Stella Jones : Q1-2024 MD&A

MANAGEMENT'S DISCUSSION & ANALYSIS

Three-month period ended March 31, 2024 compared with the three-month period ended March 31, 2023

The following is Stella-Jones Inc.'s management discussion and analysis ("MD&A"). Throughout this MD&A, the terms "Company" and "Stella-Jones" shall mean Stella-Jones Inc. with its subsidiaries, either individually or collectively.

This MD&A and the Company's condensed interim unaudited consolidated financial statements were reviewed by the Audit Committee and approved by the Board of Directors on May 7, 2024. The MD&A provides a review of the significant developments, financial position, results of operations and cash flows of the Company during the three- month period ended March 31, 2024 compared with the three-month period ended March 31, 2023. The MD&A should be read in conjunction with the Company's condensed interim unaudited consolidated financial statements for the periods ended March 31, 2024 and 2023 and the notes thereto, as well as the Company's annual audited consolidated financial statements and MD&A for the year ended December 31, 2023.

This MD&A contains statements that are forward-looking in nature. The words "may", "could", "should", "would", "assumptions", "plan", "strategy", "believe", "anticipate", "estimate", "expect", "intend", "objective", the use of the future and conditional tenses, and words and expressions of similar nature are intended to identify forward-looking statements. Forward-looking statements include, without limitation, the financial guidance and other statements contained in the "Strategy" and "2023-2025 Financial Objectives" sections below, which are provided for the purpose of assisting the reader in understanding the Company's financial position, results of operations and cash flows and management's current expectations and plans (and may not be appropriate for other purposes). Such statements are based upon a number of assumptions and involve known and unknown risks and uncertainties that may cause the actual results of the Company to be materially different from those expressed or implied by such forward-looking statements. Such items include, among others: general political, economic and business conditions, evolution in customer demand for the Company's products and services, product selling prices, availability and cost of raw materials, operational disruption, climate change, failure to recruit and retain qualified workforce, information security breaches or other cyber-security threats, changes in foreign currency rates, the ability of the Company to raise capital and factors and assumptions referenced herein and in the Company's continuous disclosure filings. Unless required to do so under applicable securities legislation, the Company's management does not assume any obligation to update or revise forward-looking statements to reflect new information, future events or other changes after the date hereof.

The Company's condensed interim unaudited consolidated financial statements are reported in Canadian dollars and are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS") and Chartered Professional Accountants ("CPA Canada") Handbook Accounting - Part I, applicable to the preparation of interim financial statements, including IAS 34, Interim Financials Reporting. All amounts in this MD&A are in Canadian dollars unless otherwise indicated.

This MD&A also contains non-GAAP and other financial measures which are not prescribed by IFRS and are not likely to be comparable to similar measures presented by other issuers. Refer to the section entitled "Non-GAAP and Other Financial Measures" of this MD&A for an explanation of the non-GAAP and other financial measures used and presented by the Company and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures.

Additional information, including the Company's Annual Information Form, quarterly and annual reports, and supplementary information is available on the SEDAR+ web site at www.sedarplus.ca. Press releases and other information are also available in the Investor Relations section of the Company's web site at www.stella-jones.com.

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OUR BUSINESS

Stella-Jones is a leading North American manufacturer of pressure-treated wood products, focused on supporting infrastructure that is essential to the delivery of electrical distribution and transmission, and the operation and maintenance of railway transportation systems. It supplies the continent's major electrical utilities and telecommunication companies with wood utility poles and North America's Class 1, short line and commercial railroad operators with railway ties and timbers. Stella-Jones' infrastructure product categories also include industrial products, namely wood for railway bridges and crossings, marine and foundation pilings, construction timbers and coal tar-based products. Additionally, the Company manufactures and distributes premium treated residential lumber and accessories to Canadian and American retailers for outdoor applications, with a significant portion of the business devoted to servicing Canadian customers through its national manufacturing and distribution network.

The Company's organic growth and strategic acquisitions have allowed it to expand its North American network by broadening its product offerings and capacity, to reinforce the strength and reliability of its raw material sourcing, and to provide greater service to customers. This strategy has contributed to solid and sustained customer relationships across North America and has expanded access to critical suppliers. It has also enabled the Company to further strengthen its seasoned management team, adding extensive expertise in all divisions throughout North America.

Stella-Jones' proven track record of delivering growth and solid results has set the foundation for a strong cash flow generating business, enabling the Company to continually reinvest in its network and return capital to shareholders through steadily increasing dividends and share repurchases.

The Company operates 45 wood treating plants, and a coal tar distillery. These facilities are located across Canada and the U.S. and are complemented by an extensive procurement and distribution network. As at March 31, 2024, the Company's workforce comprised more than 3,000 employees.

The Company's common shares are listed on the Toronto Stock Exchange (TSX: SJ).

OUR MISSION

Stella-Jones aims to be the performance leader in the industries in which it operates and a model corporate citizen, acting with integrity, and exercising a rigorous standard of environmental and social responsibility, and governance.

Stella-Jones is committed to providing a safe, respectful, inclusive, and productive environment for its employees, where problem solving, initiative and high standards of performance are rewarded.

Stella-Jones will achieve these goals by focusing on customer satisfaction, innovative work practices and the optimal use of its resources and by investing in its people through training and development to enable professional growth across the organization.

OUR STRATEGY

Stella-Jones' strategy is to solidify its leadership position in its core product categories and in key markets, through organic growth, network efficiencies, innovation and accretive acquisitions. The Company pursues infrastructure- related and other strategic opportunities that leverage its extensive network, customer base, fibre sourcing and numerous competitive strengths while also contributing to its ability to generate a consistent cash flow.

The Company integrates environmental, social and governance considerations into its daily business decisions and strategies, recognizing that this will make it a more resilient, agile, and sustainable business.

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Capital Management

The Company's capital allocation strategy leverages its consistent and strong cash flow generation while enhancing its long-term stability and shareholder value creation. To maintain the Company's strong financial position and financial flexibility, capital is deployed in a disciplined manner, balancing growth investments and the return of capital to shareholders.

The Company's current strategy is to:

• Invest between $65 and $75 million annually in capital expenditures to maintain the quality and reliability of its assets, ensure the safety of its employees, improve productivity and pursue environmental and sustainability initiatives;
• Expand the annual capital expenditure program and invest an additional $25 million in the 2024-2025 period to support growth in its utility poles product category, for a total of approximately $115 million;
• Pursue accretive infrastructure-related acquisitions that enhance the Company's strategic positioning and drive future earnings growth;
• Maintain a durable dividend payout, targeting dividends equivalent to 20% to 30% of the prior year's reported earnings per share; and
• Return excess capital to shareholders through share repurchases.

As part of its capital allocation approach, Stella-Jones targets a net debt-to-EBITDA ratio between 2.0x and 2.5x but may deviate from its leverage target to pursue acquisitions and other strategic opportunities, and/or fund its seasonal working capital requirements.

The Company's capital allocation since 2020 is summarized below: (in millions of $, except %)

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2023-2025 FINANCIAL OBJECTIVES:

1. Excludes acquisitions and assumes Canadian dollar will trade, on average, at approximately C$1.30 per U.S. dollar, with sales in the U.S. representing approximately 70% of total sales.
2. The Company may deviate from its leverage target to pursue acquisitions and other strategic opportunities, and/or fund its seasonal working capital requirements.
3. Refer to the section entitled "Non-GAAP and Other Financial Measures" of this MD&A for an explanation of the non-GAAP and other financial measures used and presented by the Company and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures.

Refer to the 2023 annual MD&A for further details and assumptions used in preparing the 2023-2025 financial objectives.

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HIGHLIGHTS

Overview - First Quarter of 2024

Sales in the first quarter of 2024 were up 9% to $775 million, compared to $710 million last year. Excluding the contribution from the acquisition of Baldwin Pole and Piling Company, Inc., Baldwin Pole Mississippi, LLC and Baldwin Pole & Piling, Iowa Corporation (collectively, "Baldwin"), sales were up $51 million, or 7%. The increase was driven by a 10% organic sales growth of the Company's infrastructure businesses, namely utility poles, railway ties and industrial products, partially offset by lower residential lumber and logs and lumber sales when compared to the same period last year. All infrastructure product categories benefited from higher year-over-year sales prices, while residential lumber sales were unfavourably impacted by the decrease in the market price of lumber when compared to the same period last year.

Led by the strong organic sales growth for infrastructure products, EBITDA increased to $156 million in the first quarter of 2024 compared to $120 million in the first quarter last year and EBITDA margin expanded from 16.9% in 2023 to 20.1% in 2024.

During the quarter ended March 31, 2024, Stella-Jones used its liquidity to support the seasonal increase in working capital requirements, maintain its assets, expand production capacity, as well as repurchase $15 million of shares. During the quarter, the Company also declared a dividend totaling $16 million.

As at March 31, 2024, the net debt-to-EBITDA ratio was above the target range, at 2.7x, largely explained by the seasonal increase in working capital requirements in the first quarter of each year.

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Financial Highlights

Operating results

1. Refer to the section entitled "Non-GAAP and Other Financial Measures" of this MD&A for an explanation of the non-GAAP and other financial measures used and presented by the Company and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures.
2. Including current portion.

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NON-GAAP AND OTHER FINANCIAL MEASURES

This section includes information required by National Instrument 52-112 - Non-GAAP and Other Financial Measures Disclosure in respect of "specified financial measures" (as defined therein).

The below-describednon-GAAP measures have no standardized meaning under GAAP and are not likely to be comparable to similar measures presented by other issuers. The Company's method of calculating these measures may differ from the methods used by others, and, accordingly, the definition of these non-GAAP financial measures may not be comparable to similar measures presented by other issuers. In addition, non-GAAP financial measures should not be viewed as a substitute for the related financial information prepared in accordance with GAAP.

Non-GAAP financial measures include:

• Gross profit: Sales less cost of sales
• EBITDA: Operating income before depreciation of property, plant and equipment, depreciation of right-of- use assets and amortization of intangible assets (also referred to as earnings before interest, taxes, depreciation and amortization)
• Capital employed: Total assets less current non-interest bearing liabilities
• Average capital employed: 12-month average of the capital employed balance at the beginning of the 12-month period and the quarter-end capital employed balances throughout the remainder of the 12-month period
• Net debt: Sum of long-term debt and lease liabilities (including the current portion)

Non-GAAP ratios include:

• Gross profit margin: Gross profit divided by sales for the corresponding period
• EBITDA margin: EBITDA divided by sales for the corresponding period
• Return on average capital employed ("ROCE"): Trailing 12-month (TTM) operating income divided by the average capital employed
• Net debt-to-totalcapitalization: Net debt divided by the sum of net debt and shareholders' equity
• Net debt-to-EBITDA: Net debt divided by trailing 12-month (TTM) EBITDA

Other specified financial measures include:

• Operating income margin: Operating income divided by sales for the corresponding period
• Return on average equity: Trailing 12-month (TTM) net income divided by the average shareholders' equity (average of the beginning and ending 12-month period)
• Working capital ratio: Current assets divided by current liabilities

Management considers these non-GAAP and other financial measures to be useful information to assist knowledgeable investors to understand the Company's financial position, operating results and cash flows as they provide a supplemental measure of its performance. Management uses non-GAAP and other financial measures in order to facilitate operating and financial performance comparisons from period to period, to prepare annual budgets, to assess the Company's ability to meet future debt service, capital expenditure and working capital requirements, and to evaluate senior management's performance. More specifically:

• Gross profit and gross profit margin: The Company uses these financial measures to evaluate its ongoing operational performance.
• EBITDA and EBITDA margin: The Company believes these measures provide investors with useful information because they are common industry measures used by investors and analysts to measure a company's ability to service debt and to meet other payment obligations, or as a common valuation measurement. These measures are also key metrics of the Company's operational and financial performance and are used to evaluate senior management's performance.
• Average capital employed: The Company uses the average capital employed to evaluate and monitor how much it is investing in its business.

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• ROCE: The Company uses ROCE as a performance indicator to measure the efficiency of its invested capital and to evaluate senior management's performance.
• Net debt, net debt-to-EBITDA and net debt-to-total capitalization: The Company believes these measures are indicators of the financial leverage of the Company.

The following tables present the reconciliations of non-GAAP financial measures to their most comparable GAAP measures.

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FOREIGN EXCHANGE

The table below shows average and closing exchange rates applicable to Stella-Jones' quarters for the years 2024 and 2023. Average rates are used to translate sales and expenses for the periods mentioned, while closing rates translate assets and liabilities of foreign operations and monetary assets and liabilities of the Canadian operations denominated in U.S. dollars.

• Average rate: There was no change in the value of the U.S. dollar relative to the Canadian dollar during the first quarter of 2024 compared to the first quarter of 2023. As a result, there was no impact on sales and cost of sales.
• Closing rate: The appreciation of the value of the U.S. dollar relative to the Canadian dollar as at March 31, 2024, compared to December 31, 2023 resulted in a higher value of assets and liabilities denominated in U.S. dollars, when expressed in Canadian dollars.

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OPERATING RESULTS

Sales

Sales for the first quarter reached $775 million, up $65 million, versus sales of $710 million in the corresponding period last year. Excluding the contribution from the acquisition of the Baldwin assets of $14 million, pressure- treated wood sales rose $55 million, or 8%. Infrastructure sales grew organically by $58 million or 10%, while residential lumber sales decreased by three million dollars. Favourable pricing across all the infrastructure product categories and higher railway ties volumes were partially offset by lower volumes for utility poles and a decrease in pricing for residential lumber. The lower logs and lumber sales compared to the same period last year were largely attributable to less lumber trading activity.

Utility poles

Utility poles sales increased to $402 million in the first quarter of 2024, compared to sales of $362 million in the corresponding period last year. Excluding the contribution from the acquisition of the Baldwin assets, utility poles sales increased by $26 million, or 7%, driven by higher pricing. While sales volumes were higher compared to the previous quarter, volumes were below levels realized in the first quarter of last year. Incremental multi-year commitments were secured from new and existing customers but the growth in volumes continued to be impacted and deferred by the slower pace of utility poles purchases by certain contract customers. Utility poles sales accounted for 52% of the Company's first-quarter sales.

Railway ties

Railway ties sales increased by $32 million, or 16%, to $227 million in the first quarter of 2024, compared to sales of $195 million in the same period last year. The increase was largely attributable to higher volumes for non-Class 1 business due to the replenished level of ties inventory, as well as sales price increases to cover higher costs, when compared to the same period last year. Railway ties sales accounted for 29% of the Company's first-quarter sales.

Residential lumber

Sales in residential lumber decreased by three million dollars, or 3%, to $87 million in the first quarter of 2024, compared to sales of $90 million in the corresponding period last year. This decrease was mainly driven by lower pricing attributable to the decrease in the market price of lumber. Residential lumber sales accounted for 11% of the Company's first-quarter sales.

Industrial products

Industrial product sales were $36 million in the first quarter of 2024, unchanged compared to the corresponding period last year. Industrial product sales represented 5% of the Company's first-quarter sales.

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