Stella-Jones Inc.
TSX : SJ

Stella-Jones Inc.

October 26, 2005 17:09 ET

Stella-Jones Increases Earnings by 79% in Q3

WESTMOUNT, QUEBEC--(CCNMatthews - Oct. 26, 2005) - Stella-Jones Inc. (TSX:SJ)



- Sales grow 20% to $42.8 million
- Gross margins improve to 21.6% of sales
- Net earnings increase 79% to $3.5 million, or $0.34 per share
- Sustained growth in core market segments


Stella-Jones Inc. today announced strong third quarter results for the period ended September 30, 2005. The Company posted solid gains in revenue, gross margins and net earnings as a result of robust sales in the utility pole and railway tie markets, revenue from the Company's recently-acquired railway tie treating facility in Bangor, Wisconsin and operational initiatives to improve efficiencies.

Sales for the third quarter ended September 30, 2005 totaled $42.8 million, an increase of $7.1 million, or 19.9%, over last year's third quarter sales of $35.7 million. Net earnings were $3.5 million, or $0.34 per share, compared to $2.0 million, or $0.20 per share, for the corresponding period last year. Nine-month increases have been equally strong, with sales growing 16.9% to $119.8 million from $102.5 million and net earnings increasing to $9.2 million, or $0.89 per share, from $6.0 million, or $0.60 per share, compared to the first nine months of 2004. Results for the quarter and nine months ended September 30, 2005 include one month of revenue from the Company's recently acquired plant in Wisconsin.

Continued buoyancy in the domestic pole and railway ties markets, along with growth in industrial treated wood, were responsible for a majority of the third quarter sales increase. Sales of all other product categories, with the exception of overseas export poles and consumer lumber, are also ahead of the corresponding period in 2004. The reduction in overseas export pole sales is in line with the Company's strategic decision to concentrate on servicing its higher-margined North American markets. The decline in consumer lumber sales is partly attributable to the slow start of the summer renovation period in Eastern Canada and delays in the openings of new retail outlets.

"Our performance in the third quarter maintains the momentum of the last few quarters and clearly demonstrates the strong growth potential of our core industrial markets," said Brian McManus, President and CEO of Stella-Jones Inc. "The sustained level of opportunities arising from the railway and utilities sectors, our strong sales backlog and the efficient cost structure of our plant network bode well for our continued growth going forward."

Gross margin increased in the third quarter to 21.6% of sales, up from 17.7% in the same period last year. For the first nine months of the year, gross margins represented 20.2% of sales, versus 18.2% for the same period in 2004.

"The operational efficiencies we have achieved by containing our manufacturing overhead costs and maximizing plant specialization have contributed significantly to our improved gross margins," said George Labelle, Senior Vice-President and Chief Financial Officer. "In addition, we are benefiting from higher average selling prices and economies of scale related to the increased overall volume in our core markets."

Selling and administrative expenses increased by $600,000 in the third quarter to $2.4 million compared to the same quarter in 2004. Total selling and administrative expenses now stand at $6.6 million for the year-to-date, up from $5.5 million in the corresponding nine-month period last year.

"The increase in expenses, both for the quarter and the year-to-date, are related to the additional provision for the employee profit-sharing pool, selling and administrative expenses related to the new Bangor plant and one-time expenses related to the final year of Environment Canada's TRD compliance program," explained Mr. Labelle.

As previously announced, in 2005 the Company is absorbing a higher amount of environmental expenses related to the audits of seven Stella-Jones treating plants by Environment Canada. In 2000, baseline assessments were carried out on all wood preserving plants in Canada by environmental consultants on behalf of Environment Canada. The Company submitted plans of action to respond to all recommendations.



Q3 HIGHLIGHTS

- On August 31, Stella-Jones announced it had completed the
acquisition of Webster Wood Preserving Company, a privately held
producer and marketer of pressure-treated wood railway ties based
in Bangor, Wisconsin, USA. This acquisition is accretive to Stella-
Jones' earnings, establishes the Company's first manufacturing
facility in the United States and provides greater access to the
U.S. treated crosstie market.
- On August 9, Stella-Jones announced that a semi-annual dividend of
$0.05 per share has been declared on the outstanding Common Shares
of the Corporation, payable on October 14, 2005 to shareholders of
record at the close of business on September 9, 2005.
- On July 29, the Company announced it had entered into a
subscription agreement with its majority shareholder, Stella Jones
International S.A., for a proposed private equity placement
consisting of the issuance of 555,556 common shares of the Company
at a price of $9.00 per common share. Proceeds of the private
placement, approximately $5 million CDN, were utilized to partially
finance the Webster acquisition.


OUTLOOK

"We are encouraged by the sustained growth in the domestic utility poles, railway ties and industrial treated wood sectors, which are our core markets," said Mr. McManus. "We have a strong base of contracted sales booked for next year and we feel that our plant network and efficient cost structure will enable us to compete for additional business across these key market sectors. The integration of our new railway tie treating plant in Wisconsin is proceeding smoothly, and even at this early stage, we see further opportunities to profitably grow their U.S. market share. We also expect growth in our consumer lumber treating services as the home renovation market expands and we begin to service new retail outlets from our Delson, Quebec and Guelph, Ontario plants. In addition, synergistic acquisitions in our core businesses continue to be a cornerstone of our growth strategy and we will actively consider additional acquisitions that meet our 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 specializes in providing customized services to lumber companies and wholesalers for the treatment of consumer lumber products 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, 2005 have not
been reviewed by the Company's external auditors.

(Signed)

George Labelle
Senior Vice-President and Chief Financial Officer



CONSOLIDATED BALANCE SHEETS

as at September 30, 2005 September 30, December 31,
and December 31, 2004 2005 2004
($) ($)
unaudited
--------------------------------------------------------------------
--------------------------------------------------------------------
ASSETS


CURRENT ASSETS
Accounts receivable 25,151,676 13,205,649
Inventories 72,567,627 52,769,898
Prepaid expenses 389,831 857,582
Future income taxes 517,000 522,000
--------------------------------------------------------------------
98,626,134 67,355,129
PROPERTY, PLANT AND EQUIPMENT 36,534,357 30,543,495
NOTE RECEIVABLE 872,025 ---
FUTURE INCOME TAXES 326,000 301,000
--------------------------------------------------------------------

136,358,516 98,199,624
--------------------------------------------------------------------
--------------------------------------------------------------------

LIABILITIES

CURRENT LIABILITIES
Bank indebtedness 25,379,409 11,420,760
Accounts payable and accrued liabilities 19,697,262 13,878,043
Income taxes 1,534,414 1,774,917
Current portion of long-term debt 4,717,786 3,699,048
--------------------------------------------------------------------
51,328,871 30,772,768

LONG-TERM DEBT 16,304,038 12,485,436
FUTURE INCOME TAXES 4,658,000 4,784,000
EMPLOYEE FUTURE BENEFITS 977,380 872,380
--------------------------------------------------------------------
73,268,289 48,914,584
--------------------------------------------------------------------
--------------------------------------------------------------------

SHAREHOLDERS' EQUITY
CAPITAL STOCK 26,115,894 20,954,892
RETAINED EARNINGS 36,974,333 28,330,148
--------------------------------------------------------------------
63,090,227 49,285,040
--------------------------------------------------------------------
136,358,516 98,199,624
--------------------------------------------------------------------
--------------------------------------------------------------------

See accompanying Notes



CONSOLIDATED STATEMENTS OF EARNINGS
unaudited

three months ended nine months ended
Sept. 30, Sept. 30,
2005 2004 2005 2004
($) ($) ($) ($)
--------------------------------------------------------------------
--------------------------------------------------------------------
SALES 42,845,299 35,677,098 119,765,278 102,517,881
--------------------------------------------------------------------
EXPENSES
Cost of sales 33,585,407 29,375,007 95,546,509 83,900,871
Selling and
administrative 2,389,127 1,846,358 6,639,651 5,471,008
Foreign exchange loss 206,027 252,117 151,198 214,316
Amortization of
property, plant
and equipment 846,421 725,288 2,403,872 2,234,900
--------------------------------------------------------------------
37,026,982 32,198,770 104,741,230 91,821,095
--------------------------------------------------------------------
OPERATING EARNINGS 5,818,317 3,478,328 15,024,048 10,696,786
INTEREST ON
LONG-TERM DEBT 264,961 235,415 680,160 715,228
OTHER INTEREST 244,271 167,941 623,274 586,002
--------------------------------------------------------------------
EARNINGS BEFORE
INCOME TAXES 5,309,085 3,074,972 13,720,614 9,395,556
--------------------------------------------------------------------
PROVISION FOR
INCOME TAXES 1,788,311 1,109,000 4,564,311 3,383,000
--------------------------------------------------------------------
NET EARNINGS FOR
THE PERIOD 3,520,774 1,965,972 9,156,303 6,012,556
--------------------------------------------------------------------
--------------------------------------------------------------------

NET EARNINGS PER
COMMON SHARE 0.34 0.20 0.89 0.60

DILUTED NET
EARNINGS PER
COMMON SHARE 0.32 0.18 0.86 0.58
--------------------------------------------------------------------
--------------------------------------------------------------------

See accompanying Notes



CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
unaudited

for the nine months ended 2005 2004
Sept. 30, 2005 and 2004 ($) ($)
--------------------------------------------------------------------
--------------------------------------------------------------------
BALANCE - BEGINNING OF YEAR 28,330,148 21,846,564
Net earnings for the period 9,156,303 6,012,556
Dividends on common shares (512,118) (400,820)
--------------------------------------------------------------------
BALANCE - END OF PERIOD 36,974,333 27,458,300
--------------------------------------------------------------------
--------------------------------------------------------------------

See accompanying Notes


CONSOLIDATED STATEMENTS OF CASH FLOWS
unaudited

three months ended nine months ended
Sept. 30, Sept. 30,
2005 2004 2005 2004
($) ($) ($) ($)
--------------------------------------------------------------------
--------------------------------------------------------------------
CASH FLOWS FROM
Operating activities
Net earnings for
the period 3,520,774 1,965,972 9,156,303 6,012,556
Adjustments for
Amortization of
property, plant
and equipment 846,421 725,288 2,403,872 2,234,900
Write down of
property, plant
and equipment --- --- --- 273,956
Loss (gain) on
disposal of
property, plant
and equipment 2,961 (33,000) 32,081 (393,384)
Employee future
benefits 30,000 18,750 105,000 56,250
Stock-based
compensation 4,350 4,311 13,000 12,932
Future income taxes (9,000) 230,000 (146,000) 490,000
--------------------------------------------------------------------

4,395,506 2,911,321 11,564,256 8,687,210
--------------------------------------------------------------------
Change in non-cash
working capital
components
Decrease (increase)
in Accounts
receivable 2,315,951 2,445,934 (9,239,324) (7,084,811)
Inventories (5,209,271) 3,061,374 (6,244,032) 14,435
Prepaid expenses 273,962 442,799 476,200 117,777
Increase (decrease)
in Accounts payable
and accrued
liabilities (457,591) (1,021,953) 4,879,416 1,820,054
Income taxes 507,274 928,822 (240,503) 1,913,271
--------------------------------------------------------------------
(2,569,675) 5,856,976 (10,368,243) (3,219,274)
--------------------------------------------------------------------
1,825,831 8,768,297 1,196,013 5,467,936
--------------------------------------------------------------------
Financing Activities
(Decrease) increase
in bank
indebtedness 8,070,095 (7,704,362) 13,958,649 (5,388,564)
Increase in
long-term debt 6,150,995 --- 6,165,995 4,759,889
Repayment of
long-term debt (868,253) (718,383) (2,801,309) (1,681,107)
Dividends --- --- (512,118) (400,820)
Proceeds from
issuance of
common shares 5,057,028 293,947 5,148,003 335,378
--------------------------------------------------------------------
18,409,865 (8,128,798) 21,959,220 (2,375,224)
--------------------------------------------------------------------
Investing activities
Business
acquisition (16,960,441) --- (16,960,441) (1,906,652)
Purchase of
property, plant
and equipment (2,509,532) (691,080) (5,529,069) (1,598,025)
Purchase of note
receivable (872,025) --- (872,025) ---
Proceeds from
disposal of property,
plant and equipment 106,302 51,581 206,302 411,965
--------------------------------------------------------------------
(20,235,696) (639,499) (23,155,233) (3,092,712)
--------------------------------------------------------------------
NET CHANGE IN CASH
AND CASH
EQUIVALENTS DURING
THE PERIOD --- --- --- ---
--------------------------------------------------------------------
CASH AND CASH
EQUIVALENTS -
BEGINNING AND END
OF THE PERIOD --- --- --- ---
--------------------------------------------------------------------
--------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
Interest paid 518,963 434,658 1,203,242 1,231,366
Income taxes paid 976,364 (86,616) 4,629,641 942,934
--------------------------------------------------------------------

See accompanying Notes


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

unaudited

NOTE 1 - Accounting Policies

These unaudited interim consolidated financial statements have been prepared following the same accounting policies as the December 31, 2004 audited consolidated financial statements. These unaudited interim consolidated financial statements and notes should be read in conjunction with the Company's latest annual consolidated financial statements.

NOTE 2 - Employee Future Benefits

For the three months ended September 30, 2005, the benefit cost recognized for employee future benefits was $34,546 (2004 - $21,732). For the nine months ended September 30, 2005, the benefit cost recognized for employee future benefits was $117,961 (2004 - $66,043).

NOTE 3- Business Acquisition

On August 31, 2005, the Company's wholly owned U.S. subsidiary, Stella-Jones Corporation, acquired the assets of Webster Wood Preserving Company, a Minnesota Limited Partnership ("Webster"). Webster was a privately held producer and marketer of pressure treated wood railway ties based in Bangor, Wisconsin, U.S.A. Assets acquired include the Webster production plant in Bangor, Wisconsin, as well as all related inventories and accounts receivables. 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 results of operations of the Bangor plant have been included in the consolidated financial statements from the acquisition date.

Stella-Jones Corporation is considered a self-sustaining foreign operation and the assets and liabilities will be translated into Canadian dollars at the period-end exchange rate. Revenue and expenses will be translated at the weighted average exchange rate for the period. Unrealized gains and losses on the net investment will be deferred and included in cumulative foreign currency adjustments in shareholders' equity. As at September 30, 2005, as there was no material change in the net investment since August 31, 2005, the date of acquisition, no adjustment was recorded in this period.




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


$
--------------------------------------------------------------------
Assets acquired

Current assets 16,268,850
Property, plant and equipment 3,106,604
--------------------------------------------------------------------
19,375,454
--------------------------------------------------------------------
Liabilities assumed

Current liabilities 395,425
Long-term debt 1,475,209

--------------------------------------------------------------------
1,870,634
--------------------------------------------------------------------
17,504,820
--------------------------------------------------------------------
Consideration
Cash, including transaction costs of $769,522 17,504,820
--------------------------------------------------------------------


Financing for the transaction was provided by a $5.0 million private equity placement with the Company's majority shareholder, Stella Jones International S.A., at a price of $9.00 per common share, $4.0 million in new term loans arranged with the Company's Canadian bankers, and a $1.3 million (US$1.1 million) term loan with Stella-Jones Corporation's U.S. banker. The balance of the purchase price was financed by the Company's existing demand operating loan in Canada, with ongoing working capital financing for the U.S. operations provided by a new operating line of credit of $11.6 million (US$10.0 million) with Stella-Jones Corporation's U.S. banker.

NOTE 4- Share Information

As at October 25, 2005, the capital stock issued and outstanding consisted of 10,834,999 common shares (10,234,639 as at December 31, 2004).

NOTE 5- Seasonality

The Company's domestic operations follow a seasonal pattern, with pole, tie and industrial lumber shipments strongest in the second quarter 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, third and fourth quarters usually generate similar sales.

Contact Information

  • Stella-Jones Inc.
    George T. Labelle, C.A.
    Senior Vice-President and Chief Financial Officer
    (514) 934-8665
    glabelle@stella-jones.com