Caesarstone Ltd (CSTE) 2013 Q2 法說會逐字稿

Good day, everyone and welcome to the Caesarstone Second Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. James Slivinski of ICR. You may begin, Sir.

Thank you, Operator, and good morning to everyone. I'd just like to remind you all of the Company's Safe Harbor language.

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 final prospectus for its IPO and in periodic filings with the Securities and Exchange Commission, including our recent 20-F filing.

In addition, the Company will make reference to certain non-GAAP financial measures on the call today including adjusted gross margin and adjusted operating expenses, adjusted net income and 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 second quarter-earnings release, which is posted on the Company's website.

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

Good day and thank you for joining us to discuss our second-quarter results. This was another record for any quarter for both sales and profitability. I would like to start with some highlights for the quarter.

Sales in the second quarter increased by 17.9% year over year, rising to $89 million; our rate of growth accelerated from the first-quarter level of 13.5%. The U.S. and Canada continued to be our strongest growth regions.

We are also pleased with our profitability in the second quarter. Adjusted EBITDA was $24.6 million, up 36.9% compared to last year.

Adjusted EBITDA margin improved to 27.7%, up 3.9 percentage points compared to last year. This increase was driven by several factors, especially Super-Natural's success and regional mix.

Adjusted net income for the second quarter was $18.6 million, up 55.2% versus last year. We posted adjusted earnings per share of $0.53 in the quarter, versus $0.35 in the same quarter last year.

We believe that our growth is coming from our strong brand supported by our innovation. This is demonstrated by the success we've seen with Super-Natural in our key regions. Our growth is also coming from the continued material conversion to quartz, especially in North America.

Here is an update on each of our major markets.

I'll start with the United States which was our largest market in the quarter. Sales grew by 33.6% to $30.9 million, compared to $23.9 million in the second quarter last year. We are benefitting from our improved product offering, the investments we made to increase the availability of our product, and elevate our sales and marketing capabilities. We are successfully positioning Caesarstone as the leading quartz brand in the market with the highest level of service.

Canada was our third-largest country by sales in the quarter and grew the fastest. Sales in Canada were up 35.3% to $13.1 million. Sales were up 37% on a constant-currency basis. Similar to the U.S., quartz is becoming a much more important part of the market. We are positioned well in Canada and lead the market by brand and size. We expect to see continued long-term growth there.

Australia, at $23.6 million, was our second-largest market. We grew 9% compared to last year, and 10.8% on a constant-currency basis. As you know, we have been outperforming the market for the past few quarters, based on good execution and new product introductions. Speaking about the economy, we know that housing starts in Australia are forecasted to increase by 7% in fiscal 2013, though renovation activity continues to weaken.

Israel also grew nicely in the quarter and was up 14.9% to $10 million. On a constant-currency basis, growth was 8.9%. We were pleased to see this growth in our most mature market.

In Europe, our smallest territory, sales were down 17.4% to $4.5 million and down 19.5% on a constant-currency basis. This is mainly due to issues related to delivery execution of small-volume orders under our new ERP system. We expect to resolve this issue toward the end of Q3. As expected, the market remains challenging and we are managing the business carefully to limit the impact on our profitability.

Revenue in the rest of the world was up 1.6% to $6.9 million in the second quarter, basically flat on a constant-currency basis. These markets were also affected by delivery challenges similar to those experienced in Europe.

We continue to run close to full capacity. In the second quarter, we leveraged some inventory we built up in the first quarter to drive the growth. Until we bring the new line into operation late this year, sequential revenue growth in the second half compared to the first half will be more challenging. We are on track to increase our capacity in Bar Lev, our production site in Israel, which will enable us to pursue growth more aggressively starting in 2014.

We also continue to target December 2014 for the completion of the first of two lines in a new U.S. facility. We've increased our capital expenditure estimate for this project to $100 million, from $75 million on 60% of the costs in Phase 1. This is primarily to incorporate additional capabilities which are expected to improve our efficiency and reduce our ongoing costs.

Thank you and I will now turn the call to Yair.

Thank you, Yosef and good morning to everyone. I will start with our income statement for the second quarter.

Sales in the second quarter increased by 17.9% to $89 million, compared to $75.4 million in the second quarter last year; this is a record level of revenues for any quarter in our history. On a constant-currency basis, sales increased by 17.7% versus last year.

Gross margin in the quarter of 49.8% was unusually strong because of a one-time benefit of $3.5 million. This relates to a change in the estimate for the value of inventory following the implementation of our new ERP system in April.

Excluding the non-recurring adjustment, adjusted gross margin in the quarter was 45.9%, up 290 basis points versus the same quarter last year. This is due to the benefit of scale, regional mix and product mix related mostly to the growth in our Super-Natural line.

Operating expenses in the second quarter were $22.1 million, or 24.8% of sales; versus last year's $18.6 million which was 24.6% of sales. I would like to note that this year expenses included $1.4 million of expenses associated with our recent secondary offering and last year included a $1 million credit for the reversal of a litigation reserve. Excluding those non-recurring items from both quarters, adjusted expenses were $20.6 million this year or 23.2% of sales; compared to $19.6 million or 25.9% of sales in the same quarter of last year.

Operating income, adjusted for the one-time items I just mentioned, grew by 56.9% to $20.3 million, compared to $12.9 million in the second quarter of last year.

Our adjusted operating margin grew to 22.8% of revenue, from 17.1% last year.

Adjusted EBITDA in the second quarter, which eliminates share-based compensation, the excess cost of acquired inventory and other non-recurring items; increased by 36.9% over prior year to $24.6 million, a margin of 27.7% versus last year's 23.8% margin; an increase of 390 basis points.

Finance income in the second quarter was $0.4 million, the same level as in the year-ago quarter.

Our taxes in the second quarter were $2.5 million, 11% of income before taxes; compared to the last year rate of 18%. This lower rate reflects mainly the reduction in Israeli tax rates related to our preferred enterprise status that became effective January 1, 2013.

Adjusted net income attributable to controlling interest in the second quarter increased by 55.2% to $18.6 million, from $12 million last year.

Adjusted earnings per share in the quarter were $0.53 on 35.1 million shares. Last year, earnings per share were $0.35 on 34.4 million shares.

Turning to our June 30 balance sheet; we grew our cash and bank deposits balance by $6.3 million from the end of the first quarter to $79.6 million, while repaying $1.9 million of loans.

Receivables at the end of the quarter were $55.3 million (sic - see press release). DSO was 53 days this quarter, in line with recent levels.

Inventory at the end of the quarter was $53.3 million. This is down $0.9 million compared to the end of the first quarter, despite the valuation adjustments we made of $3.5 million. As we discussed previously, we had built up some inventory in the first quarter that helped us serve second-quarter demand.

In general, our capital position remains strong and we continue to believe we have the necessary funds in cash flow to finance our growth and planned capital expenditures.

Now with respect to 2013 guidance; we have delivered two strong quarters in the first half of 2013, especially with respect to profitability. Therefore, despite the significant negative shift in currency, especially in the Australian dollar, we are increasing our 2013 adjusted EBITDA guidance from $76 million to $80 million range to a new range of $82 million to $85 million.

Revenues are also expected to be affected by currency and sequential growth is limited by capacity until year end. Therefore, we are reiterating our revenue guidance for the year in the range of $330 million to $340 million.

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

(Operator Instructions) Stephen Kim, Barclays

Thanks very much. Guys, congratulations; really good to see the story emerge- continuing to evolve; it's really great to see. Good job. I guess my first question relates to the margins that we saw in the quarter and seemed to be implying going forward. You had talked about three factors that were driving that and I was curious if you could give us a sense for how much mix shift-- and I guess particularly we're talking about the Super-Natural and how much mix shift do you think contribute either to what you saw in the quarter margin improvement, or in terms of what you're forecasting for the back half of the year? Thanks

So of the three factors we mentioned, the Super-Natural mix and the regional mix for the main items that grew our margins; and the volume impact was a slightly lower impact than those two.

Okay, great. Thanks very much. And when you talk about the regional mix, I guess essentially what you're talking about there is not just-- you're not just talking about the product mix in those regions, you're talking about the fact that some of your regions are more profitable than others. Can you give us a sense for the product mix specifically; how that contrasted versus the regional mix?

So it was not equivalent in impact and in the regional mix, our direct market carries a higher margin and we were doing very well in our direct markets.

Right, great. Okay, that's very helpful. Okay, great. That's very helpful. And then if you could just give us a sense for going forward, obviously capacity is the name of the game here for you guys. Demand does not seem to be the problem. Can you talk about your expectations for Bar Lev; what we should be thinking in terms of costs associated with that? Running through the P&L, not the capital investment which you've already described and thanks for that, but in terms of what we might see in terms of incremental costs that will be coming through the income statement over the next couple of quarters.

So in the second half, what we will see is some expenses [and adds] of generating revenue from this line. So there is also some of that in the second half because the line starts to produce slabs and there's some impact in the second half. And then we believe that once the line is up and running, it will be a very efficient line- like all of our Bar Lev lines and probably even more.

Michael Rehaut, JPMorgan

Hi, thanks. Good morning. It's Mike Rehaut. Congratulations also on a great quarter, guys. If we could just go into the great performance in the U.S. for a little bit; you've had now actually four quarters in a row of accelerated-- or three quarters in a row of accelerating year-over-year growth in the U.S. And I was hoping to get a sense of what IKEA contributed this quarter, if anything; I know that's just the beginning of a relationship; if Super-Natural helped and maybe by channel also; residential versus commercial; what were some of the big drivers there?

Hi Mike. So I think first of all regarding IKEA, it's going well and progressing according to plan, but given that this information related also to IKEA, we prefer not to provide specific details. But it's not something which is material yet.

As to the rest of the business or the product mix; and of course headed by the Super-Natural- has a very positive impact. Our product availability all over the country and all of what we have invested in the last two years is bearing fruits and you see the results. And in terms of channels, I think nothing new; we continue to work hard in all of our channels. Of course we benefit from both the new-home starts and the material conversion story. The new-home starts supports additional growth to the business and the renovation is still soft in the States, as you are aware of course.

So I think this is more or less what we see there.

Okay. Also in terms of the starting up of the additional line in Bar Lev later this year; I just wanted to get a sense if there was any-- I think this question was maybe alluded to before or asked before; but just get a sense if there is any expected incremental costs associated with that startup cost; if those would be broken out in the upcoming quarter or two and any-- I think on a bigger-picture question as well-- kind of working two questions in here so I apologize. But number one, any startup costs with the Bar Lev; and number two, as you think about the capacity that you expect to come online at the end of next year, are you running any actually incremental costs that might be alleviated once that comes on line? I mean certainly you've referred to extra freight. That's kind of a normal expected savings, but as you look into your cost structure down the road; if you can kind of give us an updated view on pluses and minuses about how the U.S. line or U.S. facility would change your cost structure on the positive side and perhaps from a tax perspective?

Okay, on the Bar Lev, we are not probably going to break this out separately, the running costs, and I hope that it will be quick and we will start manufacturing and delivering goods from this plant. As for the U.S. and I'm sure you saw that we updated our CapEx estimate and that went along with updating our estimate for the running costs which are actually looking pretty good now because a lot of the CapEx estimate adjustment has to do with improvement in the ongoing cost that will come after that.

When I try to compare it to Israel on big bulk; it seems that energy and freight will be the things that we will gain savings and labor and tax are the unfavorable things in general when I compare those two sites.

Dan Oppenheim, Credit Suisse

Thanks very much. I was wondering- you talked about the increase in terms of the new construction in the states with some of the remodeling slipping, a bit sluggish. I guess we're starting to see some others see better signs in terms of some of the bigger ticket remodeling starting to come through. But certainly it would be a tremendous opportunity in addition to new construction. What are you thinking about with that? Are you seeing any signs in term of that? Is that going to be more of a focus for you? Obviously with capacity limited, that's a bit of a different issue; but as the capacity comes on line, how do you think about that?

So I think that you're right. We feel some better momentum in the renovation as compared to what was before, but it's not significant yet. So looking again at the whole picture in the market, the first thing for us is that the quarter is being embraced to a higher level in the North American market and then of course the new home starts; renovation getting better, but very slightly.

Thanks. And then in terms of the capacity coming on line in the States; what is your thought in terms of just-- as you look at the sales and the acceptance of the material-- thoughts in terms of just when you would bring on additional capacity; are you sort of evaluating plans so that you will be able to have sufficient capacity as you look over-- think about sales and opportunities for 2015 and beyond?

So again Dan, what is the question exactly? I'm not sure I got it.

Just more thinking about-- as you think about capacity with the production in the States; and you think about sales growth; do you think about sort of enlarging so you're not limited in capacity from 2015 and beyond?

Yes, so we bring that all into account and this is why we build the infrastructure for two lines. Of course we are starting with one line because we want to control also our expenses. But this investment will serve also the second line and we will see what is happening in the market and start to build the second line when we believe the demand is there and to, of course, protect our capacity situation in the future.

Thank you.

John Baugh, Stifel.

Yes, good afternoon Yosef, Yair and James; great quarter. A couple things; I'm curious up in Canada there's a macro market that's slowing and your sales are not. So I was curious if you could talk about the penetration rate there that you're seeing and whether there is any correlation long term to the U.S. opportunity. And the second question would be relating to roughly how much inventory you were able to ship or to put another way-- how much you produced in the second quarter versus what you shipped and that being a guideline for the second half of the year. Thank you.

So John, first of all as to Canada, as you are aware we are also the biggest player in Canada and we have very strong position there, brand wise, and also in terms of our presence in the market. We see that quartz penetration in Canada is higher than in the States. Both of them are going up, but in Canada it's higher. And as expected from our side, this is compensated by the slowdown which is not huge, but there is a slowdown in the Canadian economy. So we continue to grow there and we expect this trend to continue. We don't say that it will be in the same percentage; whether it would be higher or lower; but we expect this overall growth trend to continue. So this is as to Canada.

As to the inventory levels; so we did produce more in Q1 to help us in Q2. I cannot get into the specific details of how much exactly Q2 was supported by Q1. But it has an impact. And this is why we say that sequential growth is limited somehow by capacity.

And as we think about 2014, refresh us again on the exact Bar Lev capacity expansion; maybe more in volume. One would presume you'll perhaps produce a little more Super-Natural design which would give you a little bit more revenue opportunity.

Okay, so first of all about the Super-Natural, I think that what you see that we are building here an edge, which is not to be undermined in terms of technology- technology-wise. And of course the Bar Lev line will help us to increase capacity and to increase the production of the quantity of Super-Natural. And this is what we see looking forward.

Just one, maybe one thing about Bar Lev; the increase of capacity will be in two installments; so the first one would be in the fourth quarter, the second one will be in the second quarter; because we are adding also a polishing line. I don't know if you remember, but we updated that we increased the investment there, so we'll have some additional capacity in Q4 and then additional capacity to the full extent of the line will be -- we will get there by end of Q1. So this is just to have the full picture of the Bar Lev projects.

Thank you.

Peter Lisnic from Robert W. Baird.

Good morning, gentlemen. The first question just on capacity with it being--approaching I guess theoretical maximums; are you seeing any shortages or service inefficiencies and maybe comment on how you feel about your market share, if you've got competitors out there that can perhaps temporarily take advantage of you being at your close to the peak in terms of capacity.

I think that we look at the business, first of all from a long-term perspective. And with that regard, we feel that we are taking the right measurement and we have a lot of success with the product development and understanding what the market it looking for. I don't think that market share is derived from specific quarters or two, and basically of course there is competition. It may be that in some occasions, somebody with available capacity can take an opportunity, but we assume that those will be small and will not impact our overall leadership position.

Okay, perfect. And then just given again, where you're at from a capacity perspective, can you maybe give us a little bit of color on what that means for pricing trends? Do you have a bit more pricing power because you're at this point where capacity is near its peak and maybe just give us a feel for what's happening from an industry pricing perspective?

So again, as far as we're concerned, we don't-- we look at what we do and also it's our customers for long term and we wouldn't like to make any changes because of capacity shortage. So we don't have any changes in pricing because of this situation. Of course we charge according to the value that we believe that we bring to the customers, but this has nothing to do with capacity, but with the value of design and quality of our products; so nothing that's expected to be on that front, on top of course of what we reported; so this is to that point.

In terms of your-- what was your second point piece exactly?

I actually think you've answered it in terms of pricing and market share trends. But if I could just ask one follow up on Bar Lev; maybe ask it a bit differently-- when you look at that line that you're adding there as a percentage of your total capacity today, what is the actual increment?

The increment from the Bar Lev additional line?

Yes, are we adding effectively 20% more capacity, 30%; how should we think about that number?

Yes think about it as an additional 25% as of the end of Q1.

Okay, okay; perfect; thank you very much for your time; nice quarter.

[Lars Stelman] from Adelphi.

Hi gentlemen, great quarter; thanks for taking the question. Can you elaborate as you did for Bar Lev also for the capacity expansion plan in the U.S., what milestones you have to reach to really be on line by the end of 2014? Thanks.

So as to Bar Lev, I think the picture is clear and we are closing to the starting point and we are on track with Bar Lev. As to the U.S., in terms of milestones, so from now to the end of 2014 we will have to finalize all the process relating to the site location starting the construction of buildings, order the lines and build it on site. It seems that the time that we have, until the end of 2014, is okay and again we feel that we are on track with this project.

So would that mean that by-- in 2015, we should have another line then in the U.S. running?

Yes. It will not run in full capacity from day one, but--

--sure, building up?

Yes.

Okay. Thanks.

Michael Rehaut, JPMorgan.

Thanks. So I think most of this has been hit on but I just want to make I understand fully. In terms of the-- any incremental cost coming in, in the back half of the year from running at full capacity, the view is that that is actually not too material? Is that correct?

In the second half, there will be some up front expenses related to bringing up the employees, training them, running a pilot manufacturing on this line and all of that until it's up and running. It is built into our guidance. It's within our guidance.

Okay.

But there's a cost [traction]. It's not huge but it could be material when you look at it. But it's built into our guidance so it's there.

Okay. And just going back to Super-Natural for a moment; could you just give us a sense of maybe within the U.S. and also on an overall consolidated basis, how much that contributed to the sales growth?

So this is relatively sensitive information in light of-- competitive sensitive information. What we can say is it's becoming significant. However we have also other successful products so we have also to remember that; and as I said, what is important is that this is a new technology that we built and we believe that this technology provides an edge as far as this type of product regards. And it seems that the market likes it.

Stephen Kim, Barclays.

Thanks very much, guys. I was curious if you could shed a little bit more light on how you assess the relative value out of the products, particularly I would say the Super-Natural which is a new and very innovative product that doesn't have a peer in the marketplace. I would assume, as an outsider, that looking at the results over the course of the last few quarters, that you would probably conclude that the value brought to the customers from this product is probably greater than what you might have conservatively assumed initially and that certainly you would be adjusting that assessment based on customer response that actually is realized once it's introduced in the marketplace.

So I was curious if you could tell us, just directionally, are you-- is that an appropriate way to be thinking about how you look at pricing your products, that as Super-Natural has come into the marketplace, the warm reception it's gotten has caused you to feel more confident that the value offered by the product is perhaps greater than you had once thought?

Yes, I think basically in the general description, you are right. The way we look at products is first of all what is their contribution to the customers and to our brand? And then of course the costs and the price of the product; and the price is derived from what I mentioned in the beginning of my sentence. So I think in general, you're quite right in the description that you gave here. We did think, according to a focus group that we did and according to expectation of our teams that this is going to be a very successful product. But it's growing faster than we thought.

That's really great. The second question that I had relates to a little bit more color around IKEA and I understand your not wanting to be overly specific about it, but could you give us some sense for the kind-- you had indicated that you didn't think it was material in the quarter, but of course it's early days. And I guess my question would be-- is it your expectation that the ramp up in the number of stores in which you're offering quartz countertops in the IKEA stores- so the number of stores- would reach a level that is potentially going to be measurable and worth thinking about from a modeling perspective by the end of the year? Or do you think it's maybe more late next year? Or give us some sense for what kind of a ramp up-- maybe in terms of number of stores or something like that-- that you're thinking about for the IKEA relationship.

So I think in terms of the numbers of stores with IKEA, of course the deal was for all the stores at IKEA and by the end of the year it will probably be in all of them, so this is something that we of course can share with you. But as to the specific progress and what is happening there, we as I said, this information is also IKEA information and we wouldn't like to provide too much detail there as it may be sensitive for them. And we still need to see what will be the results and the impact of this project. As I said, we have high aspirations but time will tell. It's too early now.

Great. Okay, well certainly we'll look forward to seeing it in the stores. Thanks very much, guys.

[Dabel Shep] from Isha Securities Limited

Hi and good morning. My question is- can you please give you me the raw material break up, if you don't mind?

Raw material break up?

Yes, in percentage-wise.

Well, we have highlighted in our 20-F for 2012, and it didn't change much from that. Our raw materials breakout is--around 40% of it is polyester, around 30% is quartz and the rest is all the rest. It didn't change much from then.

Okay, 14% polyester and 70% quartz?

40 4-0 is polyester of the content in terms of dollar costs and 30% is, approximately 30% is quartz.

30% 3-0?

3-0, yes.

Thank you so much.

And at this time, there are no further questions in the queue. I'd like to turn the conference back to Yosef Shiran for closing comments.

Thank you. We are very pleased with the year's strong sales and the improvement in profitability. We are building our brand, our infrastructure and [therefore] possibilities to deliver this kind of performance consistently and over the long term. We are very confident in our path but watching its step carefully. In the second half, we have some challenges. Currency is moving against us and we are awaiting new capacity at a time when demand is intense. Nevertheless, we are experiencing strong momentum in the business and we are confident about the future. Thank you for joining us today.

And that does conclude today's teleconference. We thank you all for your participation.