Caesarstone Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 8, 2024

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Caesarstone First Quarter 20 24 Earnings Conference Call. Today, all participants will be in a listen only mode. Please note that today's event is being recorded. I would now like to introduce you to our host for today, Brad Cray of ICR. Thank you, and you may begin, sir.

Speaker 1

Thank you, operator, and good morning to everyone on the line. I am joined by Joce Chorin, Caesarstone's Chief Executive Officer and Nahum Trost, Caesarstone's Chief Financial Officer. Certain statements in today's conference call and responses to various questions may constitute forward looking statements. We caution you that such statements reflect only the company's current expectations and that actual events or results may differ materially. For more information, please refer to the risk factors contained in the company's most recent annual report on Form 20 F and subsequent filings with the SEC.

Speaker 1

In addition, on this call, the company will make reference to certain non GAAP financial measures, including adjusted net loss income, adjusted net loss income per share, adjusted gross profit, adjusted EBITDA and constant currency. The reconciliation of these non GAAP measures to the most directly comparable GAAP measures can be found in the company's Q1 2024 earnings release, which is posted on the company's Investor Relations website. On today's call, Yoss will discuss our business activity and Hume will then cover additional details regarding financial results before we open the call for questions. Thank you. And I would now like to turn the call over to Joss.

Speaker 1

Please go ahead.

Speaker 2

Thank you, Brad. Good day, everyone, and thank you for joining us to discuss our Q1 2024 results. Our Q1 results are aligned with our goals to deliver full year of positive adjusted EBITDA and cash flow from operations. Our team has demonstrated resilience and adaptability to start off 2024 in the face of persistent global economic headwinds, regulatory changes in Australia and the ongoing conflict in Israel. Yet our revenues fell short of our expectations in the first quarter, and we are working decisively to improve execution and resume revenue growth.

Speaker 2

Despite these challenges, we have made significant progress in our strategic transformation, shifting from manufacturing centric approach to a strategy that prioritizes research and development, marketing and branding to drive revenue growth. We are successfully transforming our manufacturing footprint, having transitioned over 50% of our production to our global network of production business partners. This should allow us to better align production levels and sources with the demand for our products. Although we are making this shift, we still have strong production capabilities in quartz and growing capabilities in porcelain. We are beginning to see the benefits of these restructuring actions, which contributed to the Q1 gross margin expansion.

Speaker 2

The Stothian and Richmond Hill plant closures are on pace to have a more pronounced impact on our results in the second half of 2024 and should ultimately save us approximately $30,000,000 annually by next year compared to 2023. These savings are getting partially reinvested into additional innovation and marketing efforts to drive higher revenues. Since announcing our restructuring plan last year, one of our primary financial objectives has been to generate positive cash flow from operations and improve our net cash position. We have made solid progress on this initiative and plan to continue delivering positive cash flow from operations. With a fortified balance sheet and ample net cash, we are well positioned to continue executing on our strategic objectives in 2024.

Speaker 2

Furthermore, we have separated our U. S. And Canadian leadership teams to allow each team to better focus on the opportunities in their respective markets. Regarding the shift of the Australian market to free crystalline silica products, we have been proactive in the development of alternative products that comply with the new regulations and have begun offering them in the market. By the end of the Q2 of 2024, a majority of our collection will consist of alternative products, with a full collection of compliant products available by end of the year, which we believe will allow us to retain our leading position in the Australian markets.

Speaker 2

In conclusion, as we progress through 2024 and navigate current markets dynamics, our strategy is firmly focused on enhancing innovation and brand development while further refining our production footprint. We're committed to reducing our manufacturing cost base while increasing investment in R and D, marketing, our brand and the expansion of our premium porcelain offering to drive sales growth and profitability across the business. We remain confident that Caesarstone can rise to its potential. Thank you. And I will now turn the call over to Nahum to walk you through the details of our financial performance.

Speaker 3

Thank you, Joss, and good morning, everyone. Looking at our Q1 results. Global revenue in the Q1 was $118,300,000 compared to $150,600,000 in the Q1 of last year. On a constant currency basis, sales were down 21%. The decrease was primarily driven by lower volumes due to softer global market conditions.

Speaker 3

In addition, our sales were impacted by competitive pressures. In the U. S, sales were down 19.8%, mainly tied to soft residential end markets and less favorable product mix resulted in lower ASP related to the impact of the higher interest rates on housing market and renovation projects. Partially offset by our commercial and big book channel revenues. Canada sales were lower by 9.9% on a constant currency basis, experiencing similar market dynamics as the U.

Speaker 3

S, but to a lesser extent. Australia sales were off by approximately 17.5% on a constant currency basis, mainly reflecting slower market conditions and an air pocket in sales as we introduce alternative materials that comply with new regulations during the first half of twenty twenty four. In Israel, sales were off 39 0.3% on a constant currency basis in the Q1, mainly as a result of the war on terror, which has significantly diminished regional activity. On a sequential basis, sales in Israel improved 68.9%, which is encouraging. Looking at our Q1 P and L performance.

Speaker 3

Our gross margin was 24.5% for the quarter. Adjusted gross margin was 24.4% compared to 19.7% in the prior year quarter. The notable improvement in our margins on a year over year basis is partially due to the enhanced efficiency of our production footprint, a result of our previous restructuring efforts. We believe these enhancements to margin are sustainable and should continue to ramp through 2024. The gross margin also reflects roughly 260 basis points of benefits related to the timing of excess inventory sold, mainly in Australia and from our Richmond Hill plant during the Q1.

Speaker 3

I would like to take a moment to address the recent trade restrictions imposed by Turkey. We have been sourcing raw materials for several years from Turkey and the recently announced trade restrictions could have a negative impact on our Barlev plant production in the short term. We are actively seeking alternative sources for raw materials to minimize any potential disruptions. While we anticipate an increase in production cost at our Barelev manufacturing facility, due to these restrictions, we do not foresee currently a significant negative impact on our overall financial results. Our operating expenses in the Q1 were 34 $600,000 compared to $35,500,000 in the prior year quarter.

Speaker 3

Excluding legal settlements and loss contingencies, adjusted operating expenses were 28.6 percent of revenue compared to 24.5 percent in the prior year quarter. The higher percentage mainly resulted from the lower revenues. Adjusted EBITDA in the Q1 was $600,000 relatively stable compared to the $700,000 in the prior year quarter. Turning to our balance sheet. Eurostone has a strong balance sheet with ample liquidity to support our planned strategic objectives.

Speaker 3

As of March 31, 2024, cash, cash equivalents and short term bank deposits totaled to $96,200,000 with a total debt to financial institutions of $6,800,000 During the Q1, we generated another quarter of positive cash flow from operations of $8,700,000 Our net cash position as of March 31, 2024 was $89,400,000 compared to $83,500,000 as of December 31, 2023. In regards to our outlook, based on our significant restructuring initiatives underway, our leaner operations and our focus on profitability, we are reiterating our outlook for adjusted EBITDA to be positive in the full year of 4. In addition, we continue to expect another full year of positive cash flow from operations. Historically, we see a sequential increase in revenues in the Q2 compared to the Q1 due to seasonality. In regards to the Zotian plant closure, which occurred during the Q2 of 2023 and Richmond Hill plant closure, which occurred during January of 2024, we reiterate our expectation to realize savings of $20,000,000 in $20,240,000,000 $30,000,000 thereafter.

Speaker 3

We have begun to sublet portions of our non cancellable lease agreement associated with the Stotia manufacturing facility, which will allow us to recognize additional cash inflows on top of the plant cost savings. We are also looking for the best alternative to monetize our Richmond Hill site. In conclusion, our strategic actions to restructure the business and to optimize our cost structure have begun to yield financial benefits, reflected in this quarter mainly in our improved gross margin and sustained positive cash flow even on lower volume. We remain committed to our strategic initiatives that aim to enhance our sales and marketing initiative, production efficiency and drive growth in our top line. With that, we are now ready to open the call for questions.

Operator

Thank you. We will now begin the question and answer session. And today's first question comes from Reuben Garner with The Benchmark Company. Please proceed.

Speaker 4

Thanks. Good afternoon, guys. Hi, Ruben. I guess to start, pretty strong gross margin performance despite what was, I think, a weaker volume environment than expected. Can you talk about what kind of surprised you to the upside there and how sustainable that 24% plus level is as we go through the rest of 24?

Speaker 5

Hi, Ruben. It's nothing. So the gross margin mostly reflects the restructuring actions that we already took in the last year. We mentioned roughly 2 60 basis points of excess inventory that we expedited its sales in connection with the closure of the Richmond Hill plant and in connection with the future regulations in Australia. So we expedited the sale of certain inventory items.

Speaker 5

So these items is significantly higher than usual, the 260 basis points. But other than that, we benefited from the restructuring actions, specifically from favorable production source mix, better prices on raw materials and landed cost basically. This is on the positive side. On the other hand, as you also mentioned, the volume was a negative impact and also the significant unfavorable product mix that resulted in lower margins.

Speaker 4

And may I just add

Speaker 2

that in general, it also reflects the every restructuring that we have been going through in the last year. And I think that our platform is stronger, and we will we estimate that we will continue to see the benefits of that in also in the gross margin.

Speaker 4

So how much revenue how much did revenue benefit from the accelerated sales as you said some of those products share on inventory?

Speaker 5

So Ruben, can you repeat, please? The line was breaking.

Speaker 4

Sorry about that. Yes, can you how much did revenue benefit from the accelerated sale of the inventory?

Speaker 5

So it was 2.60 how much revenue? In terms of revenue, it wasn't that significant, but those items were fully covered with inventory provision. So it had a significant impact mainly on the gross margin.

Speaker 4

Okay. I got it. And your outlook for the full year to be breakeven on EBITDA, what sort of revenue number do you need to achieve that? I mean, you were breakeven in the Q1 at $118,000,000 I know you had a little bit of help the one time inventory item, but how do we think about that? What full year revenue target do you need to hit to achieve that breakeven?

Speaker 5

So, we do not provide specific guidance on revenues for the full year. But as we discussed also previously, we do expect to see the same seasonality trend that we used to see in previous years, meaning Q1, the lowest quarter and then improvement in Q2 and Q3. And Q4 is slightly lower than the second and the third quarter. This is in terms of revenues. And we do expect to be to show higher profits or higher margins as we continue through 2024, as we complete the more expensive inventory that came from Richmond Hill plant and as our restructuring actions more significant will give us a more significant impact on the overall results.

Speaker 5

And with regard to the outlook, we reiterated that we expect a positive EBITDA for the full year and also a positive operating cash flow.

Speaker 4

How much of the $20,000,000 in savings has been realized thus far?

Speaker 5

The $20,000,000 is the number for the full year. So basically 1 quarter. And we expect to benefit and we expect to gain more and more savings as we continue through 2024, again, on the back of closing the Richmond Hill plant.

Operator

And the next question comes from Stanley Elliott with Stifel. Please proceed.

Speaker 6

Hey, guys. This is Andrew on for Stanley. Thank you for taking my question. I think you said that U. S.

Speaker 6

Big box stores were holding up relatively better than other parts of the business. I'm wondering if you could expand on that. What's your outlook for repair and remodel for this year? And then do you have any commentary on inter quarter trends or even trends you've seen for U. S.

Speaker 6

Volumes into April? Thanks.

Speaker 2

Hi. Thanks. Yes. So in general, we performed better in the big boxes than on the residential segment. We cannot say that we have the global analysis of why is it happening.

Speaker 2

We believe that high interest rates reduce or depresses the activity on the residential side. On the other hand, big boxes are still doing well and so ourselves within these channels. And again, going forward, we will continue to expand our activity and our efforts in all the channels in the States as well as in other places, in other markets like Canada, like Australia. In the States specifically, we will see more effort on the contractors, developer segment. And we hope that step by step, we will also see improvement in the residential segment.

Speaker 6

And then I'm wondering if you could give us an update on the porcelain rollout. How is that going? And what has early feedback from customers been like so far?

Speaker 2

So are you relating to the rollout in the States or in other areas?

Speaker 6

U. S. U.

Speaker 2

S? Yes. So yes, we started to offer the porcelain in the States. Overall, the porcelain activity is still small for Silverstone, but very promising. We are investing a lot in expanding the collection, improving it, offering additional products within the postal and realm.

Speaker 2

So it's not significant yet in terms of numbers, but it is very important in terms of the potential for the future of Caesarstone.

Speaker 6

And then last one for me. I was wondering if you could quantify how much inventory is left at the Richmond Hill plant and when you would expect that to hit cash flows or earnings? Thanks. So

Speaker 5

the majority of the inventory was sold and digested through Q1, and it is also reflected in the gross margin, as we discussed in the earnings. But and to a lesser extent in Q2. So basically, most of it is done in Q1. Let's say that after Q2, we will not see the negative impact of the all inventory of Rich Madel.

Operator

And at this time, this concludes our question and answer session. I would now like to turn the conference back over to Yoss Sharon for any closing remarks.

Speaker 2

Yes. Thank you. And thank you all for your attention this morning, and we look forward to updating you on our progress next quarter. Bye. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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Earnings Conference Call
Caesarstone Q1 2024
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