Caesarstone Ltd (CSTE) 2013 Q3 法說會逐字稿

Good day and welcome to the Caesarstone third-quarter 2013 earnings conference call. Today's conference is being recorded. And at this time I would like to turn the conference over to James Palczynski of ICR. You may begin.

Thank you, Operator, and good morning to everyone. I just want to remind you of the Company's Safe Harbor language before we get started.

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 its periodic filings with the Securities and Exchange Commission.

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

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

Thank you. Good day and thank you for joining us to discuss our third quarter. We had another strong quarter and we are pleased with our record results. I would like to start with some highlights for the quarter.

Sales in the third quarter increased to a record of $94 million. Our rate of growth has accelerated over the course of the year from 14% in the first quarter to 18% in the second quarter and now 21.6% in the third. Third quarter adjusted EBITDA was also a record at $25.2 million, up 18.4% compared to last year.

Adjusted net income for the third quarter was $16.5 million, up 23.9% versus last year. And we reported adjusted earnings per share of $0.47 versus $0.39 in the same quarter last year.

Our growth was broad-based and the United States and Canada remained our fastest-growing regions. Around the world, the Caesarstone brand continues to be a leader in the markets, recognized for high quality and innovative design. We are excited about the future and we believe our long-term growth opportunity is promising.

I would like now to give an update on each of our major markets.

I'll start with United States where our sales grew by 47.8% to $34.1 million. This was by far our largest and fastest-growing market in the quarter. Our strong brand, execution, and improved market conditions all contributed. We have also made progress with our plans for a US manufacturing location; this will be an important project to support our long-term growth.

Canada, our third largest market, grew by 22.2% to $13.3 million. On a constant-currency basis growth was even stronger at 27.6%. Our business strategy in Canada is similar to the US, and the results are good.

Australia sales were $22.6 million, down 1.5% compared to last year, only because of a weak Australian dollar. On a constant-currency basis Australia was up 11.7%. We believe this market has stabilized and we are seeing a better trend in the business.

Israel grew 13.2% in the quarter to $10.9 million helped by a stronger shekel. On a constant-currency basis growth was 1.7%. Europe grew by 15.1% to $6 million and was up 8.4% on a constant-currency basis.

Revenue in the rest of the world was up 27.2% to $7.4 million in the third quarter, and was up 21.8% on a constant-currency basis. As you may remember from last quarter, both for Europe and the rest of the world, we were working on our ERP system to improve shipping processes to smaller accounts. As a result, we saw improvement in both regions this quarter.

In general, during the third quarter we executed well and managed capacity and inventory to drive the growth. The next step for us is to bring our new Bar Lev line into full operation. We've just begun partial operation; the full line will be completed in the second quarter of 2014.

I'm also glad to report that we selected Richmond Hill, Georgia, as the location for our new manufacturing plant in the United States. We are pleased with this site, which is located close to Savannah and carries operational advantages. Due to some site-specific requirements we have revised our expected start date for production to the second quarter of 2015.

Our planned capital spending for the project remains at approximately $100 million but we now expect the initial spend to increase to approximately 70% of the total investment. This will support both the first line and expedite launch of the second US line, which will be our seventh in total.

On another note, we have decided to distribute a one-time dividend of $20 million or approximately $0.58 per share. We believe that due to our strong recent and expected cash flow and current cash position, this dividend will not affect our ability to fund our growth, planned capital expenditures and working capital needs.

Thank you, and I will turn the call over to Yair.

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

Sales in the third quarter increased by 21.6% to $94.3 million, compared to $77.6 million in the third quarter of last year. This is another new record for any quarter. On a constant-currency basis, due to a weaker Australian and Canadian dollar, sales increased by 24% versus last year.

Gross margin in the quarter was 44.5% compared to 45% last year. We incurred additional labor costs related to the ramp up of the new capacity in Bar Lev and were negatively impacted by currencies. These factors were partially offset by an improved mix of revenue and better economies of scale.

Operating expenses in the third quarter were $21.1 million, or 22.4% of sales, versus $18.2 million last year, which was 23.5% of sales. Even as we increase costs to support the growth we continue to see leverage.

Operating income grew by 25.2% to $20.9 million as compared to $16.7 million in the third quarter of last year. Our operating margin grew to 22.2% from 21.5% last year.

Adjusted EBITDA in the third quarter, which eliminates share-based compensation, the excess cost of acquired inventory and other non-recurring items, increased by 18.4% for the prior year to a new record of $25.2 million, a margin of 26.8% versus margin of 27.5% last year.

Finance expenses in the third quarter was $1.1 million compared to expense of $2 million in the prior year.

Our taxes in the third quarter were $3.3 million, 16.9% of income before taxes, compared to a 13.9% rate last year. This higher rate reflects a $0.6 million deferred tax liability adjustment associated with a newly levied increase in our Israeli tax rates beginning in 2014.

Adjusted net income attributable to controlling interest in the third quarter increased by 23.9% to $16.5 million, from $13.4 million last year. Adjusted earnings per share in the quarter were $0.47 on 35.3 million shares. Adjusted earnings per share last year were $0.39 on 34.4 million shares.

Turning to our September 30th balance sheet, versus the end of the second quarter we grew our cash balance by $25.4 million to $104.9 million. This reflects cash flow from operation in the third quarter of $31.9 million. This level of cash, combined with our expected cash flow, leave us in an excellent position to fund our capital projects, fund our working capital needs and pay the one-time dividend we announced. I will note, the dividend record date is November 27, 2013, and is payable on December 11, 2013.

Receivables at the end of the quarter were $54.4 million. DSO were 53 days this quarter, in line with previous levels. Inventory at the end of the quarter was $53.7 million, similar to the level at the end of the second quarter.

And now with respect to 2013 guidance. Following a strong third quarter, we are increasing revenue guidance for the full year of 2013 to a new range of $343 million to $348 million as compared to our prior range of $330 million to $340 million. We are also increasing our expected range of adjusted EBITDA for the full year to a range of $87 million to $89 million compared to our prior expected range of $82 million to $85 million.

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

(Operator Instructions) Michael Rehaut, JPMorgan.

Thanks, and congrats on the quarter. The first question I have is on sales in the US. Great results, as you mentioned, accelerating throughout the year. I was hoping if you could go into a little bit more color or granularity as to the big drivers of the improved sales growth, if you are having particular success in one channel versus another, if you could go through your end-markets where you are seeing the greatest strength. Also if there are any new relationships or customers that you've been able to penetrate in those different channels, if that's helped, any additional color there to get a sense for if this trend is sustainable. If we're talking about a higher level of growth that you might expect in the next few quarters.

Hi, Mike. So I think what is happening in the States is basically, first of all, the result of all the hard work we have invested there and all the channels, and I think we see improvements through all the channels. But I think the story of the States, and this is a big change in also the mix, moving toward -- also towards renovation. Despite the renovation -- despite that the big growth in the renovation is not huge, but because of the supernatural success there we see more sales coming from renovation. And this helps of course the sales, the margins and the brand momentum there.

So, again to summarize, everything was good there, the market is good, and coupled with it is the success of the supernatural series which bring more sales from renovation.

Great. And, Yair, I guess a question for you on the gross margins, still very strong in the mid 40s. You identified a couple of negative impacts to those gross margins. One, the labor cost due to the start-up in Bar Lev and also the negative effect from currency. I was hoping if you could give us a sense of the dollar impact of each of those items and for the labor if that's expected to continue for another quarter or two or how lasting that impact might be.

I think between the Bar Lev impact will probably continue to some extent in Q4 and Q1 until we utilize the line in full capacity. And the dollar amount of which is I think a bit too detailed.

Are you talking about the dollar amount -- well, the dollar amount of the Bar Lev impact or also if you could give us a sense of the impact from the currency.

Yes, are quite comparable in magnitude.

And so if you had neither of those, do you have a sense of what the gross margin might have been?

I would say that it would be at least 1.5% better.

Stephen Kim, Barclays.

Yes, again congratulations, really, really great results. I guess we were curious, could you give us a sense for how much supernatural represents of your overall production currently?

Yes, Steve, we cannot get to this kind of detail, of course, first of all because of competition. Even though it sounds now this is a successful series we cannot get into quantifying those numbers.

Okay.

But it works very well, much more than we expected, I think, when we -- you first saw it. Even though we believe it's a hit, but it works very well for us.

Clearly and --

It's becoming significant.

Yes, I would bet. Okay, that's fine. Can you talk a little bit about the fifth line, I think, Yair, I thought I heard you say that you thought it would be until -- not until the fifth line is running at full capacity that you think some of the labor issues might dissipate. But let me ask the question slightly differently. How long do you think it will take before the fifth line's overall level of profitability would be in line with the Company's overall average?

I think it will be in the second quarter of 2016.

Okay.

2014.

2014, sorry.

Yes, I was -- okay.

But anyway I think that the negativity of it, which you saw in third quarter and to a limited extent in fourth quarter I think will vanish quite soon because it will start to make money. It will not be in the same profitability of the rest of the Company but it will definitely add to the profit.

Surely, yes. And then with respect to the FX, last year I think in the third quarter -- we have in our notes that the elevated level of interest expense that we had was -- about $1.7 million of that was driven by FX. Do you know how much of that was -- how much FX contributed to the interest expense number this year?

Yes, it was the $0.7 million.

$0.7 million (multiple speakers) --

Out of the $1.1 million.

Wonderful. And then last question from me right now is the tax rate. You talked about the tax rate this quarter. But can you give us a sense for what would be a reasonable to use for a model -- for modeling purposes as we go into next year?

Yes. So the tax rate, the new legislation in Israel change our tax rate starting in 2014 onwards. And in Bar Lev it was 7% this year, and it's going up to 9%. In Sdot Yam it was 12.5%, and it's going up to 16%. So if, for simplicity, if the blended rate between the two was 50-50 last year because we have two lines in each plant, now because we have another line in Bar Lev it should be on probably more proper at 60-40. So if you do the math, it's probably 2% impact increase. And then you have to add some of the profitability (inaudible) in the subsidiaries, so I would say that our run rate this year is around -- between 13% to 15% and it should go up around 2%.

Perfect. Thanks a lot for that, Yair, and congratulations.

Dan Oppenheim, Credit Suisse.

I was wondering if you can talk a bit more in terms of Bar Lev, congrats on having the expanding capacity there, and as you think about to the over-capacity utilization given the good problem of having the demand that continues to improve as it is, where is capacity utilization at this point, right at the current demand around?

Again, Dan, so you are asking about the utilization of line number five or about the rest of the --

No, overall, overall please.

So, overall, I think as we said last quarter, we are running close to full capacity. And then what you see is more or less what we can make. It doesn't mean that it cannot be plus and minus a few million dollars but this is where we are. And, of course, with line number five, when it reaches the -- to full capacity it will add another $90 million or maybe little more $90 million a year, right? Because each line now can provide about $90 million per year, little bit more this quarter. And line number five will be able to do the same.

And that's, to fully understand, so the $90 million does that include sort of the better mix including more supernatural and as you think about the coming quarters even if you are at full capacity, revenue can be going up based on the improving mix as well, correct?

This is hard to say because they are -- it's quite different according to the -- where we sell each product. But, overall, I think it's a good -- what you see today is a good number to rely upon.

Peter Lisnic, Baird.

Hello, good morning. This is Josh Chan filling in for Pete. I wanted to go back to gross margin and I was wondering if you can give us some thoughts about the factors that would affect gross margin in 2014, so whether that be some of the Bar Lev costs, how is raw materials looking and how is mix? Could you walk through some of those factors to see -- so that we can see what are some of the positives and negatives as you look into next year?

Well, I think ourselves will probably provide guidance for 2014 in the next earning call, so that will be probably a more appropriate time to discuss it. But in general, exchange rates are unknown, so we never know where those will go. This temporary impact of Bar Lev, as Yos mentioned, will probably diminish. And the rest depends on how good we continue to launch new products and to do well in the market.

Okay. Well, and my second question is on CapEx. With the change in terms of your timing for the US plant, is there a change in terms of CapEx? Could you update us on what your expected CapEx might be for 2013 and 2014?

Well, Yos just mentioned that on one hand there is a slight delay. On the other hand we are expediting CapEx to make all the infrastructure for the second line to be there rather soon than later. So we haven't yet timed each investment now to say how different it is, but I don't think it is much different than it was before.

Michael Rehaut, JPMorgan.

Be able to sneak another one, so a couple of quick ones. Just going back to the tax rate question, if I understood you right, you had originally thought this year you would be looking at a 13% to 15% tax rate and now for next year you are basically saying 15% to 17%, is that right, Yair?

That's the way again. Tax rates are a bit tricky, to determine what will be the actual tax is tricky. But, I mean, you can take this year number so far for the 9 months, exclude out the $0.6 million that I just described, which is a one-time adjustment, that will take you to around 13.5%. The effective tax rate in Israel should go up by 2%. So I think it's probably safe to say that overall we will go 2% up next year.

Okay, no, that is helpful. And just on Canada, if you could give us a sense, obviously good results there as well, if there is any particular regions or end-markets that are helping that continued solid growth trends, any additional color in terms of what you're seeing in Canada with your operations.

I think in Canada basically we are deploying the same strategy as in the States, and the market -- new home starts and all the construction markets there is a bit -- is weaker than in the States but still, because of the general trends that we speak all the time -- the material conversion, the Caesarstone name brands and the new launches that we do, and, of course, the structure there -- this all bring the results and -- but nothing specific that I can pinpoint.

[Mayen Umsoum], [Fair Fund]

Is it right to say that EBIT margins in the US are higher than the Group average?

So we are not -- I want to be cautious here. We are not reporting -- we don't have segment reporting or geographical reporting, but I would say that in general, first of all in general, our direct market carries higher ASP, therefore our gross margin, but at the other end you have the cost structure to operate in those markets. So it is not significantly different than the indirect market. And besides that I do not want to get into specific regions.

Okay. Can you break down your top-line growth for price, volume and mix?

We are not providing quantity details except for some trend in the annual reporting and -- but I can just say the total growth this year is an organic growth. Even if the ASP is higher, and it is higher, because of supernatural, it's still an organic growth. There is nothing, there is no acquisition, there is nothing else, and it is all pro forma.

But I think overall, all the three --

Elements contribute, yes.

Yes, all the three elements contributed. So all of them are for this season.

Lars Dollmann, Adelphi London.

Congratulations on the quarter again. I have a couple of questions to follow up. On the Bar Lev, the speeding up of the capacity utilization because demand is very strong. What is the difference between, the slight time difference between the full-scale speeding up of the operations versus what you expected earlier?

The difference is not big. But basically, without getting into too much detail, what we did right now allow us more or less the ability to get to about half of the capacity of the full line. And by the mid-year we will have the additional capacity of the full line. And in between it will grow up gradually. So this is how you can look at it roughly.

Okay. And then that leads me directly to the other question on the US investment, because you mentioned that there is, because of specific reasons there is a slight delay in the US but you actually will speed up the second line of the US then. What does it mean exactly? So you do the investment, it takes slightly longer to start up but then you already made the decision directly to start with a second line?

In a way, yes. What we do, as Yair said, we had some issues that caused some delay. On the other hand, we decided to go ahead and invest additional infrastructures to accommodate and to speed up the installation of the seventh line. And it seems that on one hand we will start maybe a little bit late with the sixth line, but we will start a little bit earlier than before the seventh line.

Is that as you can already see a highly visible demand in the US, as it's growing so fast?

Yes, so this is what I wanted to add. You know because we didn't say before, what -- of course we have estimation, but we wouldn't like to go out with estimation for so far. However, we feel in light of what is happening in the market that it makes sense to expedite the infrastructure for the seventh line. As to the actual dates, of course this would be judged of the actual performance and demand in the market in due time. But it reflects our overall perspective.

Then another question related to the US demand. You had fantastic growth figure obviously in the US. Do you know or do you have any data if you take a market share, and how quickly actually the quartz market within the high-end market is growing versus marble and granite?

Yes. This kind of data -- until now the only data that we saw came from Freedonia and we don't have any updated data about it. So we don't know exactly how much each competitor, or how much market share each competitor holds. And we don't know also exactly how much granite and quartz, but what you can see is that quartz is becoming stronger in the States. And this is evidenced also in some of the professional research that's done in the States. And this is something that we feel.

Okay. And lastly on the cash distribution, you distribute, because you have a very strong balance sheet, the $20 million. If we go further next year, you obviously have some CapEx, but how is management generally seeing, because you have a nice cash flow business, as a strategy with obviously increased investment into the CapEx because the demand is so strong. But you said specifically it's a one-time dividend. When is the time for the management to consider a dividend policy?

I think overall the one-time dividend was decided by the Board in light of the recent success and in -- with the aim to share the success with the shareholders. And, of course, under the calculation that we have enough cash to our -- to fulfill our CapEx and future cash needs.

As we said in the past, the Company did distribute dividends in the past before it became public. And we said that it's -- we may consider distributing dividends from time to time. However, this is only a one-time dividend, and we may consider in the future or the Board may consider in the future, of course together with us, whether there is room to distribute dividends. Again, at least what we do now is subject to our growth plans. Hence bear in mind that we also can, we can also -- we have access to funds if we need.

Stephen Kim, Barclays.

Hey, guys it's actually John, Steve's associate here. On the topic of capital allocation, outside of the one-time dividends, how do you think about the potential for share repurchases relative to dividends?

Well, there are many different ways to and options that might be used to drive value to shareholders. And at this time this seems to us to be the right method at this point of time.

Okay. Hey, guys, it is Steve Kim. So we shouldn't read anything into this particular decision to go with a one-time dividend as being something that's sort of a philosophy that you have of a method that is superior to others? You're basically saying that every time you have the funds available you will consider various strategies. And there is no particular emphasis that we should place on a one-time dividend versus repurchases in the future?

I don't think you may -- Steve, we don't think you can get to a general conclusions out of this one-time dividend. And it's, what there is is what there is. This is what we can say. I don't think that you can conclude out of it what will be the decision in the future as to a cash capital distribution or any other method that we may take.

Okay, that's fine. If I could get one more in there, a question I had related to your Ikea relationship. Just if you could give us some general update on how that has been evolving, that would be helpful.

Yes, overall it is evolving well. And, however, I think as we said in the past, it's still not something which is very significant in our overall sales. We have, of course we have expectations in the future from this, but we will have to wait. And also we have to remember that this is also information that is related to Ikea and we wouldn't like to discuss this too much in detail.

And there are no further questions at this time, I would like to turn it back to Yos Shiran for any closing or additional remarks.

Thank you very much for your interest in Caesarstone. We are working hard to deliver consistent performance and growth. And we are pleased with the results of the year so far and feel strong about our business. Thank you and have a great day. Bye.

And this concludes today's conference. Thank you for your participation.