Caesarstone Ltd (CSTE) 2013 Q1 法說會逐字稿

Good day and welcome to the Caesarstone Sdot-Yam Limited first-quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Allison Townsend.

Thank you, Audra, and good morning to everyone.

Certain statements in today's conference call and responses to various questions may constitute forward-looking statements. We wish to caution you that such statements reflect only the Company's current expectations and that the actual events or results may differ materially. For more information, please refer to the risk factors contained in the Company's periodic filings with the Securities and Exchange Commission.

In addition, the Company will make reference to certain non-GAAP financial measures including adjusted gross margins, adjusted operating expenses, adjusted net income, adjusted net income per share, adjusted EBITDA, and various metrics that may be presented on a pro forma basis. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the Company's first-quarter earnings release, which is posted on the Company's IR site.

With that, I would now like to turn the call over to Yosef Shiran, Caesarstone's Chief Executive Officer.

Thank you. Good day and thank you for joining us to discuss our first-quarter results. We have had a good start for the year with a strong first quarter, both for sales and profitability. I would like to start with some highlights for the quarter.

Sales in the first quarter increased by 13.5% to $76.4 million. This was led by strong growth in North America and is a record performance for the first quarter. Adjusted EBITDA in the first quarter was $17.6 million and our margin improved to 23.1%, almost 3 full points better than last year.

With the growth, we continue to capture the benefits of scale. We have also benefited from the supernatural line rollout, which has been very well received by consumers around the world and provides higher margins.

Adjusted net income for the first quarter was $11.3 million, up 52% from last year's first quarter. Our first-quarter adjusted earnings per share were $0.32. We are pleased with our strategy and execution so far, and we are excited to see many investors appreciating our company as we completed our secondary offering a few weeks ago.

I would like to quickly update you on our performance in each region around the world. I will start with North America.

First-quarter sales in North America grew by 25% to $34.4 million. The US is becoming our biggest market, grew 26% to $23.7 million, and Canada grew 22% to $10.7 million. In these markets, the consumer awareness, of course, as the premium material continues to grow and we believe that Caesarstone is developing a reputation as the best brand in the quartz market.

Australia grew 2% to $19.4 million, 4% on a constant currency basis. Our team there continues to do good job of rising above the tough market conditions. I would note that the market reception to our supernatural products has been also very good in Australia.

Israel grew by 14% to $10.6 million, 12% on a constant currency basis. While this is a mature market for us, we are pleased to see such growth supported by significant ASP improvement due to the introduction of new products, primarily the supernatural.

In Europe, while the economy remains challenging, sales grew by 3% to $5.9 million; 2% on a constant currency basis. We continue to expect this market to remain challenging throughout the year.

Revenue in the rest of the world was up 8% to $6.2 million in the first quarter. We believe that there is a meaningful opportunity for us in a variety of markets around the world and we are pleased to see continued success. We are happy with the global success of our supernatural design, which was enabled by our strong R&D, deep understanding of the market and consumer preference, and good execution on manufacturing and marketing. Innovation, quality, and design are what Caesarstone is known for and the supernatural lines is additional evidence of that.

In summary, things are going well across the business. We are capturing growth in our key markets, building new capacity, delivering innovative new products, and reinforcing our brands.

Yair will now take you through the numbers in more detail.

Thank you and good morning to everyone. I will start with our income statement for the first quarter. Sales in the first quarter increased $76.4 million, a new first-quarter record. This represents a growth of 13.5% compared to $67.3 million in the first quarter last year. On a constant currency basis, sales increased by 13.9%.

Gross margin in the quarter was 44.8%, [up 3] percentage points from 41.8% in the first quarter of last year and up 1.8 percentage points, eliminating last year's IPO bonus for manufacturing employees. The increase was primarily driven by the benefit of scale, the higher-margin associated with the rollout of supernatural, and a favorable regional mix.

Operating expenses in the first quarter were $21.1 million, 27.7% of sales. This is 3.5 points better than last year's first-quarter expense rate of 31.2% of sales. I would note that last year operating expenses included $1.1 million for the IPO bonus and $0.8 million for management fees.

Operating income in the first quarter was $13.1 million compared to $7.2 million last year. Our operating margin was 17.1%, up from 10.6% in the first quarter of last year.

Adjusted EBITDA in the first quarter increased by 28.9% over the prior year and was $17.6 million, 23.1% margin. Finance expenses in the first quarter were $0.2 million compared to $1.5 million a year ago, which was mostly related to FX impacts. Our FX within the first quarter was approximately $2.2 million, 16.9% of the income before tax. This compares to a tax rate of 13.2% in the first quarter last year.

Tax charges this quarter included $0.5 million worth of adjustment on deferred tax assets related to the reduced tax rate in Israel. Excluding this impact, our effective tax rate would have been 12.9% this quarter.

Net income attributable to controlling interests more than doubled to $10.5 million from $4.8 million last year. Earnings per share in the quarter were $0.30 on 35 million shares outstanding. Last year earnings per share were $0.18, but on a weighted average of 27.5 million shares.

Adjusted net income in the first quarter was $11.3 million compared to the prior-year level of $7.4 million. Adjusted earnings per share were $0.32 compared to $0.27 last year.

Turning to our balance sheet, it continues to be strong. Cash and bank deposits at the end of the quarter were $73.2 million. Net cash balance grew by $3.1 million from December 2012 and now stands at $62.9 million.

Receivables at the end of the quarter were $46 million. DSO of 65 days this quarter, in line with previous levels. We were able to utilize Q1 seasonality to build up our finished goods inventory, which will help us with the continued strong demand for our deposits. Inventory at the end of the quarter was $64.2 million, up compared to $60.6 million at year-end.

Now with respect to our guidance, we are reiterating our revenue guidance for the year in the range of $330 million to $340 million. With regards to adjusted EBITDA, given the strong profitability in the first quarter, we now believe that our results will be in the upper half of the range of $76 million to $80 million.

Thank you and we are now ready to open the call for questions.

(Operator Instructions) Steven Kim, Barclays.

It's John actually filling in for Steve. Just wanted to maybe get a little more color on what you are seeing on Australia. A lot of your competitors, or not competitors, other building product companies, have seen pretty dramatic decreases in volumes there.

Can you give us an idea how volumes in Australia trended and how mix played a role in this quarter's results?

So I think in Australia, as we reported, we managed to grow a little bit year over year in this quarter, mainly supported by the supernatural success and also by the overall quartz story and material conversion. It is true that the market in Australia is depressed in the last two years, but even with that we managed to find our way through these turbulent market conditions, and we believe that we can continue with this trend in Australia.

Okay. And just to get a better sense, where are you guys as far as capacity utilization? Then, since you are underlevered, have you given thought to possibly adding debt here or a bank loan facility in order to kind of pull forward some of your capacity additions that you've outlined for us?

So I think in terms of capacity, and I don't recall exactly from our last discussion what exactly we discussed, but I think there has been an improvement. As we said in the past, even though we don't buy full lines even until today, we mentioned increases in our capacity in the last few years by main two things. First of all, investment in additional improvements within the line but also improvement in the processes.

So so far, we feel good with this capacity since we managed to increase it with the current four lines. The fifth line is going full steam ahead and is supposed to be due on time. So as we reported by the fourth quarter, we intend to start to operate it. So we feel okay as far as capacity is concerned.

Great, thank you, guys. Good quarter.

Michael Rehaut, JPMorgan.

Good morning. It's actually Will Wong on for Mike. Great quarter.

My first question is regarding the gross margin expansion. On a year-over-year basis you had mentioned that it was driven by new products, regional mix, and also operating leverage.

I was just wondering if you could provide a little bit more color in terms of year-over-year improvement. What the main drivers were in terms of -- was it the new products, was it the regional mix, or was it the operating leverage? If you could just provide some more color on that, that would be great.

So the volume impact, the benefit of that volume was the biggest contributor of the three. We do not mix and the new product impact, the supernatural impact, was more or less the same.

Okay, great. In terms of the US specifically, which channels are you guys seeing the most expansion and which channels are you most excited about over the next 12 months?

I think that in general our growth in states is related to around 50% to new home starts today, 35% to remodeling, and about 15% to commercial. So, of course, new home starts supports this trend. At the other end, repair and remodeling is not growing in the markets, not for us, and commercial is also not growing so much in the market. So we are enjoying, of course, the new home starts in the residential area, in the multistory building, and in the houses.

Also, we are benefiting from the material conversion and the quartz increases in penetration in all of the segments, so this is what we see in the space. Basically, not much different from what we saw in the beginning of the year.

Then just last question on the gross margins, just going back to that for a second, you guys were at 44.8% this quarter. Is that something that you think is a level where you can maintain it for the rest of the year, just given that last year as we went through the quarters you saw your gross margins pickup in terms of seasonality in the second and third quarter? Is that something that we can expect this year as well?

I think we are providing the EBITDA numbers and the gross margin, which is derived from these numbers, is what we currently believe that we can achieve or whatever will be. So we are not just -- we are just -- according to the policy we cannot provide gross margins or operating margin projection.

Great, thank you.

John Baugh, Stifel Nicolaus.

Thank you, terrific quarter. Great start to the year.

Quickly, on supernatural, when you introduced that and we saw the product being made for the first time, your production speeds were slow and you were pricing it at a significant premium. I'm curious as to whether your speeds or yields have improved and your thought process about pricing going forward.

I think, overall, every new product, and of course specifically with new technology, sometimes it takes time until production processes matures and you can reap all the benefits from it. Then, yes, we did have quite a tough start last year. It was reflected in Q4 results and we are improving with the time.

So what you see here, the impact of the supernatural in Q1 you see two things. One, you see that we are selling more of it with the time, at least for the time being, and also the improvements in the production rates and methods of the products.

How do we think about maybe longer term, next two to three years, about how this product line, because it's just getting introduced in the US if I understand correctly -- I assume we will see it in New York in a couple of weeks here. But how do we think about this product line influencing overall both revenue and gross margin through time?

Again, sort of getting back to the pricing question. Will you remain at a significant premium to your core product line? Thank you.

So again, John, I don't think I'm able to reply in details to the question, but overall I think the idea is to present superior products and to understand the demand curve and to place right in the market. This is demonstrated with the supernatural.

We will continue to launch additional products of this nature and of other natures, and we believe that the technology that we are developing definitely will help us to improve our performance. Again, as far as this is related and avoiding all other measures that could happen or could not happen. I don't know what will happen in the market and all the other things, but this is specific --- I mean the market externally, not in Caesarstone.

So specific for that you would see more product of this nature and also new products. I believe that this strategy is the right strategy and it supports Caesarstone, the brand, and the performance.

Maybe lastly, if you could comment on two things, one, any changes in raw material outlook? Then, secondly, is there ample supply inventory of supernatural in the United States? And is that launch in the US more or less on the timing path that you had outlined? Thank you.

For the supernatural, we have started to launch the supernatural in the States in March and the progress is very good so far. So I don't know if you have not managed to see it in New York, maybe we refer you to somewhere to see it, but it's available in the market. Not to full extent; it takes time until the launch to the whole country will be completed, but this is in progress.

And in terms of raw material, we don't see any major changes.

Thank you.

(Operator Instructions) Peter Lisnic, Robert W. Baird.

Good morning, gentlemen. First question just a quick modeling one. Tax rate looked a little bit higher than we had modeled. Just what is the outlook for tax rate as we look to 2013 for the rest of the year?

As I mentioned, we have kind of a one-time adjustment this quarter of $0.5 million related to the adjustment of our deferred tax assets related to the reduced tax rate in Israel. So with all of it, if you take it aside, the tax rate this quarter would have been 12.9% and I believe that we are anywhere between 10% to 15% range for the rest of the year.

Okay, great. Then if I look at the gross margin expansion, very nice expansion versus last year, strong start to the year. As you start to ramp capacity or put in some of the new capacity additions here, how should we think about your ability to expand gross margins relative to either last year or prior levels? What sort of impact should we be thinking about in terms of costs when it comes to some of the capacity additions as you start to put those in the ground?

When we build the new line in now in Israel, first of all, we capture some expenses ahead of time. We hire people ahead of time, train them, and a lot of investment before the line is fully equipped. And this is taken into account within our guidance.

We do expect that when we open a line there is a temporary inefficiency at the beginning, because we don't just open it and run in full. (inaudible) we believe this will be minor and short in term. So, again, it's -- this year I don't think that there will be a significant impact. I expect that there will be a more significant impact when we open a production facility in the US.

Okay. Is there any way that maybe you can give us at least some color commentary on how significant it might be when that US production has begun?

We didn't quantify it externally, but on the other hand you should remember there are other factors, such as supernatural and the new product mix, and there's volume leverage in general on both margin and operating expenses. So, overall, I hope that we will be able to continue and maintain strong EBITDA margins.

Okay. Then, if I remember right, you are kind of at the early days of an ERP implementation. Was there any cost that you booked for that in the first quarter that you can quantify or what the impact might be for the rest of 2013 would be helpful as well?

We did go live in Israel and in Canada at the beginning of April with our new ERP system. So far it was kind of a construction in progress, so to speak, accounting wise and we will start depreciate it now, so there will be some increased depreciation that goes with that.

And I believe that there will be certain expenses to bring it up to the level that we want. You know, when you launch an ERP you still have some work to do and to improve it. So there will be some of this and, again, it's all baked into our guidance.

All right, thank you. That was helpful.

That does conclude today's conference. I would like to turn it back over to Yosef Shiran for closing remarks.

Thank you, everyone, for taking the time for the call today. We are very pleased to have started the year with a good quarter and think we have an excellent opportunity to sustain a strong business and an ability to create value for our shareholders. We are looking forward to talking to you again and have a good day.

That does conclude today's conference. Again, thank you for your participation.