Caesarstone Ltd (CSTE) 2015 Q2 法說會逐字稿

Good day, and welcome to the Caesarstone Second 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 ma'am.

Thank you, operator, and good morning to everyone. Certain statements in today's conference call in 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 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 second quarter earnings release, which is posted on the Company's Investor Relations website.

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

Thank you, Allison. Good day and thank you everyone for joining us to discuss our second quarter. I would like to start with some highlights. Sales in the second quarter increased 10% to a record of $127.5 million. Second quarter adjusted EBITDA was $33.5 million, also up 10% compared to last year. Adjusted net income for the second quarter was $23.2 million, up 12% versus last year, and our adjusted diluted earnings per share of $0.65 are up by 12% versus $0.58 in the same quarter last year.

All of our markets grew on a constant currency basis. Although our results show adverse impact of changes of currency exchange rates, the United States, Australia and Canada, our three most important markets, were healthy and excluding the impact of currency exchange rate changes, showed strong gains versus last year. We continue to believe that our performance in these markets and across our other regions speaks to the strength of our brands and the innovation of our products. We're also executing well in our other smaller markets.

Our sales in the United States grew by 19.2% over the same quarter last year to $57.1 million, and the US remains our largest market. We are confident that the market opportunity remains very strong. And although this represents healthy growth, we had expected it to be a bit higher. We expect to see a second half growth rate that is stronger than what we saw in the second quarter.

Canada was our fastest growing market, up 24.4% to $19.1 million. This is despite significant currency pressure. On a constant currency basis, growth was 40.3%, partially driven by our new partnership with IKEA Canada. Australia sales were $27 million, down 1.7% compared to last year. On a constant currency basis, Australia was up 17.8%. We are pleased to see a continued strong trend in this region. Israel was down 3.5% in the quarter to $9.6 million, but was up 7.6% on a constant currency basis. Europe was down by 7.3% to $6.8 million and up 14.5% on a constant currency basis. Revenue in the rest of the world was down 1.6% to $8 million in the second quarter and was up 16.8% on a constant currency basis. As you know, our first US production line in Richmond Hill, Georgia is now operational, and we are on track with its startup and anticipate to start operating the second line in this facility, our seventh line overall in the fourth quarter of 2015.

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 second quarter. Sales in the second quarter increased to a new record of $127.5 million, up 9.9% compared to $116.1 million in the second quarter of last year. On a constant currency basis, sales increased by 20.2% versus last year. I would note that this growth comes on top of our highly favorable comparative period last year in the US given the list from the ramp-up with IKEA, Super-Natural and our expansion of 14 locations.

Gross margin in the quarter was 41.3% compared to 41% last year. This was driven primarily by favorable product mix, lower cost of polyester and benefits of scale. These factors were partially offset by startup costs related to the US manufacturing facility and negative exchange rate fluctuations.

Operating expenses in the second quarter were $24.3 million, or 19.1% of sales versus $24.1 million last year, which was 20.7% of sales. This improvement was due primarily to revenue growth as well as the non-recurrence of several expense items, primarily costs associated with last year's secondary offering.

The revenue growth and the absence of those expense items drove a 20% increase in operating income to $28.3 million as compared to $23.6 million in the second quarter of last year. Our operating margin increased by 190 basis points to 22.2% from 20.3% last year.

Adjusted EBITDA in the second quarter, which eliminates the impact of share-based compensation, the excess cost of acquired inventory and other non-recurring items, increased by 10.4% over the prior year to $33.5 million. This was a margin of 26.3% versus 26.2% last year.

Finance expenses in the second quarter were $0.4 million compared to finance expenses of $1.4 million in the prior year. The decrease was primarily due to net gains related to our currency hedging instruments in the second quarter of this year, offsetting some of the unfavorable exchange rate fluctuations. In the second quarter of 2014, we recognized net losses on those instruments.

Our taxes in the second quarter were $4.6 million, 16.6% of income before taxes compared to a 15.2% rate last year. The increase in tax rate is partially due to higher tax rate associated with our new US manufacturing operations. Adjusted net income attributable to controlling interest in the second quarter increased by 11.8% to $23.2 million from $20.7 million last year. Adjusted diluted earnings per share in the quarter were $0.65 on 35.5 million shares. Adjusted diluted earnings per share last year were $0.58 on 35.4 million shares.

Turning to our June 30th balance sheet. We had cash, cash equivalents and short-term bank deposits of $37.7 million, down $3.4 million from our Q1 cash balance. Our cash flow from operations grew to $20.2 million in the second quarter of 2015 compared to $2.7 million in the previous quarter. Yet, we continue to consume cash given major CapEx payment of $26.7 million associated mostly with the new US manufacturing facility.

With respect to 2015 guidance, we continue to expect adjusted EBITDA in the range of $123 million to $129 million. Our profitability has been strong through the first half, and higher margins are offsetting the impact of the more modest expectations for revenue growth, due to slightly lower-than-expected growth due to slightly lower-than-expected growth rate in the US this year as well as the ongoing impact of foreign exchange rates. Our current view is that we will achieve our profit target on revenue of $495 million to $505 million.

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

Thank you. (Operator Instructions) Michael Rehaut, JP Morgan.

Thanks. Good morning everyone. The first question I had was on the US growth and after that I had a follow-up. But on the US, you mentioned that you're now expecting a slightly less lower growth rate for the year and it was part of the reduction in sales guidance. I was wondering if you could give us a sense of what that difference is and what type of growth you expect now? And what do you attribute the lower-than-expected 2Q results that by contrast you think the second half should be -- have stronger growth?

Hi, Mike. So first of all, the deviation, the change is coming from two aspects. One is the currency effect and the other one is the US performance. The deviation is relatively small from what we have thought initially, but it's big enough to impact because the United States is growing.

So first of all, we are still growing very healthy in the United States and maybe some of the external factors like the strong growth in multi-family. In light of that, it may appear that our growth is not as high as it could be, but we are a lesser of a player in this segment, and this segment is more price-oriented. Overall, last year, we had some factors that pushed the growth strongly like IKEA, like new stocking locations like strong ramp-up of the super natural. So this year, it is coming to effect, of course, much less, and this is what is happening. So according to what we see now and what we expect the growth will be stronger than the second quarter, but lower than we have initially anticipated.

I may want to add, Mike, to quantify of the $20 million, approximately $7 million is exchange rates, deteriorating exchange rates and the remainder is slightly lower-than-expected US growth.

Thanks, Yair. So you said $7 million exchange rate, $20 million US growth?

No, no. $20 million, we adjusted the guidance $20 million. So $7 million exchange rate and $13 million US.

Right, right. And, Yos, what gives you the confidence to see the better growth in the second half? Is it due to backlogs or certain customers that you're working with or the fact that maybe you're getting through the startup inefficiencies of the new line?

No, I think today we are in a situation where we are not capacity constrained. So this is behind us. And we are in a very good shape. Also, we did a lot of improvement in the production in Israel in terms of throughput. And the new line is coming up as we've planned. So this aspect is taking care of. We believe according to what we see, according to the demand for our products, according to the sales trend that we see already and of course, there is no assurance always, but according to our expectation, this should be higher than the second quarter.

All right. And just last one -- excuse me, Yair, if you could give us any sense of finance expense and tax rate for the back half?

Yes. We are expecting tax rates to continue and increase as the US manufacturing gradually increase overall for the second half. We expect range of 17% to 20% tax rate gradually up. In terms of finance expenses, net of any impact of FX that we cannot anticipate, it should be around ILS800 per quarter. That's our run rate without FX.

ILS800,000 a quarter?

ILS800,000 to ILS900,000.

Thank you.

Stephen Kim, Barclays.

Thanks, guys. My first question related to the gross margin benefit, you saw this quarter offset by the plant costs. So I was wondering if you wouldn't mind, Yair, if you could give us a little bit of a breakdown like you've done in the past, like how much in basis points you think you benefited from mix, polyester -- lower polyester costs and the benefits of scale, and how much the offset was in terms -- in your view of higher plant costs?

Yes. So [in both product mix] and polyester prices contributed approximately 200 basis points each, volume impact was below 100 basis points, and those three positive factors were offset by US manufacturing startup inefficiency that was approximately 250 basis points and negative FX impact of approximately 200 basis points.

Perfect. Appreciate that. And then, the next question I had related to the US, so I think we heard that production capacity is ramping up with really no problems and you're not capacity constrained like you have been as much in the past. And so, I was curious if you could talk about, are there any additional channels that you can go after now that you're not so capacity constrained and to what degree any of those initiatives are incorporated in your revised outlook?

Hi, Steve. So, yes, definitely, it helps us to better perform in the market for long term. It will take a while until this situation coming from capacity constrained to capacity not constrained will be translated into sales and growth, but it's -- definitely, it will improve our service, it will allow us to maybe go after projects that were not -- we were not looking at when we were capacity constrained. And this could be in all markets, but also in lower margins, maybe a project, but still healthy margins that we can address. And this is a general statement. I cannot -- we've got the specific ends, but we believe that it will allow us to do and to service much better and it will be reflected, but it will take a while. So currently, the guidance is what we see for the rest of the year.

Okay, great. That's helpful. I guess if I could also ask a follow-up regarding the outlook, you had talked about some of the external factors in the US like maybe a greater mix of multi-family for example or more robustness there, which doesn't as much benefit to US, but single family is what I was sort of hearing you say. Could you elaborate a little bit more or what you were seeing in multi-family and what your outlook is, like how much that is weighing in on the reduction in your US sales?

So again, we cannot -- we don't have a kind of data that's break down and can weigh each of the companies. But as a general statement, the multi-family growth is very strong year-over-year, but the multi-family segment is -- part of it is very price oriented and it's not a game that we're playing in. And again, I don't know whether multi-family is growing over single-family and maybe, it's a general trend that the new younger generation is investing more in a multi-family than in single homes.

We are stronger where a brand matters most. And this is in our innovation and also single-family grew, and there was a good growth, but not very strong growth like the multi-family. So in light of that, we are pleased with the results, and we expect a continued strong growth in the US, which is not stronger as last year, but strong growth. And also for the reason that Yair mentioned, last year incorporated IKEA and other factors. So this is what I can say about the markets, about the external factors.

Okay, great. Thanks very much. I appreciate it.

Thank you.

George Staphos, Bank of America.

Thanks, everyone. Good day. Thanks for the details. I want to just check, to the extent that you have any visibility on this, do you think that your peers are competing perhaps more effectively against your products in the coarse market, and that's leading to any of the slower-than-expected growth or is it purely comparisons and market? And similar question, are you seeing any signs of maybe price compression that you hadn't seen previously again with your key products?

Hi, George. So we don't have visibility to the performance of the competitors and they are -- some of the competitors are closer to our levels, some of them -- some of the competition is cheaper products that are coming from the Far East and it's not the same quality. And as I said, I think the multi-family is more price-driven. We don't have any evidence of somebody that makes better than what we do. We cannot say that it's not happening, but we are not aware of it. So we feel quite strong in the market, and we feel that we are launching the right products. We will continue to expand our new launches and new products that we show to the market of course. And we believe that in that we continue to lead the segments and we also believe in our corporation and between our R&D, our marketing and our ability to read better than the competition, the trend and to launch good products.

So we don't think that there is -- we don't see any evidence to somebody of the players in our level that does something that is better than ours. Again, I don't know if this is the case. To the -- and as I said, in the multi-family, there is definitely -- it was and it is in part of it more price-oriented segments and till now, we were not so much focused on it because of our capacity, part of it we may consider in the future. And of course, prices in that segment are lower.

Okay. I mean, does that suggest that you are planning to get more of the multi-family market with the growth in your business or you're just assuming that the slowdown you're seeing measured by share shift to multi-family over the last six to nine months?

No, I don't think we will -- I don't think it is something that we will go after in a big scale, but it's something that we can maybe better analyze and see if, within that segment, there are some opportunities for us. So this is the right way to look at it.

Okay, understood. To the extent possible, can you comment again within the US, were there any of your products that were less affected by the slowdown or more affected by the slowdown? And can you tell us how Calacatta Nuvo and some of the other launches are doing? And then, my last question and I'll turn it over, as we think about your revenue guidance, what frames the upper and lower balance of that guidance in terms of inputs and assumptions? Thank you.

As to the products, super natural sales continue to do very well. And Calacatta sales are very good. We launched the Statuario, which is a close friend of the Calacatta. We launched it in Canada and in Australia. The reception is good. And we will launch it in the States around October. So of course, we expect some impact, but relatively small in the beginning. So this is to that extent.

As to the variation of the guidance, Yair, would like to answer this?

Yes. We are working all the time with the sales on our projection estimate (inaudible) current exchange rates and that matters lot to us and we don't know how it will develop, so just as on the current exchange rate. And like Yos said, I think we believe that we will be stronger in the US this quarter than Q2. And most of the things that Yos mentioned we will do probably no longer than within this year. So we stick to our guidance.

I think, George, just to add to that and I'm not sure if I'm answering your question, but the guidance and the projection, of course, we have no assurance because we don't have a backlog. It's a day-to-day operation and some of it are projects, which we of course have, but most of it is according to the market and according to previous experience. What we do? We built it bottom up. So we go region-by-region and get the projections from each market and then incorporate it to one projection and this is what comes out.

Okay. I'll turn it over. Thank you.

Susan Maklari, UBS.

Good Morning.

Hi, morning.

At your Investor Day, you spoke about perhaps starting to work more with the big US homebuilder as your US capacity comes online, can you give us any update on your thoughts of pursuing that and maybe what your relationship with them is and where that could go?

So, again, we -- Caesarstone started with the renovation and this is where we are strongest and we started to be aware of more strong relationships and more methodological approach to this segment around three years ago, and this is growing. Of course, opening the factory will help us and will allow us to grow this segment more. So we have relationship with many of the biggest contractors, but it's not very deep. So we can definitely do more work there.

Okay. And then, in Canada, can you just give us an update in terms of how the roll-out of IKEA is going there and your overall efforts to gain some share in that market?

So Canada, as you've seen, showed a very strong performance. This was -- IKEA contribution was significant, but of course, we are very strong in Canada and there are other factors and other operations that we do on the day-to-day basis that contributed to this strong growth. IKEA, in general, in Canada going well. We are starting and we are pleased with what we see. And the growth in Canada seems good because of IKEA and because of our strength in the market.

Okay. Thank you.

Thanks.

(Operator Instructions) Mike Dahl, Credit Suisse.

Hi, thanks for taking my questions. Yair, I wanted to continue kind of the questioning on the revenue guidance, because if we look at this, what it implies for the second half of the year, it looks like we're talking up 10% to 14%. And so that's not really implying any re-acceleration in the overall business. So one, to the extent, the US is re-accelerating, where are you seeing the offsets? And then two, since this is such a big deal, is there anything specific you can share on the US in terms of what the actual growth rates or annual dollar sales range would be for the US specifically?

Well, I think that what we're comfortable to say about the US is that the growth rates will be better than Q2. And we prefer not to say more than this. The revenue guidance in my mind does suggest that second half will be stronger than the first half. And yes, there are some swings in regions, some regions that did very well in half one may not do so well in half two and there is some shifts between regions.

Got it. And then, I guess, to the extent that you are seeing slightly lower-than-expected US growth, how is that impacting your view on the opening and ramp of line seven and does it also -- is there any impact on your view as you look out to what you may think about for lines, eight and nine as well?

So, line number six is now ramping up. What we do now is we're balancing the base of ramping up in the States with the throughput from Israel and we focus on quality and on a very good production. In the States, we have the time for that, and we can do it step-by-step in a good manner that will assure that all the products that we ship to the market from the United States from day one will be good products in the same level that we do in Israel.

Line number seven, there are no changing in plans for line number seven, and we are on track to operate it in the fourth quarter. Of course, when these two lines are up and running, this is an excess capacity and this is what we wanted to achieve. So again this was built up in our plans and according to our plan, and we will continue to work towards additional growth in the future to use those lines. But this is -- everything is ramping according to what we expected.

Got it. Thank you. And then one final question, I guess [lately] you are still seeing inventory levels build on the balance sheet, is this really just tied to the early ramp of the sixth line or how should we think about the inventory management?

I think we will try not to increase the inventory now. The fact that we have now the excess capacity allow us to plan the inventory in a better way and to operate closer to the demand and not to count on anticipation. And also it will allow us to produce the right mix in a better way. So we will look -- we are not looking to increase the inventory anymore from this at least for the time being.

Okay. Thank you.

John Baugh, Stifel.

Good morning. Thanks for taking my questions. Just following up on that inventory level question, would we project that production in, I guess, Israel since line six is still ramping, production rates may slow a little bit there and would there be any gross margin pressure second half versus first half, which was all about?

Yes, Yair, please.

Okay, John. I think as we mentioned in Q1 and we repeated, this quarter, we improved our throughput here in Israel quite a bit that allow us to realign all our capacity planning and put less pressure on the lines and producing good quality and good rate. And that's what we are going to do. I don't think it necessarily will put pressure on margin because 24/7 is quite costly and leaving some of it out does not necessarily mean higher cost per slab.

Thanks for that. And then, you mentioned at the start of the year, the startup expense guidance and now that you have got line six going, is there any update on that annual number for 2015? Is it tracking in your expectations better or worse?

It is -- in alignment with what the slightly offset, given the throughput here in Israel, there is less pressure on our sides to ramp up US extremely quickly. We are taking the time and doing it in a more methodological fashion and worry more about quality than how many slabs are running out of the line that allow us to do it in a less costly way. And therefore, before we indicated around $11 million annual EBITDA impact from this ramp-up, now it has been reduced by around $1.5 million.

Okay. So -- I'm sorry, the original guidance is $11 million, and I think it could be $1.5 million less.

Yes, correct.

Thanks. And then my last question, are there any -- and I'm thinking of IKEA, I guess, but there could be other in terms of big customers or impact moving revenue that you're contemplating over the next 12 to 24 months, now that the US maybe is a little slower and you have maybe more capacity to sell into other parts of the world or other big customers. Thank you.

I think the capacity situation allows us now to access in a better fashion and also in a wider angle of the market, but I cannot be more specific in that. But in general, you are right that it allows us to do more things.

Great. Thank you. Good luck.

Thank you.

That concludes today's question-and-answer session. Mr. Shiran, at this time, I would like to turn the conference back to you for any additional or closing remarks.

Thank you for your continued interest in our Company, and we are pleased with the quarter's results and are dedicated to deliver continued growth. Have a great day. Thank you.

This concludes today's call. Thank you for your participation.