How a manufacturer of railway ties became one of Canada’s best stocks

CEO Brian McManus’s relentless focus and disciplined consolidation strategy has turned Stella-Jones into an earnings powerhouse

 

Boring is Brilliant

Cartoon characters freaking out over railway ties
(Illustration by Ryan Snook)

At a retail broker conference hosted by Laurentian Bank Securities last year, Ben Vendittelli caused a stir. The bank’s senior VP and head of equities asked attendees to raise their hands if they had advised clients to buy Google stock in time to catch its stratospheric rise. He then asked for a similar show of hands for Apple. Just as the hand raisers were feeling chuffed for their prescience, Vendittelli said, “Well, you may have done your clients a disservice, because they would have been better off if you had put them into Stella-Jones.”

He flashed on the screen the 10-year stock charts of each company: The tech behemoths’ gains were dwarfed by those of this obscure Montreal-based manufacturer of utility poles and railway ties, two of the most pedestrian, old-economy markets around.

The man in the CEO chair during that entire decade has been one Brian McManus, a former mechanic who, through a fluky combination of business acumen, family connections and sheer serendipity, landed the top job in 2001. When he joined, Stella-Jones Inc. had roughly $10 million in sales. Last year, the company recorded revenue of $1.56 billion; the percentage growth number would need a lot of digits. Even in a relatively sluggish economy, the company’s 2015 sales were up 25% over the previous year. In the past five years, the stock returned 432%. “We’ve had a bit of softness in our share price lately,” McManus grumbles.

Still, it’s the consistency that has left analysts grasping for superlatives. Stella-Jones has racked up 15 continuous years of earnings growth, routinely beating analyst estimates. “Of all the companies I cover, I would put them in the absolute top tier of management teams,” says Leon Aghazarian, an analyst with National Bank Financial. Vendittelli, a 20-year veteran of the capital markets, goes further: “If Brian was running a slightly larger company in a slightly more flashy industry, he would have been named CEO of the Year for each of the past 10 years.”

Flashy Stella-Jones isn’t. The company buys raw lumber, processes it, and then crafts it into ties and poles that it sells to North American railways and utilities. Stella-Jones produces roughly 800,000 poles and 12 million railway cross ties and switch ties a year; it also sells smaller quantities of pressure-treated lumber to residential and industrial customers. With some 80% of its business driven by infrastructure maintenance requirements that are not going away any time soon, Stella-Jones pretty much has a guaranteed revenue stream.

McManus’s formula is simple: Identify target niches, stick to them like glue and steadily consolidate a fragmented market to become the undisputed number one player. Each acquisition the company undertakes, roughly one per year, brings greater scale and cost-efficiency to Stella-Jones’s supply network and enables it to provide more turnkey offerings to clients.

Of course, if it really were simple, Stella-Jones wouldn’t have gone through four leaders in the eight years before McManus’s arrival. When you talk to the man, you get the sense he views the company’s strategy as a no-brainer—something that has proven successful but is nothing to make a fuss about. “It’s really not that complex,” McManus says, struggling to explain what his team does that’s all that unusual, before finally zeroing in on the company’s culture. “What I’m most proud of is that I’ve never lost a senior manager—voluntarily,” he says.

Many now credit him for much more: for building an underappreciated gem that is North America’s best operator in a 100-year-old industry. So why hasn’t McManus been poached to run a much bigger company for a lot more money?


Stella-Jones’s head office occupies part of a floor in a nondescript suburban building, with no sign outside announcing its presence. Its CEO is similarly understated. McManus rarely wears a suit, unless he has a meeting, and sometimes not even then (he favours the casual Friday look). He’s on the road more than half the time, preferring the world of wood-treatment facilities and pole-peeling plants, where he can talk directly to managers, to the office. “Reading emails is not going to give me a real feel for what’s going on,” he says. He’s immediately likable, with a broad smile and the compact physique of a boxer (though he’s actually an avid cyclist). He has big, thick hands, which he uses like brackets in conversation, enclosing in the air whatever topic he’s discussing. He dislikes interviews but will submit to them occasionally for the sake of shareholders.

On the wall behind McManus’s desk (a glass tabletop resting on wooden railway ties and steel tie plates) hang two framed pages covered in pen scribbles. One is the restaurant table mat on which Tom Bruce-Jones and Gianni Chiarva, the heads of James Jones & Sons Ltd. and Stella SpA respectively, jotted down the deal to buy the wood-preserving arm of Domtar Corp. in 1992. (The two private firms, both involved in wood products, were running out of room to grow in Europe.) The other, a large napkin, shows how they devised the financing.

The resulting joint venture, dubbed Stella-Jones, had a troubled start, “probably because we underestimated how long it would take and how difficult it would be to change the culture,” says Bruce-Jones, the company’s chairman. “It was a small division within Domtar, but it still had a big-company culture.” The first four presidents were old hands nearing retirement—not the types to instil an entrepreneurial culture.

Stella-Jones was searching for its fifth leader when McManus and two classmates from Western University’s Ivey School of Business presented their case study on the company to its board. McManus was doing an executive MBA after a brief career as a garage and storage business owner, with the aim of joining the boutique investment firm run by his father, Ray McManus. Stella-Jones was the firm’s client. Bruce-Jones recalls meeting with the elder McManus a few months later, saying that he and Chiarva wanted the 33-year-old rookie to run their business. “The first time we asked, he told us exactly where we could go with our suggestion,” Bruce-Jones recalls.

McManus’s own response was shock followed by intrigue. “I thought I would come in, do a bit of restructuring,” he says. “But then I started to fall in love with the industry—sounds stupid, I know.” A large part of that love was for the opportunity he saw in consolidation. First, the company needed to slim down, focus and improve its own operations. McManus applied his MBA skills by implementing zero-based budgeting—essentially forcing each facility to justify its budgets—to re-examine each business line as if starting from scratch.

Then Stella-Jones went shopping. Initially, McManus was presented with all kinds of deals—sawmills, pole-inspection companies, tie and pole installers. So two years into the job, he grabbed a piece of foolscap and wrote down three criteria for acquisitions. That page has sat under his desk blotter ever since, and what’s on it remains in effect: Every acquisition must reinforce the company’s core markets, meet specific price benchmarks and supply identifiable synergies.

McManus applied what he calls the “ink-spill approach”—expanding into adjacent markets where those synergies were most available because of overlapping customers and suppliers. The company first focused on Canada, then spilled over the border and is now flowing into the southern U.S. Its largest deal to date was the 2012 purchase of U.S. utility-pole maker McFarland Cascade Holdings, Stella-Jones’s biggest North American rival in that market.

McManus straddles the line between never overpaying and offering a fair price. That’s important because most of the companies Stella-Jones buys are owned by families, who tend to talk to each other. Typically, they’re second- or third-generation businesses with no real exit strategies; owners ready to retire and their kids focused on sexier pursuits. McManus often woos the owners for years before they sell. “The deals will often start, stop, then come back later,” he says.

Last year’s acquisition of Ram Forest Group, for example, followed a 10-year courtship of the family matriarch. “I’d meet with her almost annually, and she’d always say, ‘I promise you, Brian, when the time comes, I will call you.’ And she did.” Ram, which specializes in residential lumber rather than poles or ties, might seem to defy the foolscap criteria, until you look closer. Stella-Jones did, in fact, already have a small lumber operation, through which it served the Home Depot Canada indirectly, via a wholesaler. Ram was a competitor in Ontario that dealt with the Home Depot directly. The purchase filled in a key regional weakness in Stella-Jones’s Canada-wide lumber network and enabled it to eliminate the wholesaler to create seamless, end-to-end service for Home Depot Canada. Another no-brainer, right? “Absolutely,” says McManus.

After an acquisition, he’s happy to leave existing management in place. And once people join the Stella-Jones team, they don’t leave. While the company has more than 2,000 employees and 34 facilities across the continent, the core management is about 20 individuals, most of whom started with McManus. Marla Eichenbaum, vice-president, general counsel and secretary, has been at Stella-Jones for 18 years, a fact that surprises even her. “It’s so exciting!” she laughs, knowing how that sounds in reference to a pole seller. “I love coming to work, not because there’s a hunk of treated wood in somebody’s truck but for the people, the interaction and the respect. You can say what you want to Brian.”

Stella-Jones may be a billion-dollar-plus multinational, but it still runs like a small company—something that’s a point of pride for McManus. “We keep the politics, the bullshit out. I tell people, ‘You’re not going to lose your job by making a mistake. You’ll lose it by trying to hide it.’ If there’s an issue, let’s ring the bell and deal with it.”


Very few CEOs of public companies can boast 15-year tenures; the average is five. But in the case of McManus, the bigger surprise is that this 47-years-young star hasn’t left to apply his talents to a bigger canvas. He’s had offers. “Yeah, you have days when maybe another challenge would be nice,” he says, “but I still see opportunity here.”

That opportunity is, in large part, more consolidation, especially in the utility pole market—which is expected to experience a major boom. Most poles were installed in the postwar era, when utilities expanded the grid, and they are now passing the end of their projected lifespans. “It absolutely will happen, but it’s going to be lumpy,” says McManus. “One of my salespeople said, ‘The pole is like this elastic you can keep pulling but in time will snap.’”

The new Home Depot contract immediately doubled Ram’s lumber business, turning the niche into more than 15% of Stella-Jones’s sales—a significant revenue stream, with good growth prospects, says Aghazarian. With an estimated 50% of the North American railway tie market and close to 40% of utility poles, Stella-Jones still has runway left. “I’ve had a lot people tell me, even in year two [of McManus’s tenure], ‘The growth is gone; he’s done all the acquisitions he can do,’” says Vendittelli. “Yet he always finds different opportunities.”

Still, a decade and a half of the same kinds of acquisitions, with little in the way of innovation—doesn’t it get old after a while? McManus struggles with that question. He concedes that when the company becomes a utility-style dividend stock, he may bow out, but he has trouble imagining his departure. “I started my career as an auto mechanic and never expected I’d end up running a sizable company, so I’m just enjoying it.”

That may sound like a dodge, but McManus likes stability. He has been married for 23 years, he is a lifelong Montrealer, and he is surrounded by a trusted team. Why take on the stress of some big, problem-ridden outfit like Bombardier that’s full of the politics he hates? Fundamentally, McManus sees Stella-Jones as his own family business. “I still consider myself an entrepreneur,” he says. “I view this as my company, and that’s how I treat it.”


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