Caesarstone Ltd (CSTE) 2015 Q1 法說會逐字稿

Good day and welcome to the Caesarstone first quarter 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Allison Townsend of ICR. You may begin.

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 Annual Report on Form 20-F and subsequent files 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 press 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. Yos?

Thank you, Allison. Good day and thank you, everyone, for joining us to discuss our first quarter. I would like to start with some highlights. This was a record first quarter for sales, EBITDA, and net income. Sales in the first quarter increased 14% to $107.8 million continuing our growth trend. First quarter adjusted EBITDA was $25.5 million, up 15% compared to last year. Adjusted net income for the first quarter was $16.4 million, up 19% versus last year. And our adjusted earnings per share of $0.46 is up versus $0.39 in the same quarter last year. The United States continues to be the main driver in our revenue growth with Canada and Australia also showing significant growth on a constant currency basis. Caesarstone continues to be a market leader, which is reflected in the healthy demand for our range of innovative products.

Now, I would like to give an update on each of our major markets. I'll start with the United States where our sales grew by 27.6% to $48 million. The US continues to be our fastest growing market. Canada grew by 18.7% to $13.9 million on a constant currency basis. Growth was even stronger at 32.1% partially driven by our new partnership with IKEA Canada. Australia sales were $23.4 million, up 9.6% compared to last year. On a constant currency basis, Australia was up 25.6%. We are pleased to see a continued stronger trend also in this region. Israel was down 12.5% in the quarter to $9.9 million, primarily due to a strong US dollar. On a constant currency basis, we saw sales down 0.7%. Europe was down by 1% to $4.7 million and was up 17.9% on a constant currency basis.

Revenue in the rest of the world was up 2.9% to $8 million in the first quarter and was up 19.1% on a constant currency basis. We are progressing on schedule at our Richmond Hill, Georgia manufacturing plant in the United States. We are pleased to have begun commissioning for the first US lines and continue to expect it to become operational in this quarter. The second line is Richmond Hill and our seventh globally is also on schedule and is expected to become operational in the fourth quarter of 2015. We are excited about executing our capacity expansion in the US to better service the continued demand we are experiencing. We have strong confidence in our ability to further the [health] of the business going forward.

Thank you. And I will now turn the call over to Yair.

Thank you, Yos, and good morning to everyone. I will start with our income statement for the first quarter. Sales in the first quarter increased by 14.2% to a first quarter record of $107.8 million compared to $94.4 million in the first quarter of last year. On a constant currency basis, sales increased by 22.9% versus last year. Gross margin in the quarter was 42% compared to 41.5% last year. This increase was primarily due to favorable product mix, benefits of scale, and improved utilization of our production lines in Israel. These factors were offset by negative exchange rate fluctuations, start-up costs related to our new US manufacturing facility, as well as continued growth from lower-margin fabrication and installation revenue in North America.

Operating expenses in the first quarter were $24.6 million or 22.8% of sales versus $21.9 million last year, which was 23.2% of sales. Operating income grew by 20.1% to $20.7 million as compared to $17.3 million in the first quarter of last year. Our operating margin increased by 90 basis points to 19.2% from 18.3% last year. Adjusted EBITDA in the first quarter, which eliminates share-based compensation expenses, increased by 15.3% over the prior year to a new first quarter record of $25.5 million. This shows margin of 23.7% versus 23.4% last year. Finance expenses in the first quarter were $1.9 million compared to finance expenses of $1.6 million in the prior year. The increase was partially due to lower interest income as we utilized cash to fund our new US production facility.

Our taxes in the first quarter were $2.5 million, 30.1% of income before taxes compared to a 14.2% rate last year. Adjusted net income attributable to controlling interest in the first quarter increased by 19.1% to $16.4 million from $13.8 million last year. Adjusted diluted earnings per share in the quarter were $0.46 on 35.5 million shares. Adjusted diluted earnings per share last year were $0.39 on 35.4 million shares. Turning to our March 31 balance sheet. We had cash, cash equivalents, and short-term bank deposits of $41.1 million, down $13.2 million from the end of 2014. This was driven primarily by $10.6 million of seasonal inventory buildup occurring in the first quarter, $19.8 million of cash consumed by capital expenditures mostly for the US manufacturing facility.

We expect our total capital expenditure related to the US manufacturing facility to amount to $130 million compared to our previous estimate of $115 million. With respect to 2015 guidance, we are maintaining our revenue guidance for the year of $515 million to $525 million and our expected range of adjusted EBITDA for the year of $123 million to $129 million. Thank you. And we are now ready to open the call for questions.

Thank you, sir. (Operator Instructions) Stephen Kim, Barclays.

I wanted to first of all congratulate you on a strong quarter once again. My first question relates to the gross margin. I was curious if you could provide a little bit of color as to maybe some of the things that could have been helping to drive that. For instance, are you maybe purchasing some raw materials in dollar denominations and things like that? If you can maybe provide a little bit of color behind the gross margin.

So on gross margin; our whole product offering was contributing around 300 basis points positively, volume was around 100 points, and improved manufacturing efficiency in Israel was over 100 points around 150 points on that, and FX was over 300 points negative and the impact of the startup cost in the US was close to 150 basis points. In terms of raw material, we continue to buy quartz in US dollars and polyester mainly in euro.

Okay. My second question relates to SG&A, I know that you have direct distribution in a number of markets and was wondering if perhaps there was maybe some benefit from the strong dollar that flowed through on the SG&A line. Is there any way for you to quantify what that impact was?

So, the FX [raised up] the SG&A because of the expenses in Australia and Canada for the most part, also part of it in Israel around $0.5 million.

$0.5 million. Okay. And then I guess my last question sort of a general one, which is that in the US at least mostly what we've seen with quartz is its success due to its performance benefits over stone and granite and things like that and so a lot of the design that we've seen from quartz has been simulating stone products. I was curious as to whether you thought longer term there might be the opportunity for quartz to establish a trend or benefit from a trend in design where you no longer just simply try to imitate or mimic stone, but actually venture forth into the services or designs that cannot be replicated by the natural products kind of like your Motivo where you have the embossed, but that obviously wouldn't apply well in the kitchens. But I guess I was curious as whether you think there's any opportunity there, if it's way too early or if you're seeing any early signs that you might be able to move into that direction because that would seem to me to be a significant step-up in the longer-term opportunities for quartz?

Stephen, I think that what drives the quartz evolution as I mentioned many, many times is mainly three things; low maintenance, long-term beauty, and low total cost of ownership; and this does not have to do specifically for a specific design. The design which is inspired by marble or by granite is of course doing very well. However, looking backwards, Caesarstone's strength was much more in the uniformic designs which goes hand in hand in a way with minimal design closer to the [powerhouse] style for example. So, we have the ability to do all kind of designs and actually we do today and most of the sales are not coming from designs that are inspired specifically by stone, but more by color; but the fundamental is the functionality. So it's not just design, it's design and functionality, it's the combination of the two.

That's very helpful. Thank you very much for that and best of luck.

Susan McCleary, UBS.

This is actually Ben Miller on for Sue. You talked in your last call that you're in the process of trying to find a source of quartz in the US to meet the demands of the new lines in Georgia. Could you just give us an update on that and maybe if you could quantify how much you expect to save by sourcing from the US versus Turkey?

So, we are working on firming up our supply chain and we are definitely looking for quartz in the States. But in the meantime until we find a solid source, we will continue to buy quartz from Turkey also to the States. So there is quartz in the States and some of it may be adequate for our production, but it needs additional work on it either small investments or heavy investment on the side of the producers. So eventually I believe it will happen, but it will take time.

Okay. And then next, could you talk about the agreement with IKEA in the US? And as I understand it, this is expected to expire at the end of 2015. Do you plan to renew this agreement and maybe more broadly if you could just talk about that relationship as you noted that they had a positive impact on Canada growth?

So, the agreements at the moment in both in Canada and in the States is until the end of 2016 and there is no news to report on that end, I think it is going well. We are trying to improve and to make it flawless and make it better for everybody and we gain experience. So, this is what we have at the moment to say about it. I think of course IKEA recognizes the importance of all kinds of talks and will continue also on their side to try to offer the consumer the best they can. So for the time being, there is nothing new there.

Okay. Thank you.

(Operator Instructions) Michael Rehaut, JP Morgan.

It's actually Will Wong on for Mike. I was just wondering if you could talk about the US for a minute. It looks like the growth is very impressive at 28%, but it looks like a little bit of a deceleration from the last couple of quarters even though the comp looks pretty similar. So just wondering if there any things that for instance that impacted the US, maybe if you guys could talk about if the port strike on the West Coast impacted results at all or if you could give us any color on the slowdown?

Growth in the US at close to 28% obviously remains very strong and growth last year was impacted by the IKEA ramp-up. We entered too many IKEA stores so of course it has a strong impact. There have been no changes to fundamentals in the markets. As to the port delays, there was an impact, but it was relatively marginal. Apart from that, the market looks good there.

Okay. Can you tell us what the impact IKEA had in terms of how much it contributed to sales in the prior year and also this year?

We don't provide these numbers for IKEA reasons and for our reasons, but it has some significance of course. But as I said, the fundamentals in the markets stay the same. In IKEA of course when you're entering to new stores and generate also a revenue from the installation and fabrication, it has a strong impact. Today, we are incorporated in all the 42 stores and the growth that happens there should be more or less in line with the rest of the market and in a significant way, it's same-store sales today not like starting from zero.

Okay, got it. In terms of the gross margin, it was very impressive this quarter and definitely above what we were looking for. What do you think is a sustainable level for the year? Do you think the 42% is something that you guys can do for the full year?

We give a guidance on revenue and EBITDA and I would like to stick with that. I would just say that the opening of the new manufacturing facility in the US will have a bigger impact in the next quarters. In Q1, it was the minimal.

Okay, got it. And then just lastly, the marketing and selling and the G&A; those are relatively fixed expenses I would imagine. How much leverage do you think is possible just based off of your expectations for growth? Do you think you'll have to increase G&A and marketing and selling as we go forward or you think these levels are pretty reasonable in the next couple of quarters into 2016?

No. We think that as we grow in the US and in Canada and in Australia we continue to grow, we will have to grow our salesforce and our cost structure, but it won't be at the rate of the revenue growth and we would expect to see leverage.

Okay, very good. Thank you.

John Baugh, Stifel.

Another great quarter. I was curious on you gave the gross margin breakdown the puts and takes, but you cited fabrication mix hurting, is there a rough gross margin basis point impact from that?

Yes, around 100 points, slightly below 100 basis points.

Okay. And just to be clear, is Canada with IKEA doing the same formula?

Yes, more or less the same.

Okay. I know you build inventory in the first quarter seasonally always like a lot of manufacturing companies, that's a good thing because your demand has been so strong. It is a sizable increase year-over-year. I was just curious whether there were any issues on the West Coast port strike relating to that inventory build or how comfortable you see moving a lot of that inventory as you typically do in the second quarter?

So regarding the port, as I said there was some impact but it was relatively small. And definitely we are usually building inventory in the first quarter to service the second quarter and the third quarter and we see little bit below our target inventories for Australia, Canada, and the States; but we are getting there. So, we have benefited from improved manufacturing in Israel and hopefully in Q3 we will have also our new line that will help us. And again remember that we have today with line number six, we estimate that we have an excess capacity in terms of production to service the immediate demand. Of course we expect the future demand to grow, but we are okay with the immediate demand.

And the increase in the CapEx, is that for equipment process building and then help us understand the spread maybe or the annual CapEx budget for 2015 versus say 2016?

With regards to the increase, it's actually a combination of a few things. There are some improvement related investments that got into the project. We also invested additional money to improve our environmental footprint that is extremely important for us so that plays another significant role. But there was also some parts of deviation from original budget that wasn't budgeted appropriately. So, it's the mix of those things.

And is there any change to your outlook for the total startup expense of the US facility on 2015 earnings?

No. I think that overall for the year, I would say that it's more or less the same though in Q1 there was less startup costs than we originally estimated.

Okay. And my last question is on Australia. It seems like the economy there is slow and yet the housing market is quite strong, I was just curious on any color in that market in terms of outlook. Thank you.

So in Australia we benefited from positive market, increased quartz penetration, and an improved product offering. These were the main factors for the growth in Australia. And we feel quite good with the three markets; the United States, Australia, and Canada; in terms of demand.

Thank you. Good luck.

And we currently have no additional questions at this time. I would like to turn the conference back over to Yos Shiran for any additional comments or remarks.

Thank you. So, thank you for your continued interest in our Company. We are excited about our business and are working hard to deliver continued growth. Have a great day. Bye.

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