentioned earlier you you talked about the the long-term commitment used to be cured for for some of that expanded capacity is where are you at now in terms of fully

41:20 Selling out that additional capacity at Candiac, how much is committed, how much is yet to be committed, and what's the line of sight on getting that commitment if it's not all committed already?

41:33 As I mentioned, we have one contract for 10 years that covers 30% of the capacity. We are fully booked for 2027, and 2028 is filling up fast. I want to think that... By the next time we talk, we'd be very close to having that capacity sold for 2028. We're quoting a lot of projects currently. A lot of interest from Canadian utilities. Our current federal government has gotten our utilities focused on by Canadian, which is definitely positively impacting us. Lots of interest for what we do. which fits very well with Fayetteville coming online because I do believe that at one point we're going to have to shift some U.S.

42:24 customer requirements back into Tennessee. We might be quoting them out of the Candiac facility, but it very well might get shifted back into Tennessee because we're seeing the Canadian customers have a very strong appetite for projects.

42:41 Okay, that's all very helpful. I will get back in the queue. Thank you.

42:45 Thank you, Michael. Your next question comes from Benoit Poirier from Desjardins. Please go ahead.

42:55 Yes, thank you very much and good morning everyone. Just to be sure on the performance optimization program, my understanding is that you kept the long-term EBITDA margin target unchanged at 17.5 and to 18.5. Would it be fair to say that it's not much incremental, it doesn't allow you to go over that targeted range with this 100 million initiatives over three years? Is it the right way to think about it?

43:34 For now, Benoit, it's the right way to think about it. With what we've put forward today, It's a good way to look at it. We will obviously be bringing back this topic over time to be able to talk more about it and we'll be maturing the project, but your assumption is right.

43:50 Okay, got it. And for utility, Paul, it looks like that the organic growth was down 1%. So could you break that down into steel structure this quarter? Volume and pricing for Woodpoll. I understand the comment that volume on the Woodpoll side is mid-single digits so far, year-to-date, but I would be looking for between those three, please.

44:21 Thank you, Bruno, for that. I'll let Silvana take that question.

44:25 So Benoit, I believe we had put a slide in the presentation where we break out the steel structures to show that the impact in the quarter was a $7 million reduction in sales. So it was actually a plus $1 million for our wood utility poles on an organic basis. And we had mentioned volumes were plus 3%. So pricing, because the mix was down about, let's call it like a little 2% or were just about that.

44:58 Oh, okay. That's a great caller. And with respect to the, let's say, the comment around spot pricing, how could it impact the upcoming contract renewals on the utility side? Is there a risk to see some lower pricing with the upcoming contract renewal or it's mostly stable in terms of spot pricing?

45:25 So for spot pricing, I do believe we've reached a normalized level at this point. So I don't think we were not expecting more pressures. So therefore, it helps our conversation with contract renewals with customers. Don't forget that for contract customers, there's a suite of value-added services from logistics and, you know, So, storage and finished good yards that are also part of the mix, which is highly value-added and appreciated by our customers. So, that helps support our views on pricing when we talk to our contract customers.

46:04 Okay, that's great. And with respect to the 10 million impact from fuel, how much is related to transportation cost versus preservative and which segment is more impacted? Any thoughts about whether you see an opportunity to pass them through to customers at maybe a faster rate?

46:29 So approximately, so we're estimating that we can about 75% is a pass-through, more or less, we believe. So most of our cost being freight or preservative is embedded in our inventory cost. So obviously it's an opportunity for us to have the conversation with the customer. So we believe that 75% will get pass-through.

46:59 And maybe if I could add Benoit, is that the majority of those costs we would say is preservative costs. And that's why to Eric's point, that's why we're able to pass them through very little of that amount is transport and all the rest, like the fuel that we need for our mobile equipment and for the rest. So just wanted to add that.

47:26 Okay, so it's mostly preservative and a bit of transportation. Yes. Okay, okay. And maybe last one for me, free cash flow expectation for Q4. Could you talk whether any expectation in terms of working capital movement for Q4 and any thoughts about the free cash flow going into the fourth quarter?

47:52 Yeah, so typically in Q4, we do get, you know, a cash inflow from our ARs. You know, obviously we collect a stronger Q3 sales versus the lower Q4 sales. So we typically see, you know, an over $100 million inflow in the ARs. In Q4, offset in part by some of the inventory bills. So we're still expecting our working capital to be sort of a net inflow of almost $100 million for the year. Year to date, we're at $50 million. I think we could expect another $50 million in the last quarter. And in terms of Your next question comes from Martin Pradier from Veritas. Please go ahead.

49:06 Thank you for taking my question. Just on Candiac, can you tell us a little bit about what was the volume this quarter and how do we think to the volume in Q4 and Q1, like in thousand tones or whatever metric you have?

49:28 So we've been, I want to say through Q2, Q3, we've been running, I want to say, Something around 80% of, or sorry, maybe 50 to 60% of the capacity. Obviously, there's disruption on the shop floor. And we'll be ramping up to 80% of capacity. So 80% of that 20,000 tons, if you want, by Q4, and then hitting the 100% cadence throughout Q1 of next year.

50:01 Okay. So I should expect, I guess, a 20% increase quarter over quarter in terms of the volumes.

50:07 Yes.

50:10 That gives us a good idea. In terms of Brook, the margins on that, have they been similar to the other margins or is there any difference?

50:25 Definitely comparable to our utility products division in terms of margin. Yes, they're definitely at that level. So helping our corporate average for sure.

50:35 Okay. And on the treatment, you said that this quarter the treatment was about 10%. How does that compare to other quarters? Because I don't have the context there.

50:49 Oh, well, Silvana, you want to explain the treating services, the impact of treating services? I think that's an interesting point.

50:55 Yeah. So, the treating services only for railway ties, just to make sure, you know, we're talking about the same, I guess. So, basically, yeah, so... we said anywhere going forward there's you know one particular customer that has indicated their preference for treated services only so you know we mentioned in Q2 last year that we're looking anywhere between seven and ten percent probably is the expected volumes of TSO that we expect when we look in the past That number was definitely below a 5% and even smaller probably. In the past, it's really more of a more recent sort of shift from the black tie to the TSO preference for one of the customers.

51:49 Okay, so that is what is impacting it because in the past it was close to 5%, let's say, and now it's close to 10%.

51:57 It would have been less, depending on the quarters. Perfect. Thank you very much. That's all my questions. Thank you, Martin. Your next question comes from Maxim Sychev from National Bank. Please go ahead. Hi, good morning.

52:20 Good morning, Maxim.

52:23 Most questions were already asked, but I just had one clarification around the covenant being bumped to four from 375. I was wondering, is that a function of, you know, telegraphing potential M&A, you know, NCIB, or is it just how the restructuring map is being treated by the banks just trying to get any color there? Thank you so much.

52:45 Yeah, well, I mean, essentially, as we went out for renewal of our credit facility, you know, for our profile of a company credit rating, that's what the market offers. But we're not signaling anything. It's not as if we came in with a request to increase it. You know, it was offered as part of a renewal. And obviously, we will take any flexibility we can. Not that we need that much indebtedness, to be honest, but that's essentially it. Silvana, I don't know if you want to. No, that's fine. Thank you.

53:15 Okay, that makes sense. Thank you so much.

53:17 Thank you, Maxim. Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Next question comes from Christian Ritt from Raymond James. Please go ahead.

53:40 Hey, Eric and Silvana. Just a quick question on capital allocation. I mean, your shares are trading even below levels where you've historically repurchased stock. Just trying to get a sense on how you're thinking about the buyback here versus M&A and organic investments. You just have substantial liquidity, obviously, on the balance sheet here.

53:58 Yes, thank you, Christian. So like we said, pretty much in terms of our strategy, obviously buybacks are a part of our capital allocation strategy, but are a function of the leverage ratio and the pipeline of M&A that we see. So currently our leverage is still sitting because of the low profitability. a little bit at the higher end of the range at 2.4. So, you know, given sort of the growth opportunities that we're working on, we think it's prudent at this point, you know, to renew the program, to have it available for us, but to keep that in mind before making any decisions on repurchasing.

54:42 That's great, Carla. Thank you. And just on inventory and working cap, given the network optimization and consolidation, is there any

54:51 uh potentially for structurally reducing your inventory requirements is there any cash that could come from that so definitely uh you know uh as as uh as there's cost savings uh we would hope that they're you know that translate directly into into cash savings also that is the expectation so that 100 million would over the three years up to 100 million would be you know cash cash savings In terms of working capital investments, I don't see any specific impact. And also, just even in terms of investments needed for these initiatives, there's nothing significant there to highlight.

55:40 Thanks so much for the call. I'll turn it over. Next question comes from Jonathan Goldman from Scotiabank. Please go ahead.

55:53 Hey, good morning, team, and thanks for taking my questions. Maybe just circling back to the mix of southern yellow pine, are you able to quantify how much of the mix of woodpoles that was this quarter relative to, I guess, last quarter or what a historical level would be? And do you think mix is stabilized or is it possible that we can actually increase the percentage of southern yellow pine?

56:16 Well, so one thought I shared earlier was part of the mix this quarter in particular was the demand from Southern Yellow Pine customers being more important, if you want, or the growth being more important than the other wood species. So that'll shift over time depending on customer projects and different... Investments and their requirement in certain profile of product. So that can definitely shift over time. As far as quantifying it, I don't want to ignore the first part of your question, but we don't necessarily disclose that level of detail, Jonathan.

57:03 Silvana, you want to add something? Okay.

57:06 So we mentioned, Jonathan, I believe in my part of the script that, you know, that SYP is an important part of our network and, you know, it represents about 60% of our poll capacity. So in terms of it, you know, increasing, I think it It would be a little bit, always possible, but I think at a 60%, I think we've got a good share of that.

57:33 Okay, that makes sense. On the point about some clusters growing faster and they use Southern Yellow Pine, on the ones that may have used it as an alternative to be a little more cost effective, is there a structural advantage of Southern Yellow Pine versus your typical species like Douglas Fir that makes it a better application for utility poles or are they kind of fungible?

57:57 Not really. Each wood species and its each size and class has a predetermined strength. So it really comes down to the engineers at our customers that are designing the lines that select the products they need. There might be some challenges for transmission type products because Sudden Yellow Pine would not be a very common species for transmission. It would typically be Douglas Fir or Western Red Cedar that grow on the west coast of Canada in the Pacific Northwest in the U.S. But other than that, it's a very good product. I mean, we sell it across North America. Some Canadian utilities actually use it.

58:44 So it's readily available and we've got a very deep network there to be able to support demand.

58:51 Okay, got it. And Silvana, could you repeat the comments you made in the prepared remarks about the margins? They would be at the low end if it weren't for a couple of issues in the quarter. And could you break out the issues, the impact of that delta? How much was the inflation or the inefficiencies and the relative impact on the delta to what you said previously?

59:11 So to clarify, so for the quarter, we called out the fuel impact and the residential lumber pricing lag. And we said without those impacts, we would be a little bit over 17% year to date. If we take those two items, but also include the site-specific items that we noted in Q2, There, on a year-to-date basis, we would have been at the lower end of our range. So, yeah, and we, other than what we broke out, I guess, in the presentation slides, that gives you perhaps an indication of impacts of, you know, I did not break out and descript any further those elements.

1:00:00 And would those comments be applicable to the quarter as well as year-to-date? in terms of relative impact.

1:00:07 So for the quarter, the relative impact of fuel costs is definitely the bigger piece with the $10 million impact that we noted.

1:00:22 Okay. Thanks for the call. I'll get back to you. Thank you. Your next question comes from Michael Tufong from TD Cohen. Please go ahead.

1:00:34 Thank you for taking the follow-up, but just two things here. So one thing, just picking up a little bit on the last line of questioning about the SYP and the mixed impact in the quarter, like I understand that you don't think SYP as a proportion of the total sales necessarily gets a lot larger from here, but is that still a headwind in the fourth quarter, just as far as the mixed impact and the pricing and then what that means for pricing in the fourth quarter for utility products?

1:01:03 So perhaps maybe just to keep in mind the seasonality impact, right? I mean, SYP basically is deliveries could be done all year long versus the other species, which are impacted more by weather. So just that, just typically Q4 would be a higher weighting of SYP just because of that, of the period of the seasonality of Q4.

1:01:32 okay so like maybe just leaving aside Candiac for a second and the sort of the the fact you probably get a bit more uh volume coming from the expansion there in the fourth quarter versus the third but but outside of that like is the dynamic in the fourth quarter kind of similar to what we saw in the third quarter for utility products as far as like some volume growth on the wood pool side but you've got this negative mix issue hurting pricing on the Woodpoles side. Does that look similar in the fourth quarter?

1:02:00 Yeah, I would agree with that, Michael.

1:02:04 Okay, thank you. And then last one is just on railway ties. It sounds like you think the TSO sort of contribution here in that 10-ish percent range is maybe kind of holds in at that level and doesn't necessarily change too much. So how do we think about organic growth in this Segment as we get into next year, because you're not going to necessarily, assuming that's true, but you're not going to necessarily have any kind of a greater impact from that perspective. You've got these renewals you've talked about. So should we be thinking about organic growth being positive next year in in ties or is it like how do we think about it? I guess that's the question for next year, 2027 organic growth.

1:02:49 Yeah, great. So I want to give you a bit of context there, Michael, because there's a few things to say about that topic. We, you know, we started the year with four class one contract renewals. And the teams set a strategy, you know, which was based around three things, pricing discipline, you know, focusing on margin improvement and obtaining greater volumes. and early in the year we had some difficult decisions to make because we wanted to stay disciplined on pricing and we did see some volume be at risk. For one particular customer. Since then, for this customer, we are recapturing some of the volume, which actually is looking very positive for 2027.

1:03:42 We shared last quarter in Q2 that we had renegotiated a contract with increased volumes going into next year. And with the remaining contracts, we're really currently looking at securing the base of volume we have, but increasing our volumes with regards to bridge structures and crossings and pre-plated products. We've made capital investments and have obtained long-term commitments from our customers on those products. So when I think about our real product category, I do believe that the organic growth next year could be slightly higher than that low single digit, as you take into account everything I just explained.

1:04:34 That's very helpful. Thank you.

1:04:36 Thank you. Your next question comes from Benoit Poirier from Dijardin. Please go ahead.

1:04:46 Yeah, my question was around 2027, so great color for railway ties, but I would be looking for some color around what we could expect from the utilities, especially on the Woodpole side in terms of volume for 2027. I know it's mid single digit year to date, but given what you see or comments made by the utilities around the interest rate being more prudent, so I would just be curious to see what you would expect on the Woodpulse side in terms of volume for next year.

1:05:22 Thank you. Thank you, Benoit. We're still thinking of the 5% or the mid-single-digit target is still good. You bring up a good point. We had in our prepared remarks, there are some potential headwinds for our customers. We also understand a lot of our customers have done a lot of work in the last 18 months ensuring availability of capital. A lot of our customers are also in a situation where it's important to do these investments now in order to be ready for future energy demand and future grid resiliency. So I think our customers will power through going forward and I still expect that mid single digit growth in wood utility poles next year.

1:06:08 Okay, thank you very much again. Thank you Benoit. Your next question comes from Hamir Patel from CIBC Capital Markets. Please go ahead.

1:06:21 I just want to follow up a bit more on that volume question. So, I mean, Eric, if you're getting 5% wood pole volume growth, it sounds like prices have stabilized. Maybe prices hold steady. What sort of contribution from steel year over year would you expect in 27? Sure.

1:06:40 So in 2027, we expect that as it will get ramped up, as we said at the end of Q1, so probably be at 90, 95% of capacity. And we always mentioned to the market that, you know, doubling the capacity would double the sales. So, you know, you know if you look at sort of that 55 million that we had put out when we originally bought the uh uh lock well you know so um you know you could kind of do the math and you know double that capacity and double those sales based on okay sorry okay great no thanks uh that's helpful so then and and Eric just to clarify on the on the railway ties um you know you mentioned some of the other uh business that you've gained there would that actually show up in the

1:07:28 industrial products segment versus the railway tie segment? I think you mentioned some.

1:07:33 Yes, so anything, yes, the bridge timbers and the crossings show up in the industrial products. The pre-plated ties and switch-tied timbers actually show up in the railway tie reporting segment, reporting group.

1:07:50 Okay, so based on that, when you think about your actual categories you have for railway ties, would you, And then given that you have a comp of perhaps more, at least year over year, more TSO, would railway tie sales actually decline next year, even if maybe even a dollar is holding steady and then the growth is actually on the industrial products category?

1:08:14 Yeah, no, I don't see that. I don't see TSO having that effect on the sales to create growth. and many others. We still have a lot of volume gains with customers that take a finish good at black dye, as we commonly call it, so quite optimistic that we'll see some growth in that tight grouping as well.

1:08:44 Just a last question. Silvana, when you think about this $100 million cost improvement program, what sort of incremental capex on top of You know, maybe your regular maintenance, are you going to be spending to deliver it?

1:08:58 Yes, most of the initiatives put forward will not require any additional capex. Part of the polls and network optimization that we already put forward, there's actually some cost avoidance. There are some capex that will not be needed going forward given some of the facilities that we're mothballing or closing.

1:09:28 Okay, perfect. That's all I have. I'll turn it over. Thanks. Thanks, Amir. We have no further questions in the queue. Thank you.

1:09:40 Thank you, Vincent. And thank you, everyone, for joining us today. Look forward to updating you when we release our fourth quarter results and year-end results in February. Until then, stay safe and have a happy upcoming holiday season. Thank you so much. Ladies and gentlemen this concludes today's call. Thank you for participating. You may now disconnect your lines.