Caesarstone Ltd (CSTE) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Caesarstone Fourth Quarter and Full Year 2013 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions)

I would now like to turn the call over to your host, Mr. Michael Callahan of ICR. You may now begin, Sir.

Thank you, Operator; 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 actual events or results may differ materially. For more information, please refer to the risk factors contained in the Company's annual report on Form 20-F.

In addition, the Company will also make reference to certain non-GAAP financial measures including adjusted gross margin, adjusted operating expenses, adjusted net income, adjusted net income per diluted share, adjusted net income attributable to controlling interest, 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 measure can be found in the Company's fourth quarter earnings release, which is posted on the Company's website.

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

Good day and thank you for joining us to discuss our fourth quarter, which was a great finish for the year. We are pleased to once again report record results.

I would like to start with some highlights for the quarter. Sales in the fourth quarter increased to a record of $97 million, our 27% growth rate was the highest of any quarter this year.

Fourth quarter adjusted EBITDA was $24.2 million, up 47% compared to last year.

Adjusted net income for the fourth quarter was $17.5 million, up 56% versus last year and we reported adjusted net income per diluted share of $0.49 in the quarter versus $0.32 in the fourth quarter last year.

Overall, we posted a solid finish to the year and our business continues to strengthen. We grew every geographic region in which we operate. We also expanded margins significantly over the prior year as a result of higher volume, the success of our Supernatural collection, and good cost controls.

I would like to now give an update on each of our major markets, both for the quarter and the totals for the year.

Fourth quarter sales in the United States were $34.7 million. Our year-over-year growth rate accelerated to 59%. This continues to be our largest and fastest-growing market. For the full year, sales in the United States were $123.4 million, an increase of 42% over 2012.

We believe these results demonstrate the realization of our quartz penetration vision and our robust position in the US market. We continue to see a very large growth opportunity as the adoption rate for quartz is still low, relative to our other key markets. We set a solid base in 2013 and believe we will also benefit from improving housing starts and remodeling activity.

I would like to note that during the fourth quarter, we have completed our deployments into all 38 stores of IKEA in the US, which are now offering our countertops. IKEA and [us] have been pleased to see the progress of our cooperation translated into sales and demand and we believe that we are on a very positive path there.

Australia sales in the fourth quarter were $24.3 million, up sequentially but down just slightly compared to last year. On a constant currency basis, Australia was up 7%.

For the full year, Australia sales were $89.9 million, up 1%. On a constant currency basis, the full-year growth rate was 9%.

Canada; sales in the fourth quarter grew 10% to $12.1 million, and 17% on a constant currency basis. For the full year, Canada sales were $49.2 million, up 22% and 26% on a constant currency basis. This was achieved despite weaker housing market conditions.

Israel grew 21% in the quarter to $10.5 million, helped by a stronger shekel. On a constant currency basis, growth was 11%.

For the full year, Israel was up 16% and on a constant currency basis, growth was 8%. This is a solid result from our most mature market.

Europe sales in the fourth quarter grew by 51% to $6.6 million, 44% on a constant currency basis. This was driven by our ability to fully close on pent-up delivery backlog which was created in connection with the change of our ERP system.

For the full year, Europe sales were $23 million, up 11%; and on a constant currency basis, were up 8%.

Revenue in the rest of the world during the quarter was up 69% to $8.6 million, driven also by our ability to fully close backlog. On a constant currency basis, growth was 63%. We are very pleased to see good results in this group, which includes many smaller markets.

For the full year, sales in the rest of the world were $29.1 million, up 24% and up 21% on a constant currency basis.

In general during the fourth quarter, we continued to execute well. Our capacity expansion in Bar Lev and greater efficiency allowed us to achieve record production volume.

In the second quarter of 2014, we expect to complete the next phase of line number five to a full line. We are also moving forward with our new facility project in Richmond Hill, Georgia. The first line in the US is on schedule for startup in the second quarter of 2015, and at the same time we've begun preparations for a second line in our US plant. We're excited to build additional capacity to meet the strong demand for our products.

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 fourth quarter.

Sales in the fourth quarter increased by 27% to $96.8 million, compared to $76.2 million in the same quarter of last year. This is another quarterly record for us. On a constant currency basis, sales increased by 29.7% versus last year.

Gross margin in the quarter was 43%, compared with 41.8% last year. This increase was driven mainly by scale and higher volume and an increased average selling price. The price increase mainly reflects growth in our Supernatural collection sales.

I also note that our gross margin improvement was partially offset by a significantly unfavorable exchange rate impact.

Operating expenses in the fourth quarter were $21.8 million or 22.5% of sales, versus $19.7 million last year, which was 25.8% of sales. This efficiency improvement primarily reflects our increased volume.

Operating income grew by 62.2% to $19.8 million, compared to $12.2 million in the fourth quarter of last year. Our operating margin grew to 20.4% from 16% last year.

Adjusted EBITDA in the quarter, which eliminates share-based compensation expense, the excess cost of acquired inventory and other non-recurring items, increased by 47.1% over prior year to $24.2 million, a margin of 25% versus last year margin of 21.6%.

Finance expense in the quarter was $0.4 million, compared to finance income of $0.2 million last year.

Our taxes in the fourth quarter were $2.3 million, 12.1% of income before tax; compared to last year rate of 11.6%.

Adjusted net income attributable to controlling interesting in the fourth quarter increased by 55.9% to $17.5 million or 18.1% of revenue, compared with $11.2 million last year which was 14.7% of revenue.

Adjusted earnings per share in the quarter were a net $0.49 on 35.4 million diluted shares. Last year adjusted earnings per share were $0.32 on 34.6 million diluted shares.

I would like now to quickly make some observation on our full-year financial performance.

Sales were up 20.2% and up 21.6% on a constant currency basis. Gross margin was 45.5% in 2013, compared to 43% last year.

I would remind you that in the second quarter of this year, we recorded a $3.5 million positive inventory adjustment related to our ERP implementation. Excluding that benefit, our gross margin was up 150 basis points versus last year.

Operating margin also excluding the inventory adjustment, was 20.3% this year, an improvement of 350 basis points versus last year.

Our adjusted EBITDA was $91.7 million, a 25.7% margin, up 230 basis points versus 2012.

We grew adjusted earnings per share by 34.8% to $1.82 and we drove operating cash flow of $75.7 million, with free cash flow of $48.3 million.

Our yearend balance sheet was strong with cash and short-term deposits increasing by $19.5 million, to $92.2 million, after a $20.1 million dividend paid in Q4. We are very pleased with this strong performance.

Now with respect to our 2014 guidance; we are expecting revenue in the range of $410 million to $420 million and adjusted EBITDA in the range of $104 million to $109 million.

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

(Operator Instructions) Stephen Kim, Barclays

Thank you very much, guys. Congratulations; very strong quarter; very nice to see.

Thank you.

Quite a few questions, but let me just get a couple out. So first of all, I was wondering if you could clarify the expansion plans; any anticipated impact in the 2014 guidance that we should be thinking about and can you also remind us of any costs from Bar Lev that came through in the income statement? If you said it; I missed it.

Okay, so regarding 2014, the US line should not have, except taking out CapEx, on the P&L, it shouldn't have a major impact in 2014. And most of the impact will be towards the end of the year, naturally, as we put ourselves more towards opening the line.

With regards to Q4 this year, there was some impact on opening line five and some inefficiencies, some material waste when you start up the line and it doesn't produce immediately good [slabs]. So it did have an impact, which is part of the reason to the gross margin difference between Q3 and Q4 this year.

Can you quantify that for us in any way, Yair? I think you said in the third quarter that the press did maybe--

Yes, it was—the impact of this was around 1%.

1%, okay got it. That's great. Okay, and then can you talk a little bit about the IKEA initiative? I know that that is going well and you're encouraged by it. I was curious as to what potential benefit the [load-in] represented in the quarter and also, longer term, what are your plans for IKEA potentially outside the US or as a share of your overall business- do you think it might go through that channel?

Stephen, so in the fourth quarter, we finished the deployment of-- into the 38 IKEA stores and it was the first time actually that we have a chance to sell across the board there. This was towards the end of the quarter. And so the reaction that we see is very positive and we expect this trend to continue. So we cannot asset yet what will be the size of it. But it seems quite promising.

At the moment, we operate in this manner only in the States and we work with IKEA under a different arrangement in other countries over the world, but nothing that's very significant. So most of the focus with IKEA is in the United States.

John Baugh, Stifel

Good morning, and my congratulations as well. Could you comment on whether you got any capacity expansion in Q4 from Bar Lev; whether you were able to increase the production of any of the other four lines or was the incremental revenue over what we have believed to as more or less capacity in those four lines, driven by the mix shift of Supernatural?

Hi, John. So overall, the four lines are working very good and if you look at what we have achieved in the last few years you can notice that we've improved our efficiency through the years and manage also with some small investment relatively to improve the throughput out of these lines.

Now line number five has just begun towards the end of Q4 and it will produce more and more as we progress into 2014. The full line will be deployed by the end of Q2, but until then, we can still use part of it and use other machinery that we have in the Company to produce more and to increase the throughput.

So you don't see it—you see a very small part of it in the throughput that we did in Q4.

Okay, thank you. And then in terms of the 2014 guidance; do we have FX headwinds? What are we thinking about in terms of a startup expense or any other factors that are impacting the 2014 EBITDA number negatively? Thank you.

So with respect to the guidance in 2014, there is a significant FX impact that is not helping us. If I compare the current exchange rate to what they were in 2013, the impact is around $4 million (inaudible) for us that's baked in our guidance.

Michael Rehaut, JPMorgan

Thanks. Great quarter, everyone; congratulations. The first question; just to go into the 2014 EBITDA, it does imply a similar ratio to sales as 2013 and so here you just broke out that you expect FX to be, if I understood it right, an incremental $4 million headwind versus 2013? Please correct me if that's not the case. But I was wondering if you could---sorry?

No, the exchange rate I may have misstated myself. The exchange rate is a negative impact for us in 2014. So it drags our profitability down by around $4 million compared to 2013.

Okay, so that's an incremental negative impact because you already had some negative impact in 2013?

Correct.

So just bigger picture though; you have a negative impact from currency. What would be sort of the positive drivers to the margin in 2014 and the negative ones? It would appear that volume in Supernatural would be positive ones. Are there any other negative impacts that offset, to keep the ratio or the margin at the same level versus 2013?

Yes, there are two negative impacts. One is the exchange rate that we just discussed. The other one is raw materials price increases, mostly in the quartz where due to the significant demand, there are some price increases which are baked again into the guidance.

So the impact of the raw material cost increase is similar to that of the FX.

Okay Michael, just to add to that; I think that the trend is very strong; it's very strong positively and then of course we have something that could work negatively, something that could work to the other side also. So overall, this is how we see it.

Okay. And just in terms of a couple of below the operating line items; the finance expense at $0.4 million in the quarter; you know sometimes that works as a positive hedge against currency. It doesn't appear that that was the case in the fourth quarter. I just wonder your thoughts around that, and also how to think about the tax rate for 2014.

Okay, so exchange rate this quarter and finance expenses did not-- was insignificant; so probably what you see now is I would say, a good run rate; maybe slightly more than that. There was some positive impact, but very small.

On tax rate, as we have discussed before, those should go up a little bit given that the tax rate in Israel are growing in Sdot Yam from 12.5% to 16% next year and in Bar Lev from 7% to 9% next year.

Overall, I believe that our—

Here just mention that the 9% will be the higher weight—

Yes, with higher weight toward Bar Lev, because now we will have three lines there instead of two. So there will be a higher mix of low tax bracket.

But overall, I believe that anywhere between 13% to 16% tax rate without any major adjustment of any kind would be ongoing. That's what I foresee.

(Operator Instructions) Josh Chan, Baird

Just wondering, given the pace of growth that you're experiencing, what is the capacity utilization? Are you having to squeeze incremental capacity before the fifth line becomes fully productive in order to meet demand? I mean how much of a constraint is capacity right now?

So capacity is quite a constraint. However, we have demonstrated that we can squeeze it a little bit more in the past year and also specifically in the fourth quarter. We continue to work on improving the capacity of the [counter] production line. Of course we will try to accelerate the operation of the fixed line and another thing that you should bring into account is also the product mix.

We are focused in general on increasing our differentiated lines as example is the Supernatural, but there are also other products in our offering today and also there will be future products, of course, that we're supposed to launch during this year.

So overall, capacity is a constraint, but we have still a little bit of room to maneuver.

Okay. Thanks for that. And if I look at the sales growth for 2014, if I take out currency, it seems that you are assuming that sales growth is pretty similar to what you generated in 2013. I was just wondering as you look across the different regions, are there certain regions that you think could accelerate versus 2013 and are there other regions that you think could slow down a bit?

Well, we are not providing revenue guidance by region. But given our trends, I think that you can guess that our growth in North America will continue to be strong.

Okay. Thank you for your time.

Michael Dahl, Credit Suisse

Hi; thank you. I wanted to ask about just how to think about the revenues, given your current mix, if we think about 4Q being $97 million; that's really only reflecting the four full lines. Would that mean at the current mix levels, that once you get the fifth line open, we should really be thinking about $475 million to $480 million as what your full capacity would be?

So in general, each line, if you look at what we've accomplished let's say in Q3; you can see that each line can produce around $95 million. So if we have five lines and all of them are fully operated and all of the throughput and there is an equivalent demand for all of the throughput, then you get five times $95 million, which is $475 million. But this is of course not the case right now, because line number five is maybe still not up and running and second, as we always say, the fact that we increase production does not mean that immediately we get the ability to sell all that. It takes time.

So of course with time, we'll get there. But as for this time, our guidance is what we believe we can achieve in light of all the constraints.

I would add to what Yos said, that we need to also recognize that Q1 there is a seasonality in Q1 that is a bit unrelated to capacity. So all in all, as Yos said, this is all baked into our guidance.

Thank you. That's helpful. And then second question; if we think about the IKEA relationship and clearly it's very new here. But as you see some successes there, does that change the way you think about expanding relationships or building relationships with some of the—call it mass merchants or bigger home centers here in the US as you bring on new capacity?

So I think in the short term of course, I think we will continue with the strategy that we are currently taking in the market because of course it doesn't make sense in light of the capacity constraint right now, to enter into a mass market.

In addition, IKEA, we choose to cooperate with IKEA because we believe that IKEA is very focused on kitchens. Again, as we said in the past, once we have excess capacity in the future, we may reconsider this approach and then we may approach other mass retailers that are in the markets in the US or in other places all over the world.

Great, thanks. And if I could squeeze one last one in; you mentioned you're seeing the raw material price increases. What are you doing on the price side; your own pricing? Obviously there's strong demand here, so there should be some pricing power. Is there anything planned as far as increases for 2014?

In general, we try to base our relationship with the customers for long term and not to use short-term situations and try to raise prices, even though we have this ability. Of course, special products like the Supernatural that brings special value to the consumers, we will try to price in a way that recognizes this help or this contribution to the consumers and to us.

So there we will be very sensitive around pricing. As to raw materials, there is some increase in quartz prices and from time to time, we didn't experience it so much this year, but in the past we experienced also a (inaudible) price increase. And again, as we said, we have the full ability to pass it on to our consumers, but we will be very cautious with that; again everything due to our strategy to build long-term relationships.

Okay, thank you.

Lars Dollmann, Aldelphi Capital

Hi, gentlemen; congratulations on the year. I just want to follow on, on the pricing power you have. As you're obviously close to capacity and you see some cost increases, would it be fair to say that if you see further cost increases and obviously unfavorable exchange rates which you are expecting for the year to come, that you should be at least able to pass on as far as the cost increases, as obviously a competitor with a competitive product also will have some cost increases. So what is your point of view on that (inaudible)?

Yes, if we see that (inaudible) raw materials or other expenses are going up or there will be a currency, negative currency effect over a certain hurdle, then we will raise prices.

Okay, thank you very much.

Thank you. Operator?

Yes, that does conclude today's question-and-answer session. And I'd like to turn the conference back over to Mr. Shiran for any additional comments or remarks.

Okay. So thank you all for joining us today. We are very pleased with the fourth quarter and the year we had in 2013. As we are starting 2014, we'll see another strong and exciting year of growth ahead of us as the quartz story unfolds globally and particularly in the United States.

We are working hard to capture that opportunity to build capacity, to serve the demand in the markets, and to launch new differentiated and attractive products that will further enhance the Caesarstone global brands.

Thank you again for your support, time and attention and have a good day. Bye.

And this does conclude today's conference and we thank you for your participation.