Stella-Jones Q3 Margin Falls as Costs Outpace Sales

Third-quarter adjusted EBITDA fell to CAD 159 million from CAD 171 million as sales rose to CAD 979 million from CAD 958 million. Fuel costs and delayed lumber-price pass-through cut the adjusted EBITDA margin to 16.2% from 17.8%.

What does the quarter say about demand?

President and CEO Éric Vachon said: “This quarter once again demonstrated the resilience of demand across our end markets, with wood utility pole volumes continuing to grow.”

Utility product sales rose 7% to CAD 513 million, aided by CAD 33 million from the Crossarm acquisition and 3% growth in wood utility pole volumes. Lower prices, largely from a shift toward cheaper southern yellow pine poles, and softer steel structure sales offset those gains.

Vachon said some customers raised demand for southern yellow pine, while others chose the species because it costs less to use. He expects mid-single-digit wood pole volume growth in 2027 despite cost pressures facing utilities. Growth in poles did not translate into higher profitability.

Can the cost program repair margins?

Stella-Jones expects up to CAD 100 million in cumulative pretax savings and incremental profitability over three years. Its Performance Optimization Program combines network initiatives with production tracking, standardized processes, automation and improved logistics.

Vachon stressed that CAD 100 million is cumulative, not an annual benefit at period-end. The company cited an approximate CAD 30 million annual run rate, equivalent to nearly one percentage point of EBITDA margin improvement.

Railway tie and wood pole network initiatives alone should generate CAD 20 million to CAD 27 million in annualized savings and incremental profitability. Little benefit reached third-quarter results, and Vachon cautioned against expecting a meaningful margin boost this year. Most initiatives require no additional capital spending, according to Travaglini.

The long-term adjusted EBITDA margin target remains 17.5% to 18.5%. Vachon expects a margin above 17% in 2027 and a return to the target range more likely around 2028 as efficiencies and pass-throughs take effect. The recovery schedule extends beyond this year.

What is the steel expansion delivering?\n

At the Candiac steel facility, a slower-than-expected ramp has left one piece of equipment due in December. Stella-Jones targets a full annual production run rate of 20,000 tons by the end of the first quarter of 2027, doubling capacity. Candiac is fully booked for 2027, and 2028 orders are filling quickly.

A Fayetteville, Tennessee, facility remains scheduled for commissioning in late 2027 and a phased ramp to full production by the end of 2028. The project should add about 20,000 tons of annual lattice capacity. The call gave no project-level profit or return estimate.

Bookings do not remove ramp-up risk.

Are railway ties and residential lumber stabilizing?\n

Railway tie sales fell to CAD 208 million from CAD 211 million as lower Class 1 demand was offset by commercial activity. Travaglini said pricing variance largely reflected a higher share of treating-services-only shipments, which exceeded 10% of Class 1 shipments. Railway tie margin dollars were essentially flat, while margin percentage improved.

Management expects a seasonal fourth-quarter decline, partly because certain Class 1 programs were substantially complete by the end of September. Contract renewals and commitments for higher-value products could support growth next year, and Vachon expects growth within the reported railway tie category.

Residential lumber sales fell to CAD 196 million from CAD 201 million, although volumes matched last year. Travaglini attributed the decline to a lag in adjusting prices. Vachon said price increases implemented late in the quarter were largely absent from third-quarter margins, but should improve pricing in the fourth quarter and into 2027.

The weakness mainly reflects timing and mix.

What did fuel and restructuring charges cost?

Higher fuel-related costs reduced third-quarter adjusted EBITDA by approximately CAD 10 million, with preservative costs accounting for most of the impact. Management estimated that about 75% of the fuel-related cost increase could be passed through to customers.

CFO Silvana Travaglini said: “Excluding those costs and the residential lumber pricing lag, the quarterly adjusted EBITDA margin would have exceeded 17%.” That calculation depends on exclusions; the reported margin was 16.2%.

Stella-Jones recorded CAD 32 million in asset impairment and restructuring costs, mainly tied to its wood pole network. Nine-month charges reached CAD 64 million, including CAD 43 million in non-cash impairments. Travaglini said the company does not currently anticipate further significant restructuring and impairment charges.

Reported earnings absorbed costs management expects to ease.

What can the balance sheet do?

The company generated CAD 158 million in operating cash during the quarter and reduced net debt by almost CAD 200 million in the first nine months. Leverage stood at 2.4 times, and available liquidity totaled CAD 836 million at quarter-end.

Management renewed the share repurchase program, but Travaglini said any buyback decision would consider leverage and acquisition opportunities. Vachon said disciplined acquisitions remain part of the long-term growth strategy.

Cash supports flexibility; repurchases remain conditional.

Stella-Jones, listed on the Toronto Stock Exchange under SJ, makes treated wood poles and crossarms, steel lattice towers and steel transmission poles for major North American electrical utilities. It also supplies treated wood railway ties to Class 1, short-line and commercial railroad operators. Its products support electrical distribution and transmission networks and railway operations and maintenance.

The margin case now rests on cost execution and a steel ramp-up through 2028.