Scienjoy Holding Corporation Q1 FY2026 earnings call

• Utility products: Continues to be a key growth driver with double-digit volume growth for wood utility poles, anchored in contract-based business, though pricing tempered by product mix and spot market pressures.
• Railway ties: Demonstrated stability, navigating competitive landscape, with ongoing efforts to optimize production network by consolidating facilities to align with demand, and pursuing growth through Class 1 contract renewals and commercial market opportunities.
• Growth initiatives: Acquisition of Lockwell provides growth platform, capacity expansion in Canada on track, steel structure production capacity investment on schedule, and new steel lattice tower facility in Fayetteville, Tennessee selected with expected commissioning by late 2027 and full production by end of 2028.

Utility products business is the primary growth driver, delivering over 10% growth. Q1 sales were $469 million, up 12% from the same period last year, accounting for approximately 59.3% of total sales. Railway tie division had sales of $198 million, down 5% or $10 million from the prior year period, largely due to foreign exchange, making up about 25.0% of total sales. Excluding currency impact, railway tie sales were relatively stable. Residential lumber sales were $76 million in the first quarter, down 14% from the same period last year, representing around 9.6% of total sales.

• Railway ties: Views for 2026 are still flat sales year over year, with low single-digit growth expected over the three-year guidance period. Cost savings of $10 to $15 million annualized starting in 2027.
• Utility products: Believes will hit mid-single-digit growth for the business, with pricing expected to remain relatively stable compared to Q1, within guidance range for the year.
• Residential lumber: Confidence in long-term strategy remains unchanged, managed with discipline through soft market.

• Market competition: Intense spot market competition for utility products, which is expected to continue as additional capacity comes online.
• Foreign exchange: Impact on railway tie sales as seen in Q1. -原材料成本：Potential headwinds from fuel cost increases affecting preservatives and distribution costs, though built into pass-throughs in contracts for now.

Q: On the railway tie side, are you still expecting flat sales there overall for the full year? And have any of the four class one contracts renewing this year been renewed yet?

A: Our views for the year are still flat sales year over year for 2026. With regards to contract, there's still ongoing discussions, very positive on discussions with several of our customers.

Q: Sylvana, you referenced 10 to 15 million of cost savings by early 27. When's the earliest we'll start to see the benefits there start to show up?

A: We don't expect any benefits this year. Most of the benefits will only start in 2027.

Q: On the red lumber side. How much of the 11% decline was weaker volumes versus softer pricing? And how is your key customer there thinking about spring demand?

A: In terms of the percentage decrease, it's pretty much 50-50 in terms of volumes and pricing. And we're starting to see a nice pickup in demand. Our key customer remains bullish on the year with some growth or market share gains.

Q: On the utility pool. Can you help us frame the cadence of the contract to backlog to the balance of 26? know specifically you know do you have a line of sight to maintaining that strong volume growth that we saw in q1 into q2 and q3 uh you know just and then maybe you can comment on how you expect the the pricing backdrop there to evolve in the back half as uh some of this new capacity comes on A: A quick reminder, first half of last year, if you remember, we had some softer volumes in utility pulls. And the second half, we actually saw some better performance. So definitely, I would say the comp is easier in the first half of the year. We still believe that we'll hit that mid-single-digit net for the business and that would incorporate that pricing headwind. We think it'll remain relatively stable for now compared to what we saw here in Q1, and hopefully it holds that level, if you want, of pricing on the spot pricing market.

Q: You've talked a little bit about the optimization of the railway ties production network. Do you see an opportunity to do the same for utility poles and residential lumber?

A: It's been a year now that we have added a CEO to the organization, and he's got strategic improvements, initiatives going on in the business, continuous improvement. So it's definitely something that we are deploying throughout the organization, but Obviously there'll be different impacts. If I think about our utility pole business, it's been a growth business now for several years. We're using capacity very well and increasing capacity. So I don't think, for example, restructuring and capacity, downward capacity adjustment would be something We will see in utility poles, but it doesn't mean that we're not working on other efficiency initiatives within the division. And I would say same for residential lumber. We're pretty happy with our footprint and our capacity usage there. But not to say that, you know, we're not looking for other opportunities to improve our bottom line.

Q: Free cash flow at Sylvana, very strong performance in Q1 is in what we is a typically a seasonal week quarter and Any explanation? I see less working capital build. Was it a call on the residential lumber inventory? Is it the impact from network optimization?

A: Most of the favourable impact in the first quarter was us right-sizing some of the inventory, particularly in ties, you know, as we're looking to, you know, potentially, as Eric mentioned, opportunities for maybe TSO volumes, which is less capital intensive. You know, we did make an effort already starting in Q1 to, you know, to right size that, that, that inventory. So that was most of the impact, the build of residential lumber, obviously, you know, with a bit of a, the later season, uh, you know, was actually going, uh, uh, the, the other way. And, uh, we definitely have holes in line with what we typically see in the first quarter. Also using the tools that we have with SAP, a lot more visibility into inventory management. So definitely that is also helping out as part of that optimization and being efficient with our working capital.

Q: Update on the brooks automation and the potential for uh selling cross arm in canada and maybe also uh with respect to the new location in tennessee for uh steel lattice uh was curious to to know how much of the upcoming capacity has been already sold A: First part of your question with regards to brooks um very happy with the progress in the integration i would say probably fully integrated by now other than probably the it systems and that'll be completed by the uh the end of the year um we've uh opened the door to a lot of new customer contacts to the brooks team including uh canadian customers uh Can't divulge too much into the weeds, but yes, we're making inroads with Canadian utilities, so we're very happy with the progress there. And the second part of your question was, I believe, was with regards to our selection of our Tennessee location for our steel lattice business. That is also progressing very well. So obviously, we've selected the site. It has a building, as I mentioned, so it sort of de-risks a lot of the project. We're... already done and probably in the coming weeks we'll be finalizing the purchase of all the equipment to be delivered in about a year from now. So we're on track to be to commission the facility at the end of 27. But things are working well. We've aligned our our resources internally to be able to support that project. Obviously, again, under our CEO, we've developed an engineering team. So now we have actually employees that are well-versed in this type of project and are dedicated to it. So like, like my VP of sales likes to say, we have someone that goes to bed and wakes up in the morning thinking about these projects. So we're really focused on the success of the project, looking forward to commission it. And I also think you were inquiring about having some purchase orders there. So no firm purchase orders, a lot of discussions with customers, a lot of increased visits in our Canadian facility from US customers. to understand our quality control, our processes, to certify the facility. And ultimately, once we have a U.S. facility fully functional, the opportunity will be, of course, servicing U.S. customers. We'll be able to move some production from Canada into the U.S., freeing up some capacity in Canada for Canadian projects. We have a lot of Canadian utilities that are looking to source Canadian content, and we will be very well positioned to answer their requirements.

Q: Question on the restructuring within the TIES business. You mentioned two sites that are going to be idled. Is it specifically those two that get you to this 10 to 15 million in savings, or are there additional opportunities or additional restructuring options contemplated as well?

A: The savings Sylvana mentioned, the 10 to 15 is associated to those two facilities. So a treating plant and a finished good, or sorry, a raw material green tide consolidation yard. As I also mentioned in my remarks, it's an ongoing process. We're evaluating other opportunities, but for the time being, you know, this is the adjustment we deem necessary.

Q: As far as the restructuring charge, I realize it's largely non-cash. But did you quantify what we should expect that to be in the second quarter, Silvana?

A: No, we have. We're still working on those numbers. You know, obviously there's, you know, when we talk about the non-cash, it's really the write-down of the assets. So we're just trying to figure out which assets basically we can reuse in the network. So there's still some work to be done there.

Q: On the pricing headwind in the polls business, you mentioned it was largely mixed. What happens as far as the prior year comp from a mixed perspective as we move into Q2 and then through the balance of the year? Is that dynamic still at play from a mixed perspective, or is it more just the industry headwinds on the pricing side?

A: For Q1 of 25, it was a very unique situation with an unusual revenue stream for utility wrap polls. That does not come into play following Q1. So it's back to a normal comparison. So we would have that mixed effect to explain the delta between profitability year over year for the balance of the year.

Q: Talk a little bit about M&A opportunities. Obviously, you've got a lot on your plate with the Lockwell expansion, the U.S. Lattice expansion, closing facilities and ties, but just – you know, are you still focused on potential M&A opportunities? What does the landscape look like? Is there anything that we should be thinking about on that front?

A: Well, thank you for recognizing that we've got a lot, a lot of, a lot going on and we do. But fortunately, you know, we also have a, a vice president of business development. So he is dedicated to the, the pursuit of M&A or, and, you know, finding new opportunities. So we, still have a lot of interest. We have a, I would say, healthy pipeline of projects ahead of us in our traditional wood treating railway ties and utility poles, and as well on the steel transmission side. I would qualify it in that broader market, which if you remember at our investor day, we had talked about an addressable market a total of 5 billion Canadian annual. So definitely that's part of our strategic priorities as we were discussing here earlier in our prepared remarks. So definitely our VP of Business Development has all of those three in a line of sight and working on some projects. Then obviously, can't promise the timing on those. Each project has its own cadence, but I would be very, very happy if we could execute on some of these in the next 12 months.

Q: On the state of the lattice market in the U.S., and any incremental data points you can point to, and if it's still the case that sort of all the van product is coming offshore still.

A: A lot of articles have been published and they keep on a regular basis about the, I want to say the effervescence in the electrical grid in North America. So I think, you know, from our standpoint, we still see We keep having discussions with our customers that are looking to invest and execute on large CapEx projects, a lot of transmission projects in there. I was mentioning earlier in another question, we have seen an increase in visits or certification visits from customers at our facility here in Quebec. A lot of interest from North American utilities to buy a bit more products well, Canadian for Canada, but on the continent for our U.S. customers. A lot of interest for our U.S. business, our U.S. facility that's getting built as well. So I think that is also prompting the interest in how we're operating. And to your point, you were asking about the offshore. They remain in play. We know the players. We keep having discussions with them. We share some notes to make sure we understand what what we understand what they're up to and i think you appreciate that we have a bit of a unique uh service proposal product uh offering in in north america having a footprint closer closer to the project so that's what our customers appreciate uh i guess that's about you know our thoughts at this point uh maxim Q: Is there any pinch point around preservatives given sort of all the geopolitical issues on kind of input costs or it's just immaterial?

A: I don't see, not necessarily pinch point. The only thing I guess I, I want to point to, since you're bringing it up, is there could be a bit of headwinds because of fuel cost increases. So obviously our oil-borne preservative would have a bit of an impact and also on fuel could impact our carrying costs, our distribution costs. Nothing material for now, all built into pass-throughs we have in our contracts with our customers. So nothing of great concern at this point. But obviously, we're monitoring the oil price situation in North America because it's closer to home, but it's a global impact, I guess.

Q: I think you called out the mark-to-market item on stock-based compensation this quarter being a $5 million headwind. I just want to know, what was it last year? And just to be sure, you're not adjusting either of those amounts out of adjusted EBITDA?

A: Yes, so to the second part of your question, Jonathan, is that no, we are not adjusting any of the mark-to-market items. And last year, it was actually a negative, a small negative amount under $1 million.

Q: The Q1 last year was a net negative. Yeah, exactly. And then another one ought to be the dead horse here on the pricing decline in polls. But of that 6%, how much of it was due to mix versus sales? competitive dynamics. And if we're thinking about pricing for the rest of the year, if we back into the competitive element, the Q1, is it the expectation that that's going to accelerate and get worse through the balance of the year as more capacity comes online?

A: The Q1 impact is almost, or probably all, not probably, it is all mixed. So, you know, Excluding that factor, I think we see the pricing pressures being relatively stable year over year. So maybe there will be some headwinds for sure, a couple of percentage points, but no more than that and not as significant as the first quarter.

Q: For the full year, how should we think about investment in working capital?

A: You know... I've said in the past kind of, you know, our rule of thumb is always that, you know, for every incremental sales dollar, you know, we need to invest 40 cents on that dollar to support those sales. You know, that said, you know, as I mentioned, you know, with perhaps more opportunities to do TSO, you know, that might be lower because obviously that is less capital intensive, you know. So for the year, I still think there will be a net investment, but probably less than $50 million.