Caesarstone Ltd (CSTE) 2014 Q1 法說會逐字稿

Good day, and welcome to the Caesarstone First Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Miss Allison Townsend. You may begin, ma'am.

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 the actual events or results may differ materially. For more information, please refer to the risk factors contained in the Company's most recent Form 20-F, and the subsequent filings with the Securities and Exchange Commission.

In addition, the Company will make reference to certain non-GAAP financial measures including adjusted net income, adjusted net income per share, and adjusted EBITDA. 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 website.

With that, I'd now like to 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 first quarter. I would like to start with some highlights for the quarter. Sales increased by 24% to $94 million, a record first quarter. First quarter adjusted EBITDA was $22.1 million, up 25% compared to last year. Adjusted net income for the first quarter was $13.8 million, up 22% compared to last year. We posted adjusted net income per share of $0.39 in the quarter, versus $0.32 in the first quarter last year.

Overall, this is a good start for the year, and our business remains strong. Our work continues to be driven by a combination of innovative products, a solid operation platform, and powerful brands.

I would like to provide an update on each of our major markets for the quarter. First quarter sales in the United States were $37.6 million, a growth rate of 58.7%. The US continues to be our largest and fastest growing market. The adoption rate of quartz in the United States continues to build and Caesarstone is positioned as a clear leader in the market.

Australia sales in the first quarter were $21.3 million, up 10% compared to last year. On a constant currency basis, Australia was up 26.8%. We are pleased to see strength returning to the market, along with the acceptance of our offering.

Canada sales in the first quarter grew 9.5% to $11.7 million, and were up 19.8% on a constant currency basis. We continue to see significant growth in Canada, despite weak conditions in the housing markets.

Israel grew 6.7% to $11.3 million in the quarter, and on a constant currency basis, growth was 0.5%.

Europe sales in the first quarter were $4.7 million, down 20.3% compared to last year. On a constant currency basis, sales were down 23.4%. This is attributable largely to the timing of shipments to certain distributors.

Revenue in the rest of the world during the quarter was up 25.5% to $7.8 million. On a constant currency basis, growth was 22.4%. This group continues to be healthy.

Our Bar Lev capacity extension started to contribute to volume increase this quarter, and we expect additional contribution in the following quarters.

Our new facility in Richmond Hill, Georgia is on track to have the first line operational in the second quarter of 2015. Additionally, to meet growing demand, we have accelerated our investment for the second line, which is now planned to be operational in the fourth quarter of 2015.

In general during the first quarter, we continued to focus on increasing throughput, building inventory, executing well, and growth.

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

Thank you, Yos, and good morning to everyone. Before I go through the quarter, I would like to note that the SEC staff has informed us that it has completed its review, and does not object to the Company selection of the US dollar as its functional currency. Accordingly, there will be no change to the results of operations previously disclosed by us, and we will file our Form 20-F in the coming days.

I will now review our income statement for the first quarter. Sales in the first quarter increased by 23.5% to $94.4 million, compared to $76.4 million in the same quarter of last year. This is a record for any first quarter. On a constant currency basis, sales increased by 27.9% versus last year.

Gross margin in the quarter was 41.5%, compared to 44.8% last year. The decrease in margin was driven largely by currency impact and to a lesser extent by raw material price increases.

Operating expenses in the first quarter were $21.9 million, improving to 23.2% of revenue; versus last year's $21.1 million, which was 27.7% of sales. This efficiency improvement primarily reflects our increased volume.

Operating income grew by 32.1% to $17.3 million, compared to $13.1 million in the first quarter of last year. Our operating margin expanded to 18.3% from 17.1% last year.

Adjusted EBITDA in the quarter, which eliminates share-based compensation and the excess cost of acquired inventory, increased by 25.4% over prior year to $22.1 million, a margin of 23.4% versus last year margin of 23.1%.

Finance expenses in the quarter were $1.6 million, compared to $0.2 million in the first quarter of last year. This increase reflects foreign exchange rate fluctuations.

Our taxes in the first quarter were $2.2 million, 14.2% of pre-tax income; compared to last year rate of 16.9%

Adjusted net income attributable to controlling interest in the first quarter increased by 22% to $13.8 million, 14.6% of revenue; compared to $11.3 million last year, which was 14.8% margin.

Adjusted net income per share in the quarter was $0.39 on 35.4 million diluted shares. Last year adjusted net income per share was $0.32 on 35 million diluted shares.

Our March 31st balance sheet was strong with cash, cash equivalents, and short-term bank deposits of $90.8 million. Our inventory went up by approximately $11 million, compared to year end, reflecting strong manufacturing throughput that allowed us to build inventories ahead of Q2 and Q3.

And now with respect to 2014 guidance; following the strong first quarter, and to reflect ongoing healthy demand, and an improvement in both inventory and manufacturing throughput, we are increasing our 2014 revenue guidance from a range of $410 million to $420 million, to a new range of $420 million to $430 million.

We are also increasing our 2014 adjusted EBITDA guidance from an original range of $104 million to $109 million, to a new range of $108 million to $113 million.

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

Thank you. (Operator Instructions) Michael Rehaut, JPMorgan

Hi, good morning. It's actually Will Wong on for Mike. How are you guys? Congratulations on the very strong quarter. My first question is with regards to the US, a very strong growth, up 58.7%. Just wondering if you could break out in terms of the different channels, what you guys are seeing in terms of the growth. Is there any one channel in particular where you're seeing exceptionally strong growth or is it pretty consistent across all the channels?

Hi, Mike. So I think usually we don't break it. But what I could say is that there is no major change from the past apart of a stronger growth from IKEA.

OK. And then in terms of the gross margins; a little bit of a year-over-year decline, and you Yair you had talked about the FX being a bigger part of that. I was wondering if you'd just give us a little bit more granularity in terms of what the FX represented, as well as what the raw material cost increases represented.

The FX impact was north of 3 percentage points and the raw materials was close to 1 percentage point impact.

Great. And then just last question; in terms of the Supernatural, I'm just wondering if you could provide us with some additional color in terms of what its contribution was to sales and also margins. Are you guys still seeing it priced pretty significantly above the rest of your product line? And also what percentage Supernatural now is in terms of the overall company sales?

So I think as usual, it's difficult for us to provide information specifically about the Supernatural. What we can say is that this is getting more and more important for the Company. And what I mean is first and foremost the technology that we created and developed for that. We are expanding the product offering around the Supernatural and launching additional products.

Part of them I think you can see—in the market, part of them you will see in the market. And we believe that we have a strong—strong capabilities on hand in terms of product-wise and the ability to match the market tastes and demands.

OK, great. Thank you very much.

Michael Dahl, Credit Suisse

Hi, thank you. I just wanted to—just to follow up on the gross margin question. I think interesting thing was gross margins were a bit weak this quarter, but it looks like your margin guidance actually increased for the full year. So could you kind of walk us through what the puts and takes are for the rest of the year? Thanks.

Yes. So as you know Q1 is generally our weakest quarter, and actually the gross margin, while it was maybe low compared to previous quarter, as far as our planning it was within our expectation and even slightly more than that.

And given again, given our increased manufacturing throughput and better inventories, and the healthy demand, we believe that we can generate more volume in the coming quarters, and therefore [we think with revenue level adjust the] margin.

OK, thanks. And then on the capacity addition, I guess could you help us understand kind of what the thought process was for accelerating the plan and also what type of product we should expect to see in the initial stages coming out of the US plants and how that might impact the revenue mix. Thanks.

So as you may remember, we are building a plant for two lines there. Initially we decided to start with one line, but we invested or are in the process of investing in the infrastructure for two lines. Lastly, not long ago we decided to add another line, and this is to meet the expected demand that we hope to have.

So the first line there should be operational in the middle of the year, or let's say first half of 2015, and the second line which will be the seventh line of the total lines in the Company, should be operational by the end of the year 2015, if everything works according to plan. And this is what the expectations are now.

And just one quick one; what's your current—if you look at the—kind of the productivity that you've been able to get out of the current lines, where would that now stand as far revenue per line?

So last time we mentioned, and I think the number is still valid that each line in full throughput yields around $95 million a year. That's a bit up from previous numbers that we provided, because of the increase mix of high-end product and some regional mix as well. So we have four full lines and partially the fifth line now.

OK. Thank you.

Stephen Kim, Barclays

Thanks, guys. Great quarter. It's getting to be a habit with you guys, which is a good thing. I guess I have a few questions. One is just on the FX. Was there any benefit in the quarter to your SG&A from FX?

Yes, there was slight benefit for spending in Canada and Australia relative to the US dollar. Correct.

Can you give us some range in basis points maybe, of what that was do you think?

Not much. It was [way] short of $1 million.

OK, OK. All right. And then the second question relates to your new Georgia, the [bull] line coming on earlier. I guess one thing I was curious about is the acceleration there; is that attributable to just simply things going your way, not running into problems that you had maybe anticipated you might? Or is this due to something deliberate that you have done differently than would have done differently—than you would have done, let's say, three or six months ago? So I'm trying to figure out, how much of this is just things going well, as you had been progressing along similarly, or if it's something that you actually did differently.

I think overall what is happening—I mean strategically according to we hoped and anticipated, particularly we see the demand, especially in the States, accelerating. And according to what we expect and the position that we would like to be in terms of capacity, all those factors called for accelerating with the seventh line. So there is no specific incident or positive incident that happened that caused us to take this decision, but this is something that we—all the time we monitor and try to balance between the capacity and the CapEx and the future income.

Yes, absolutely. That's great. When this new line comes on, when the first of the America's lines comes on in let's say, let's call it 2Q of next year, what kind of expense increase, fixed expense increase, should we be thinking that that would add per quarter do you think?

So according to our analysis, the cost structure of the facility in the US on an operational level should be similar to that of a plant in Israel. And the only difference between the two is the tax rate that as you know in the US, is a lot higher. We estimated it to be similar in dollar annually per line.

OK. And that's a pre-tax number, right?

Yes. Pre-tax number we believe this operationally the same as the-- same cost structure, though there are many puts and takes to those. So labor in the US is higher, but energy is a lot lower.

And also bear in mind that it will take a few months or a few quarters until we get to full capacity there.

Oh, naturally, sure. And yet, that's a good segue to my last question, which relates to your impressive inventory build this quarter, despite decent sales. Is the improvements in productivity, which you're now saying per line you can do about $95 million, it sounds like obviously some of that is better mix, richer mix of product. But I was curious if there was a component of that where you're actually increasing the volume of material that you're able to produce on a finished basis out of your lines, and if you could give us some sense for—if that is the case, how much of the increase is coming from volume versus mix?

We don't have this breakdown, how much come from each of them. But I think both contributed.

OK. Well, that's great. That's encouraging. All right. Thanks very much, guys. Great job.

John Baugh, Stifel

Good afternoon. Thank you and congratulations on a good quarter, and thanks for not using the word weather in the presentation.

I wanted to ask about Bar Lev. Could you update us there on the speed of that line, where you are relative to full production and when you'll get there?

Pardon, John. Can you repeat, please?

I was asking about Bar Lev and the fifth line there, where you were in terms of production rates currently, and when you'd be at full speed.

So we are building the capacity there and so first quarter it helped us a little bit. Second quarter it will be a bigger contribution, and in the third quarter probably we will enjoy most of—like a full, almost full capacity out of this line.

OK. And then with your granite product, how is the production of that going? And I know you're not in the US with that product, but how are the revenue sales going with that new introduction?

It is going well, so both for the production goes well and also the sales are encouraging. Again, I cannot get into specifics and to quantify it. But it looks good.

Is that priced similarly to Supernatural?

Not all of it; most of it, yes. Part of it, no; part of it in a lower price.

And my last question was on IKEA. I was curious, if you could give any color. Are you in all the stores? Are you in a service or inventory position fully where you want to be with all the stores? And are you starting to see a sell-through rate at IKEA that you're pleased with? Thank you.

Yes. So as we said last time, we are already in the 38 stores of IKEA, and in general, we are very happy with the sales and IKEA business. As I said, I think the IKEA share in the first quarter and expected to be in the whole year, more significant. And in terms of inventory, we are not at the level that we want to be, but it has been improved a lot during this quarter.

Great. Thank you and good luck.

And it appears there are no further questions at this time. That concludes today's call. Thank you for your participation.

OK. So thank you for being with us. We are happy to start there with a strong quarter, and we'll be in touch next quarter. Bye.

Thank you. Bye.