Stella-Jones Inc.
TSX : SJ

Stella-Jones Inc.

October 31, 2006 16:06 ET

Stella-Jones Announces Substantial Q3 Sales and Earnings Growth

Q3 sales increase 59% to $68.1 million Net earnings more than double to $7.2 million Sales continue to grow organically and through acquisition

MONTREAL, QUEBEC--(CCNMatthews - Oct. 31, 2006) - Stella-Jones Inc.(TSX:SJ) today announced strong financial results for its third quarter ended September 30, 2006. The Company reported significant gains in sales and net earnings resulting from sustained growth in its core utility pole and railway tie categories as well as the contribution of its newly-acquired facility in Western Canada.

Sales in the third quarter reached $68.1 million, an increase of $25.3 million, or 59.1%, over the $42.8 million reported for the same period in 2005. Net earnings were $7.2 million, or $0.60 per share, more than double the $3.5 million, or $0.34 per share reported one year ago. Sales and earnings increases for the year-to-date have been equally strong. Sales grew 45.5% in the first nine months of fiscal 2006 to reach $174.3 million, from the $119.8 million recorded in the same period one year ago. Net earnings for the nine-month period also substantially surpassed the corresponding period in 2005, rising from $9.2 million, or $0.89 per share, to $17.2 million, or $1.52 per share.

Growth strategy driving top and bottom line results

"The healthy results we have achieved in the third quarter are a validation of our strategy to grow the Company both organically and through acquisition while focussing on operational efficiencies," said Brian McManus, President and CEO of Stella-Jones. "As expected, our new Alberta facility made a substantial contribution to our top and bottom line performance and we look forward to even stronger results as we fully integrate this plant. The continued strength in our key markets, particularly utility poles and railway ties in Canada and the United States, is an encouraging indication of our organic growth potential."

The significant sales increase during the quarter was the result of gains in three of the Company's four product categories, the exception being industrial lumber. Utility pole sales benefited significantly from the addition of the Carseland, Alberta facility, gaining 57.4% to reach $30.7 million, compared to $19.5 million in the third quarter of 2005. Third quarter sales of railway ties totalled $23.8 million, a 63.0% improvement over the $14.6 million recorded during the same quarter in 2005. Consumer lumber sales also increased significantly, rising to $9.1 million from $2.7 million in the same period last year, with the Carseland facility responsible for most of the increase in this category. Industrial lumber sales declined to $4.6 million in the third quarter from $6.0 million in same period in 2005. All product categories are ahead of last year on a year-to-date basis.

Gross margins on product sales also improved, both in dollar terms and as a percentage of sales. Third quarter gross margins grew to $15.6 million, or 22.9% of sales, up from $9.3 million, or 21.6% of sales, in the same period in 2005. For the nine-month period ended September 30, 2006, gross margins now total $39.0 million, representing 22.4% of sales. This compares to $24.2 million, or 20.2% of sales for the same nine-month period in 2005.

"Our gross margin improvements are a reflection of the operational initiatives we have implemented to optimize profitability coupled with the effect of increased prices and a better product mix," said George Labelle, Senior Vice-President and Chief Financial Officer. "We are pleased with our performance in the third quarter, especially given that we have not yet completed the integration of our cost-saving policies at the new Carseland facility. We expect to further improve our margins and bottom line results going forward at this location."

Selling and administrative expenses for the third quarter of 2006 were $3.1 million, up from the $2.4 million reported in the prior year. For the nine-month period, these expenses increased to $8.3 million from the $6.6 million reported in the corresponding period in 2005. The increases in both the quarter and nine-month period are due to additional selling expenses at the Bangor, Wisconsin facility acquired in August of 2005 and the Carseland facility acquired in July of this year, as well as increased provisions under the Company's employee profit sharing plan.

Q3 Event

- On June 30, 2006, the Company announced that it had acquired, through a wholly-owned subsidiary, substantially all of the assets and operations of Bell Pole Company, a Canadian manufacturer of wood utility poles based in Western Canada. Bell Pole Company was also involved in the remanufacturing and treating of dimensional lumber in Alberta. The acquisition was effective on July 1, 2006.

Outlook

"The positive momentum we have generated over the last several quarters is propelling Stella-Jones to another record year," said Mr. McManus. "We continue to be enthusiastic about the continued strength across all our product categories, particularly in our core utility pole and railway tie markets. The transition of the Carseland facility is proceeding smoothly and we are optimistic that we can further leverage our market leadership in the Canadian wood pole market. We anticipate this product category will continue to be our largest in the fourth quarter. We are equally encouraged by the sustained demand in our railway tie category, which we expect will continue to benefit from the overall strength of the railroad industry."

"After a slow start to the year, consumer lumber sales in Eastern Canada began to pick up in the third quarter. We expect this trend will continue through the end of the year. The consumer lumber category will also continue to generate increased volume in Western Canada due to the addition of our new facility in Carseland. Despite sales declines in industrial lumber during the last two quarters following a strong start to the year, we expect this to remain a solid product category given our position as a proven supplier in this market. In addition, strategic acquisitions will continue to be an integral part of our growth plan and we will continue to pursue opportunities that meet our stringent investment criteria," concluded Mr. McManus.

ABOUT STELLA-JONES

Stella-Jones Inc. (TSX:SJ) is a leading North American producer and marketer of industrial treated wood products, specializing in the production of pressure treated railway ties as well as wood poles supplied to electrical utilities and telecommunications companies. Other principal products include marine and foundation pilings, construction timbers, highway guardrail posts and treated wood for bridges. The Company also provides treated consumer lumber products and customized services to lumber retailers and wholesalers for outdoor applications. The Company's common shares are listed on the Toronto Stock Exchange.

Visit our website: www.stella-jones.com

Except for historical information provided herein, this press release may contain information and statements of a forward-looking nature concerning the future performance of the Company. These statements are based on suppositions and uncertainties as well as on management's best possible evaluation of future events. Such factors may include, without excluding other considerations, fluctuations in quarterly results, evolution in customer demand for the Company's products and services, the impact of price pressures exerted by competitors, and general market trends or economic changes. As a result, readers are advised that actual results may differ from expected results.

NOTICE

The interim unaudited consolidated financial statements of Stella-Jones Inc. for the third quarter ended September 30, 2006 have not been reviewed by the Company's external auditors.


(Signed)

George Labelle, Senior Vice-President and Chief Financial Officer



CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2006 2005
($) ($)
as at September 30, 2006 unaudited
and December 31, 2005
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ASSETS

CURRENT ASSETS
Accounts receivable 41,714,113 21,059,721
Inventories 100,092,426 77,316,420
Prepaid expenses 2,046,776 1,611,755
Future income taxes 570,000 550,000
--------------------------------------------------------------------
144,423,315 100,537,896

PROPERTY, PLANT AND EQUIPMENT 59,412,005 37,003,106
OTHER ASSETS 297,084 ---
NOTE RECEIVABLE 279,425 ---
FUTURE INCOME TAXES 375,000 350,000
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204,786,829 137,891,002
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LIABILITIES

CURRENT LIABILITIES
Bank indebtedness 38,800,938 21,311,735
Accounts payable and accrued liabilities 21,785,771 17,452,438
Income taxes payable 2,698,768 2,227,785
Current portion of asset retirement
obligations 674,772 ---
Current portion of long-term debt 3,693,003 4,061,370
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67,653,252 45,053,328

LONG-TERM DEBT 28,979,308 21,139,874
ASSET RETIREMENT OBLIGATIONS 1,498,726 ---
FUTURE INCOME TAXES 5,349,000 5,089,000
EMPLOYEE FUTURE BENEFITS 1,109,896 978,649
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104,590,182 72,260,851
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SHAREHOLDERS' EQUITY

CAPITAL STOCK 44,708,776 26,228,300
CUMULATIVE TRANSLATION ADJUSTMENT (622,832) (201,646)
RETAINED EARNINGS 56,110,703 39,603,497
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100,196,647 65,630,151
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204,786,829 137,891,002
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See accompanying Notes to these interim consolidated financial
statements

CONSOLIDATED STATEMENTS OF EARNINGS
unaudited

three months ended nine months ended
Sept. 30, Sept. 30,
2006 2005 2006 2005
($) ($) ($) ($)
--------------------------------------------------------------------
SALES 68,072,607 42,845,299 174,340,725 119,765,278
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EXPENSES
Cost of sales 52,505,916 33,585,407 135,344,816 95,546,509
Selling and
administrative 3,112,421 2,389,127 8,296,633 6,639,651
Foreign exchange
loss
(gain) (455,371) 206,027 (430,768) 151,198
Amortization of
property,
plant and equipment 871,754 846,421 2,457,886 2,403,872
Gain on disposal
of property,
plant and
equipment --- --- (26,783) ---
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56,034,720 37,026,982 145,641,784 104,741,230
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OPERATING EARNINGS 12,037,887 5,818,317 28,698,941 15,024,048
INTEREST ON
LONG-TERM DEBT 622,588 264,961 1,506,378 680,160
OTHER INTEREST 437,717 244,271 1,069,740 623,274
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EARNINGS BEFORE
INCOME TAXES 10,977,582 5,309,085 26,122,823 13,720,614
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PROVISION FOR
INCOME TAXES 3,728,283 1,788,311 8,960,812 4,564,311
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NET EARNINGS
FOR THE PERIOD 7,249,299 3,520,774 17,162,011 9,156,303
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NET EARNINGS
PER COMMON
SHARE 0.60 0.34 1.52 0.89

DILUTED NET
EARNINGS PER
COMMON SHARE 0.58 0.32 1.46 0.86
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See accompanying Notes to these interim consolidated financial
statements

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
unaudited

2006 2005
for the nine months ended
Sept. 30, 2006 and 2005 ($) ($)
--------------------------------------------------------------------

BALANCE - BEGINNING OF YEAR 39,603,497 28,330,148
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Net earnings for the period 17,162,011 9,156,303
Dividends on common shares (654,805) (512,118)
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BALANCE - END OF PERIOD 56,110,703 36,974,333
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See accompanying Notes to these interim consolidated financial
statements


CONSOLIDATED STATEMENTS OF CASH FLOWS
unaudited

three months nine months
ended Sept. 30, ended Sept.30,
2006 2005 2006 2005
($) ($) ($) ($)
--------------------------------------------------------------------
CASH FLOWS FROM
OPERATING
ACTIVITIES

Net earnings
for the
period 7,249,299 3,520,774 17,162,011 9,156,303
Adjustments for

Amortization
of
property,
plant and
equipment 1,056,925 846,421 2,643,057 2,403,872
Loss (gain)
on
disposal
of
property,
plant and
equipment --- 2,961 (26,783) 32,081
Employee
future
benefits 43,749 30,000 131,247 105,000
Stock-based
compensation 13,455 4,350 40,361 13,000
Future
income taxes 67,000 (9,000) 215,000 (146,000)
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8,430,428 4,395,506 20,164,893 11,564,256
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CHANGE IN
NON-CASH
WORKING
CAPITAL
COMPONENTS
Decrease
(increase) in
Accounts
receivable 575,175 2,315,951 (13,613,232) (9,239,324)
Inventories 1,062,104 (5,209,271) 3,451,605 (6,244,032)
Prepaid
expenses 895,548 273,962 (68,723) 476,200
Note receivable 1,675 --- (282,750) ---

Increase
(decrease)
in
Accounts
payable
and accrued
liabilities 2,357,972 (457,591) 2,908,206 4,879,416
Asset
retirement
obligations 2,173,498 --- 2,173,498 ---
Income taxes 2,151,582 507,274 482,717 (240,503)
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9,217,554 (2,569,675) (4,948,679) (10,368,243)
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17,647,982 1,825,831 15,216,214 1,196,013
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FINANCING
ACTIVITIES

Increase
(decrease)
in
bank
indebtedness 464,660 8,070,095 17,795,365 13,958,649
Increase in
long-term
debt 10,301,855 6,150,995 13,001,855 6,165,995
Repayment of
long-term
debt (861,073) (868,253) (5,398,494) (2,801,309)
Dividends on
common
shares --- --- (654,805) (512,118)
Proceeds from
issuance
of
common
shares 18,308,192 5,057,028 18,440,016 5,148,003
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28,213,634 18,409,865 43,183,937 21,959,220
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INVESTING
ACTIVITIES

Business
acqui-
sition (54,931,944)(16,960,441) (54,931,944) (16,960,441)
Purchase
of
property,
plant
and
equipment (932,382)(2,509,532) (3,521,923) (5,529,069)
Purchase of
note
receivable --- (872,025) --- (872,025)
Proceeds
from
disposal
of
property,
plant and
equipment --- 106,302 49,230 206,302
Restricted
cash 10,000,000 --- --- ---
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(45,864,326)(20,235,696) (58,404,637) (23,155,233)
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EFFECT OF
TRANSLATION
ADJUSTMENT 2,710 --- 4,486 ---
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NET CHANGE IN
CASH
AND
CASH
EQUIVALENTS
DURING THE
PERIOD --- --- --- ----
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CASH AND CASH
EQUIVALENTS
BEGINNING AND
END OF
THE PERIOD --- --- --- ---
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SUPPLEMENTAL
DISCLOSURE
Interest paid 956,381 518,963 2,400,811 1,203,242
Income taxes
paid 1,530,064 976,364 8,248,502 4,629,641
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--------------------------------------------------------------------

See accompanying Notes to these interim consolidated financial
statements


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

unaudited

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

These unaudited interim consolidated financial statements have been prepared following the same accounting policies as the December 31, 2005 audited consolidated financial statements adjusted for the following changes resulting from the business acquisition described in Note 3 below. These unaudited interim consolidated financial statements and notes should be read in conjunction with the Company's latest annual consolidated financial statements.

Principles of consolidation

These unaudited interim consolidated financial statements include the accounts of the Company and its subsidiaries, Guelph Utility Pole Company Ltd., I.P.B.-W.P.I. International Inc., Stella-Jones Corporation (since August 31, 2005) and since July 1, 2006, the consolidated accounts of Bell Pole Canada Inc. ("Bell Pole") - see Note 3 below, using the purchase method. The consolidated accounts of Bell Pole include the accounts of Bell Pole's 50% interest in Kanaka Creek Pole Company Limited, a joint venture which is accounted for under the proportionate consolidation method of accounting.

Property, plant and equipment

Roads related to timberlands and cutting rights acquired in the Bell Pole acquisition are being amortized on the basis of timber cut.

Timberlands and cutting rights acquired in the Bell Pole acquisition are being amortized on the basis of timber cut.

Asset retirement obligations

(i) Reforestation obligations:

The British Columbia Forest Act requires the industry to assume the costs of reforestation on certain harvest licences. Accordingly, the estimated present value of the cost of reforestation is recorded as timber is harvested. Reforestation costs are included in the cost of inventory and related cost of goods sold.

(ii) Site remediation obligations:

Site remediation obligations relate to the discounted present value of estimated future expenditures associated with the legal obligations of restoring the environmental integrity of certain properties acquired in the Bell Pole Company acquisition. The Company reviews estimates of future site remediation expenditures on an ongoing basis and records any revisions, along with accretion costs on existing obligations, in other expenses.


NOTE 2 -- EMPLOYEE FUTURE BENEFITS

For the three months ended September 30, 2006, the benefit cost recognized for employee future benefits was $47,790 (2005 - $34,546). For the nine months ended September 30, 2006, the benefit cost recognized for employee future benefits was $147,038 (2005 - $117,961).

NOTE 3-- BUSINESS ACQUISITION

Effective July 1, 2006, the Company, through a wholly-owned subsidiary, acquired substantially all of the assets and operations of Bell Pole Company, a Canadian manufacturer of wood utility poles based in western Canada. Bell Pole Company was also involved in the remanufacturing and treating of dimensional lumber in Alberta. Assets acquired include a treating plant located in Carseland, Alberta, several peeling facilities located throughout the province of British Columbia, as well as all inventories and accounts receivable. Assets acquired also include substantial cutting rights in British Columbia and Alberta.

The acquisition has been accounted for using the purchase method and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on management's estimate of their fair value as of the acquisition date. The following fair value allocation is preliminary and is based on management's best estimates and information known at the time of preparing these interim unaudited consolidated financial statements. Subsequent revisions to this preliminary fair value allocation, if any, are expected to be accounted for by December 31, 2006. The results of operations of Bell Pole have been included in the consolidated financial statements from the acquisition date.



The following is a summary of the net assets acquired at fair values;

Assets acquired $
----------
Current assets 34,455,814
Property, plant and
equipment 21,706,657
Other assets 297,089
-------------------------------------------------------------
56,459,560

Liabilities assumed

Current liabilities 17,138,491
Long-term liabilities 1,436,560
-------------------------------------------------------------
18,575,051

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37,884,509
Consideration

Cash, including transaction costs of $2,500,967 37,884,509
-------------------------------------------------------------


Financing for the transaction was provided by the private placement of 1,060,000 subscription receipts issued on May 2, 2006 for a total consideration of $18.0 million. Following the closing of the acquisition, the subscription receipts were exchanged into common shares of the Company, on a one-for-one basis. The remainder of the purchase price was financed by the assumption of liabilities totalling $18.6 million, a $10.0 million debenture to the Fonds de solidarite des travailleurs du Quebec (F.T.Q.), as well as additional debt funding under existing and new bank facilities.

NOTE 4-- SHARE INFORMATION

As at October 30, 2006, the capital stock issued and outstanding consisted of 12,295,117 common shares (10,880,840 as at December 31, 2005). On July 1, 2006, the Company exchanged 1,060,000 previously issued subscription receipts for an equal number of common shares to partially fund the business acquisition described in Note 3 above. See Note 6 below.

NOTE 5-- SEASONALITY

The Company's domestic operations follow a seasonal pattern, with pole, tie and industrial lumber shipments strongest in the second and third quarters to provide industrial end users with product for their summer maintenance projects. Consumer lumber treatment sales also follow the same seasonal pattern. Inventory levels of railway ties and utility poles are typically highest in the first quarter in advance of the summer shipping season. The first and fourth quarters usually generate similar sales.

NOTE 6-- SUBSEQUENT EVENT

On October 18, 2006, the Fonds de solidarite des travailleurs du Quebec (F.T.Q.), exercised all of their outstanding warrants allowing them to subscribe to 190,000 common shares of the Company at an exercise price of $4.10 per share. The Company has no other warrants outstanding.

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