Caesarstone Ltd (CSTE) 2015 Q3 法說會逐字稿

Good day and welcome to the Caesarstone Third Quarter 2015 Earnings Conference Call. Today's call is being recorded.

And at this time, I'd like to turn it over to Allison Cain of ICR. Please go ahead.

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 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 third quarter earnings release, which is posted on the Company's Investor Relations website.

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

Thank you, Allison. Good day and thank you everyone, for joining us to discuss our third quarter. I would like to start with some highlights.

Sales in the third quarter increased 11% to a record of $136.8 million. Third quarter adjusted EBITDA was $36.2 million, slightly above last year's record level. Adjusted net income for the third quarter was $24.4 million and our adjusted diluted earnings per share was $0.69.

This was a good quarter. We saw double-digit revenue growth. On a constant currency basis we grew our third quarter revenues by 23.8%, the fastest growth for any quarter of this year-to-date. Every region grew by 20% or more on a constant currency basis, with the exception of Israel, our most mature market.

In the United States, our largest market, we grow our business by 22.2% over the same quarter last year to $61.7 million. Our core business growth in the US remains solid and we expect it to show healthy growth next quarter. We are however lowering our overall US expectation for the fourth quarter to reflect approximately $5 million of floor focused sales through IKEA. This is related to IKEA's operational factors connected to sales events timing, which we see as temporary.

Sales in Canada grew by 16.9% to $19.8 million or 40.7% on a constant currency basis. This rapid increase reflects continued strong performance in [general] and the positive impact of IKEA Canada, which we began selling to in the first quarter of this year.

Australia sales were down 5% to $29.3 million, a growth rate of 21.3% on a constant currency basis. This growth rate is the result of our new product success and strong growth in new housing completions. Israel sales were down 5.3% in the quarter to $10.6 million but was up 5.2% on a constant currency basis. This is a good performance for this developed market. We're pleased to see a significant increase in Europe, which was up 14.9% to $7.1 million and up 36.9% on a constant currency basis. I will point out that third-party business tends to fluctuate.

Revenue in the rest of the world was up 8.5% to $8.4 million in the third quarter, up 26% on a constant currency basis. We are ramping up, our US manufacturing facility in Richmond Hill, Georgia. The first line in the US is now operating at a higher pace and the second line is now in commissioning stage. This facility supports our growth, removes the capacity constraints and enables us to better serve the US markets. We're endeavoring to allocate production efficiently across our global manufacturing footprints, while balancing cost and time to market considerations.

As you know, there were some recent tech changes to our Board of Directors. We believe that we have a stronger Board as a result of these changes. Our Annual General Meeting, including the election of directors is set for December. Maxim Ohana has been our Chairman since 2010, a period during which we achieved many remarkable milestones. Maxim has decided to step down from the Board to facilitate the election of new Independent Chairman. On behalf of our Board, I would like to extend our thanks and appreciation to Maxim. Maxim faithfully served the Company as the Chairman, was committed to the best interest for the Company throughout his service and was an important contributor to our leadership and success. The new proposed Board includes majority of Independent Directors, one of whom will be the Chairman and another will be an Experienced American Executive, Ron Kaplan, the former CEO and the common Chairman of Trex. Recently we were informed by the Kibbutz that they would like to propose an alternate slate of directors, including similar slates with two different independent directors. Our Board will consider this Kibbutz initiative.

Finally, I would like to address the recent attack by a short-seller against our Company. We were surprised by their unfounded allegations, constituting a deliberate attempt to unfairly damage the Company and to harm our shareholders, while at the same time profiting from the [other sources]. Caesarstone is a strong global company.

We are leading the quartz evolution worldwide with our powerful brand known for high quality, innovation and inspiring design and excellent service. We have a strategy to capture a significant opportunity for growth and profitability. We have built and maintained a very solid balance sheet to support this strategy. We financed our US investment by our own cash flow from operations; we are proud of what we have built here and take the responsibility to create value for our shareholders very seriously. We believe that our continued efforts to grow our business with transparency and consistency will enable our shareholders to benefit from their investments in our Company.

Thank you again. 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 third quarter increased to a new record of $136.8 million, up 11% compared to $123.3 million in the third quarter of last year. On a constant currency basis, sales increased by 23.8% versus last year. Gross margin in the quarter was 39.5% compared to 43.7% last year.

As we anticipated, the decrease was primarily driven by approximately 300 basis points of unabsorbed cost related to the early stage of production in the US manufacturing facility. We also saw approximately 300 basis points of pressure from exchange rates. These two factors were partially offset by favorable product mix and lower polyester and quartz costs relative to last year.

Operating expenses in the third quarter were $29.4 million, including a $4.7 million non-cash expense related to silicosis claims we have in Israel. Excluding this non-cash expense, operating expenses would have been $24.7 million, 18% of revenue, versus $22.7 million last year, which represents 18.4% of revenue. This slight improvement in percent of sales was due primarily to scale benefit.

Operating income was $24.7 million or 18.1% of revenue. Excluding the above mentioned non-cash expense, operating income would have been $29.4 million or 21.5% of revenue as compared to $31.2 million or 25.3% of revenue in the third quarter of last year. This was primarily a result of a lower gross margin.

Adjusted EBITDA in the third quarter, which eliminates the impact of share-based compensation, the excess cost of acquired inventory, legal settlements and loss contingency expenses and other non-recurring items was $36.2 million, $300,000 above last year. This was margin of 26.5% versus 29.1% last year.

Finance expenses in the third quarter were $100,000 compared to finance income of $1 million in the prior year. The change versus last year, was primarily due to lower net gains related to currency derivative instruments, which offset some of the unfavorable exchange rate fluctuations.

Our taxes in the third quarter were $4.2 million, 17% of income before taxes, compared to 15% rate last year. The increase in tax rate is mainly due to higher tax rates associated with our new US manufacturing operations. Adjusted net income attributable to controlling interest in the third quarter was $24.4 million, compared to $27 million last year. Adjusted diluted earnings per share in the quarter were $0.69 on 35.5 million shares, compared to $0.76 on 35.4 million shares last year.

Turning to our recent balance sheet, we have cash, cash equivalents and short-term bank deposits of $52.6 million, up $14.9 million from June 30th cash balance. Our cash flow from operations grew $28.5 million in the third quarter of 2015, compared to $20.2 million in the previous quarter. I would note that beginning with this past quarter, capital expenditure related to the US manufacturing facilities are slowing down and we are beginning to generate significantly more free cash flow.

Related to the $4.7 million of non-cash expense, this expense was recorded for all the silicosis claims that we have been subject to in Israel record for a number of years, other than the claims filed seeking class action status. In the third quarter and thereafter, their occurred certain developments, that triggered the recording of this expense. These developments include our consent to settlements.

In addition, we entered into an agreement with the state of Israel, related to the silicosis claims, not including the claims seeking class action status. Under the agreement, without admitting any liability we and the state have agreed to cooperate in dealing with the claims. If either we or the state of Israel if found liable for damages, we have agreed appointment of those damages. Overall, we believe the agreement with the state would be enable us to manage more effectively the silicosis claims and reduce our exposure. The $4.7 million is the estimate of our total uninsured exposure.

With respect to 2015 guidance, we believe we will offset the lower IKEA US contribution in the fourth quarter and continued negative impact of exchange rate with strong performance elsewhere. Therefore, we currently expect that our 2015 revenue will be in the range of $497 million to $502 million and full year 2015 adjusted EBITDA will be in the range of $125 million to $128 million, both are narrowed ranges within our previous guidance.

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

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

Hi, thanks. Good morning, everyone and nice quarter. First question I had was on the guidance regarding the US and the mentioning of the $5 million of sales related to IKEA. It's certainly a positive that you expect to offset this and the FX by strong performance elsewhere. Just wanted to better understand, I didn't hear fully what the issue was around the $5 million hit? And from a -- if you were to exclude that hit, are we to think that the US would grow in 4Q similar to 3Q or would it have even grown at a stronger rate?

So what we can say about the IKEA and of course, we cannot elaborate too much about it, but they have their own considerations which in this get not related to us. And it mostly has to do about events that they do from time-to-time. So these events were postponed and will be renewed next year, in the beginning of next year, it takes some time from the event until we can get the benefit of it. And it's very important to the amount of our sales there. Now the reason for that has nothing to do with us, but anyway we are connected to it. So this is the IKEA story. And again just to mention that we see this relationship very fruitful and benefiting for both parties. And as we said we expect to be temporary and we'll benefit from it more next year.

Now as you mentioned of course, we're also happy that we can cover this from other places and also from our strength in the U.S. And to your question about Q4, if we're looking at our core business without IKEA in the States, so Q4 is expected to be the strongest this year. So that's where we are.

That's from a growth rate. Yes, when you say strongest you mean from a growth rate perspective?

Right. You're right. It's good. Sorry. From a growth rate perspective this will be the strongest not from absolute dollars.

Right. That's helpful. Thank you. And when you say events, I assume you mean promotional events done by IKEA?

Promotional events. Yes.

Okay. Second question was just on the silicosis non-cash charge and I appreciate the detail here. What I wanted to understand was, if you were to look at the -- now from what I understand this is all related as you described in your statement Yair, related to claims not associated with the class action. I just want to understand; number one, is this only related in the claims in general are really only concentrated in Israel number one, from both the class action and those outside of the class action? And number two, in terms of the totality of the claims that you have at this point, has that number changed at all this year versus last year, if you could give us a sense of whether or not, because this has obviously been something that's been fully disclosed and really hasn't changed that much from a risk standpoint for the last three years? And I just wanted to make sure I understand that, whether the total amount of claims, have they changed at all, and is this just more of a maneuvering to deal with certain claims that are outside of the class action?

Yes, all the claims that we have in Israel including the class action, there is nothing outside of Israel. And the Israel again covers all the claims outstanding today, except for the class action. In our 20-F we have been providing data about claims that we have submitted every year. This year there are additional claims, we will probably give details about it in the next 20-F, but the reserve that we set aside or the expenses we set aside reflect the exposure for everything that is outstanding today.

And just to mention that, it's not the class action, it's the motion to be recognized in the class action and we believe we have a strong defense against it.

Mike Dahl, Credit Suisse.

Hi, thanks. Just for my first question I'll follow-up on that last comment, sorry, did you say that, this charge fully covers all outstanding claims as you'd estimate them today or was that all of the individual claims, sorry if I missed that clarification?

It covers all the individual claims filed in the Israeli court, [deposited uninsured], so that's what it covers. The claim that, with a motion to be recognized as class action is not part of that, as I said before.

Got it, and I guess to be clear on the agreement with the state of Israel, this now represents your maximum liability under those claims, would that be accurate, the individual claims?

According to the estimation that we did in a duly manner, so this is what the risk, together with the lawyer that has to assess every claim one-by-one, so this is after work that was done on each claim.

Okay. And then shifting to the US side, so one clarification there as well, yes, when you say US would be the strongest growth rate in the fourth quarter ex-IKEA, can you give us any sense of magnitude since, obviously the first three quarters were impacted by some of the ebbs and flows in the IKEA business. So what type of growth rate should we really be thinking about, because that would really would be helpful as we think forward to next year and if we get these events back, but just any quantification of what that ex-IKEA business is growing?

So first of all the IKEA minus $5 million, which will suffer in fourth quarter will impact the overall US growth for us. So this is just to be clear there. We speak about the core business here and just to signal that we feel very good that the core business is very healthy and more than that I really can't get into much details, because then I will get into the IKEA number exactly and as you know, we cannot do and we don't break it down, but in general, I'll give you the direction that the growth is healthy.

John Baugh, Stifel.

Thank you. Good morning. My first question is on the plant start up, yes, I think you have guided us to around a $10 million drag for the year. Where do we sort of sit through Q3, is the first question? And with nine months in the books, so we're still looking at $10 million for the year, and how do we think about where start up drag peaks, did it peak in the third quarter or is it peaking fourth quarter and going into next year, any color on that particular issue?

Yes, so overall the annual impact on our EBITDA taking aside depreciation is still around $10 million, slightly above $10 million. In Q3, as I mentioned it was around 300 basis points of the gross margin, which include the depreciation part. I think that according to what we see, there isn't much difference from the impact between Q3 and Q4. Nothing really much to say.

Going forward for next year without quantifying anything, we expect that the ramp up of the US facility will of course reduce this impact quite a bit.

Okay. And that's helpful, I appreciate it. Is there any color around, I think it was the $13.4 million item on the balance sheet that is related to the legal settlement and I believe that's a new line item, could you discuss that in the context of the $4.7 million charge?

Yes, sure. So according to the US GAAP the full liability must be recorded on the balance sheet. And then to the extent that insurance payments are highly certain then there is an offsetting effect that is also recorded, which is the way we treated it. So what you see on the balance sheet, you see $13.4 million in long-term liability related to this exposure and there is around $1.1 million in short-term liability, so altogether the gross exposure as we estimated today related to all the claims, except the one that seeks to be a class action is in total $14.5 million. On the other hand, we recorded long-term and short-term receivables of $8.7 million long-term and $1 million of short-term respectively for a total of $9.7 million, which represent insurance payments. So the difference between the $14.5 million and the $9.7 million is $4.7 million which is what we recorded as an expense.

(Operator Instructions). Stephen Kim, Barclays.

Thanks very much guys. So I just -- Yair, if I could follow up a little bit on John's question just about the drag in the US from the Richmond Hill facility ramping up, I think you indicated, it wouldn't be that much different from the 300 basis point drag that you saw in 3Q, in 4Q it would be similar, but in terms of the timing of, when we might be able to expect to see that drag moderate, is it your expectation that we would see that drag moderate as quickly as the first half of next year or is this something which is going to take longer do you think?

No, I see this improvement quarter-over-quarter next year. And I see this plant as a whole contributing next year to our EBITDA as a stand-alone operation.

I think the next year -- next year our plan is to produce much more in the US than we produced this year of course because, we're just starting this year and we are ramping up as we said in line number 6 and line number 7 is now in commissioning and will also help next year, so it will be a different picture, totally different picture next year regarding the US facility.

Got it, okay. And then in the US, well overall we saw your inventory levels moderate a little bit sequentially and I was curious as to whether you could share with us just generally, in the US not by specific product line, but maybe supernatural or versus high-end versus lower-end, if you could talk a little bit about what you're experiencing in terms of demand trends or delivery times, have they extended for some products more than others and overall impact on the inventory levels you recorded?

So inventory is one thing, so I will divide it into two. The inventory levels are going down also because of, of course, the help that we get from our factory in the US, which allows us as planned, to reduce inventories and react faster. So this is one thing and we're working on reducing the inventory, which of course helps also the cash flow.

In terms of new products, we are continuing to launch new exciting products. We are now going to launch new product [afford] we define the upper end of the supernatural, sometimes we call it the ultra-natural, mainly known as Calacatta and Statuario. And now there is a new one, we call it Statuario [Maximos] which will be launched next year all over the world, and it looks very good. Maybe more importantly to the United States, we intend to launch more targeted collections next year for the American market, which we also expect to have a positive impact on our performance in the states and in general of course.

In terms of competition, competition in other markets, the quartz market is growing and this is very positive. With the growth also the competition is growing, which is also in some way positive, but also we should adopt and we should make sure that we maintain the margins and then the profits and in general we're welcoming competition. So we see competition of course in the lower end, which we less care about because we are more focused in the mid and high range and but also there there is competition and there has always been competition but it's getting tougher and we're getting better.

Susan McCrory, UBS.

Good morning. First, could you talk a little bit about the change in the Board? You noted that your Chairman is going to be stepping down to make way for a new independent person to come in. Can you talk a little bit about his decision to do that, why now? And then you also mentioned that the Kibbutz is going to propose a slate of new initiatives for the Board. Can you talk a little bit about that as well?

So Maxim, our Chairman as we said he decided to step down, and he will be replaced with an independent Board member from our current independent Board of Directors. And in addition, what I think also was important for us is to bring to the Board to be elected of course an American Director and we brought Ron Kaplan from Trex and this again, we see as a very positive step in improving our Board. The Board will be constituted according to the current offer of nine directors. So this is what our Board has decided and we filed of course 6-K for that and there'll be a general assembly in December.

The Kibbutz very recently sent a letter to us and notified to offer a different slate of board members, including the same members proposed by our Board, except for two different independent directors. So our Board will need to consider this Kibbutz initiative and of course we'll need some time to assess and see what does it mean and how to react to that.

Okay. And then you mentioned that your cash flow is improving. And as we look to next year and the US plant is fully sort of operational and up and running. Can you talk about how you think about your uses of free cash going forward?

I believe that we will continue to generate strong cash flow from operation and given that our CapEx will go down dramatically, compared to this year that will increase our free cash flow, it should.

George Staphos, Bank of America Merrill Lynch.

Hi everyone, good day. Just wanted to come back to two things, one on silicosis and then the other on the board to start. So I just want to understand the $15 million or so of liability that's on the books, represents your best estimate of claims to-date, however and excluding the claims associated with the potential class action, but to the extent that there might be future claims, have you incorporated those in your estimate or would those be incremental should any arise?

No, any future claims that may come or may not are not included in this exposure.

Okay, fair enough. And the related point that I had Yair, on that is, as I recall your maximum insurance coverage was around $10 million and at some point it was going to trend to $5 million on annual basis, did I recall that correctly and if not could you give us an update in terms of what your coverage is year-by-year?

Since April this year.

I'm sorry, I didn't hear that what was that?

Yes. Since the April of 2015, the [$5 million] of potential damages related to silicosis are on the Company, we're self-insured for this respect. After the $5 million we have an additional global insurance of $35 million, covering our exposure globally with certain limitation on timing and damage occurrence. In addition to that and [discounts] will be deductible around -- not around, exactly $125,000 per claim. Above that, in each region Australia, Canada and the US we have additional coverage for those regions so, if there is something, for example, if there is a claim in the US then that will cover it, first the regional coverage that we have in the US and then we have the $35 million from the global umbrella.

Okay, that's helpful, I appreciate that. And then other question I had to extent that you can comment and you might not be able to. The Kibbutz's slate of directors, you said the only difference is their choice of the two independent directors. Can you comment as to, who those two independent directors are or why they were not in agreement with your choice? Thank you.

No, we don't know.

(Operator Instructions) Michael Rehaut, JPMorgan.

Hi, thanks. Just a couple of clarifications. Number one, on the startup cost that you mentioned slightly above $10 million for this year. I just wanted to be clear, given the fact that you will have next year the second line I guess starting to come up? Did you say that, you expect 2016 in aggregate to have less start-up costs than 2015? And if there is any way you could quantify the magnitude of that?

Yes. What I said is that next year, the unabsorbed cost from the US manufacturing, which should be a lot less and the impact on our EBITDA margin should be a lot less than this year. We also believe that the plant itself will contribute EBITDA dollars to our total performance unlike this year. And as far as specific quantification, we're still rolling out our annual plan and it's a bit too early to talk about it exactly in the next earnings call. Probably I will be in a better position to discuss it.

Okay, thank you. And then just also again on the two independent directors that the Kibbutz is proposing in contrary to you, just to be fully clear. The difference is, on these two different directors, the Kibbutz is still proposing obviously these two different directors are still independent. They are just two other independent directors than the two that you've proposed. Is that correct?

Yes. It's the same slate a part of two independent directors, but they are proposing two different people than what was proposed by our Board.

Right and those two other people are also independent.

These two people are also of course, they are also independent, and they are from Israel. They're proposing two independent from Israel instead of farther two independent from Israel, is what they're proposing.

So they are in agreement with the proposal of Ron from Trex?

Yes.

Stephen Kim, Barclays.

Great, thanks. Yes, just sort of a follow-up, I just want to make sure that the IKEA temporary impact is that I understand it clearly, it sounded like, this is going to have a drag effect on your 4Q which you indicated, but am I correct in interpreting your remarks to suggest that, in the first part of next year, let's say maybe in the first quarter, you would actually see that, you expect that promotion to be restarted and at that point you would basically take what the $5 million drag was in 4Q and it would actually be a benefit to 1Q, am I interpreting your remarks correctly there?

I think most of the benefit will start on the second quarter. Because the event starts in Q1 but it takes time until we benefit, from that it takes a bit and we expect stronger business with them next year.

Okay. And then again just simply to make sure that I heard everything correctly, you've indicated that the year-over-year growth rate excluding this IKEA effect which is roughly 1,000 basis points, let's say to your growth rate, excluding that would have been the strongest year-over-year growth rate this year, you did 27% or so in the first quarter, the 27.5% in the US year-over-year growth rate. So essentially what you're implying is that, had it not been for this 1,000 basis point impact in 4Q, your growth rate in the US would have exceeded 27.5% year-over-year growth, that essentially is what you're trying to say, right?

Well, not exactly because the 27.5% was including IKEA. So what we're saying is that excluding IKEA this will be the fastest growing quarter for us on a year-over-year comparison.

Got it. Would there be any reason to think that a $5 million quarterly run rate benefit was different in 1Q of this year, I mean was it fairly -- would that be a fair guess?

Yes.

Okay, thank you, that's very helpful.

(inaudible) very little by those sales events. It was a good sales event growth.

Okay. And since we're in the sort of the additional question period, can I ask a couple of more questions or do you want me to get back in queue.

No, you go ahead and ask.

Okay. So we just had a question regarding the claims that are made, Yos you made in your opening remarks, the comment that you felt like the claims that were made against you by or the charges, allegations made by an investor were somewhat spurious. I was curious as to whether the Company has considered taking legal action. You sort of alluded to it in one of your documents earlier, but I was wondering if you had considered that, where that stands, have you decided against that or where does that stand now?

I think that it's a possibility, it's on the table, in terms of the timing we have to take also other considerations. And of course also weighed on effort to reward, but it's definitely something that we will -- and I think that we'll consider with the time, when the time is right.

Michael Weisberg, Crestwood Capital.

Hi, everyone. Just a clarification if I could. You mentioned that, Georgia will be EBITDA positive in 2016. Is that including the startup cost or is that before the startup cost you could bare next year?

Including everything, all inclusive.

Including everything, that's great. The board that you are proposing has a majority of independent directors, is that right?

Sure. It has to be like that, and it has six independents.

So its six independents and three members of the management of Kibbutz?

Yes.

Mike Dahl, Credit Suisse.

Hi, thanks for the follow-ups. Just wanted another clarification on the IKEA relationship and I know they've been -- you haven't necessarily had advance notice in terms of these sales events being cancelled or postponed this year. So just to confirm, it sounds like from your comments, they have notified you that they will definitively resume these activities in the first quarter, is that correct?

First of all I would like to emphasize that they don't -- it's not that -- it wasn't planned and wasn't sure that this will be the case. And again I cannot elaborate on, and it's not a big deal by way, but I cannot elaborate on the reasons for that. But according to what we know now, it will be resumed in the first quarter.

Thanks and then separately from IKEA, because it does seem like you've had success ramping up the growth rate. Can you talk about in the US, I know you mentioned some of the product rollouts, but anything in terms of channel penetration or expansion, what's been more successful for you over the past several months than it had been in 2Q?

So, I think overall as I said, we are working diligently in the United States to increase the sales and this includes among other things taking care of different segments, fine tuning the distribution, launching new product and more importantly new targeted products for the American markets, and of course other things. So and as I said, there are also big bunch of things that we are doing and I believe that would bear fruit next year. But even before that, the business is solid and as I said the growth rate in Q4 compared to last year is the best -- is expected to be the best so far this year.

George Staphos, Bank of America Merrill Lynch.

Hi guys. I just wanted to perhaps parse gross margin a little bit, to the extent again possible. So I think you said this, but I just wanted to confirm, the startup expenses with the Richmond Hill, the 300 basis points that was in line with your expectations, better than your expectations, worse than your expectations, if you could provide some color there? And then you said, if I remember correctly that inputs and mix were partial offset increases to gross margin. Can you comment as to whether you got more benefit from mix or more benefit from raws in the quarter? Thanks and good luck in 4Q.

The impact of the unabsorbed cost of the US manufacturing operation was pretty much in line with what we had expected entering into this quarter. What was not in line with our expectation is the FX that continued to drag on us and make it harder. And with regards to the benefits on the other side, product mix was slightly -- had a slightly bigger positive impact than the raw material cost.

Michael Rehaut, JPMorgan.

Thanks for taking my follow-up or second follow-up, just I guess a clarification on previous question that was asked around the 4Q growth rate in the US versus, comparing it versus the first quarter. Just want to make sure that we are on the same page here. Again, if you were to exclude the $5 million, the US would grow faster than 28%, is that what you are saying or not and if not, what are you saying in terms of how you think about the first quarter growth rate?

Okay, I would say the following; we need -- when we say excluding IKEA, we mean excluding IKEA in total, so first quarter this year -- you have to remember that last year in Q1 2014, the business was just starting to ramp up, so it was very weak. So therefore Q1 this year for IKEA was quite a strong year. So that's what we mean. When we say $5 million it's what is the impact of this lack of sales events on our original -- on our previous assumption about what will be the US revenue in Q4.

So let me maybe just say to that Mike, if I understand your question. So what we are saying, we are referring to Q4 this year and we are saying that in Q4 because of the temporary issue with IKEA, we are having less $5 million in this specific quarter than what we thought we had before, so this is the change. On the other hand, if you exclude IKEA in the fourth quarter, and just measure core business compared to core business year-over-year, then we grow more, but the overall growth in the United States will be lower, so it will be lower because we are selling $5 million less than expected. So this is the math, if it's clear enough, if not please, ask me again.

Okay. So can you give us a sense then of, for this year excluding IKEA roughly speaking what has your core US been growing at, if you could give that in a rough range or would this be too specific to the IKEA relationship?

I think it would be too specific.

Okay. Alright, we could talk offline.

Yeah, thank you so much, thanks.

John Baugh, Stifel.

Thanks for taking my follow-ups. The FX drag for the year, where does that number come out, I guess on an EBITDA basis projecting currencies through the rest of the year at similar levels?

So year-to-date FX drag is around 2% -- 200 basis points.

Okay, and would that be similar you think in Q4?

No, I think in Q4 it may be higher.

Okay. And then as it relates to lines 8 and 9, I think you've talked about may be doing some preparation CapEx for that in calendar 2016. Any update on that or is that really more a 2017 event?

We are taking very, very initial steps towards it, so it's -- we still need to wait and see what happens with the growth and with the first factory and then gets to the line 8 and line 9, but we are -- of course we are prepared, but it's not -- it's very initial steps.

Okay and then my last question is on, I think it was $130 million of the total Richmond Hill capital spending number, I know that part of that was a showroom, I guess part of that's land, I'm just curious what is being depreciated and how much is the depreciation expense for per year for the next, I don't know 5 years or 10 years?

I would say, the rule of thumb based on, I don't have plans now what will be depreciation specifically, but as a rule of thumb if you take 7% to 8% that is a good rule of thumb, because the land is not being depreciated. So generally what I've seen previously investment this is a good assumption.

All right. Thank you and good luck.

Mike Dahl, Credit Suisse.

Hi, thanks. One more attempt, trying to get some color around the whole ex-IKEA business, and so may be to frame it. What was the strongest quarter so far to-date ex IKEA in the US, because our sense is once you lap that first quarter comp the IKEA business would have been run rated and that your core growth in 2Q and 3Q would have actually exceeded the total growth that you reported in terms of the 19% and the 22% in 3Q. Can you give any color or confirmation around that?

I would just say that the core business has improved quarter-over-quarter steadily.

So 3Q would have actually been your strongest?

Yes, yes.

Okay. Thank you.

With no further questions in queue. I'd like to turn it back to Yos Shiran for closing remarks.

Okay, thank you for your continued interest in our Company. And we are pleased with the quarter's results and look forward to sharing more with you next quarter and have a great day. Bye.

That concludes today's conference. We thank you for your participation.