Caesarstone Ltd (CSTE) 2015 Q4 法說會逐字稿

Good day and welcome to the Caesarstone fourth quarter and fiscal year 2015 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Allison Cain 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 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 fourth quarter and full-year earnings release, which is posted on the Company's Investor Relations website.

With that, I'd now like to 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 fourth quarter. We had a good finish to the year. I would like to start with some highlights.

Sales increased 12.1% to a new fourth quarter record of $127.4 million. Without currency impact, our growth would have been 21.6%. Adjusted EBITDA for the fourth quarter was up 8.2% to $30.4 million, a 23.9% margin. Adjusted net income of $19.7 million and adjusted EPS of $0.55 were both in line with our plan.

We successfully grew our business this year. We opened a new state-of-the-art manufacturing facility in the United States. We strengthened our brand leadership position around the world and we introduced new innovative designs and expanded our product offering. We accomplished these things despite strong foreign exchange headwinds.

Now, I would like to give you an update on each of our major markets, both for the quarter and the full year. Fourth quarter sales in the United States grew by 14% to $56.5 million, with the strongest core market growth of the year offset by significantly lower sales to IKEA. As we mentioned last quarter, we expect IKEA promotional calendar to resume in the first quarter of 2016, with a positive impact starting in the second quarter.

For the full year, sales in the United States was $223.3 million, an increase of 20.3% over 2014. United States continues to be our largest market. It also continues to hold the largest potential for growth.

The quartz material conversion in the United States continues to be powerful. In this past year, in addition to growth at the mid to high end of the market, which is our primary target, this trend extended to a growing portion of the lower-priced market. The level of competition within the quartz category has increased mainly at the lower end.

We continue to enjoy a leading position in the marketplace and a strong opportunity for growth. Our new US manufacturing facility will provide scale benefits and flexibility to help us capture this opportunity.

I'm pleased to announce that as of this week, Dan Clifford is our new President of our US distribution organization, Caesarstone USA. Dan has quickly proven himself as the Head of our Canadian business and we are excited to have him take on the leadership of our US business. Dan spent over a decade working in the US in leadership positions for a number of companies.

I would like to thank Sagi, who many of you know, for his contribution in building our US business. Sagi remains with the Company and will be working on a global business initiatives from here in Israel.

Australia sales in the fourth quarter was $30.7 million, up 9.7%. On a constant currency basis, Australia was up 31.4% in the fourth quarter. For the full year, Australia sales grew 2.6% to $110.3 million. On a constant currency basis the full-year growth rate was 24%, built up by strong new housing starts activity. Our business in Australia is solid.

Canada sales in the fourth quarter grew 29.2% to $17.9 million. On a constant currency basis, Canada's growth was 50.2%. For the full year, Canada sales grew 22.2% to $70.7 million.

Full-year growth was 41.2% on a constant currency basis, reflecting also the IKEA ramp up. We have already hired a strong replacement for Dan Clifford as President of our Canadian business, who will start his role on mid-March.

Sales in Israel for the quarter were $9.6 million, up 8.1% compared to last year. On a constant currency basis, sales were up 9.9%. For the full year, Israel sales were down 4% to $39.6 million, but up 5.3% on a constant currency basis.

Europe sales in the fourth quarter increased 10% to $5.5 million, but were up 25.6% on a constant currency basis. For the full year, Europe sales were $23.9 million, up 3.6% and up 23.6% on a constant currency basis.

Revenue in the rest of the world during the quarter was down 14.2% to $7.2 million. On a constant currency basis, revenue was down 5.2%. For the full year, sales in the rest of the world were $31.6 million, down 1.4% and up 13.9% on a constant currency basis.

In general, during the fourth quarter, we achieved our plan, executed well and positioned the business for continued growth. We look forward to improving efficiency in our US plants and gradually recapturing the temporary decrease in profitability that was created by this major expansion.

Given our strong cash flow, we are pleased that our Board has authorized a $40 million share repurchase. This reflects our commitment to drive value to shareholders.

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

Thank you, Yos, and good morning to everyone. I will start with our income statement for the fourth quarter.

Sales in the fourth quarter increased to $127.4 million, up 12.1% compared to $113.6 million in the fourth quarter of last year. On a constant currency basis, sales increased by 21.6% versus last year.

Gross margin in the fourth quarter was 37.9% compared to 43% last year. The decrease was primarily driven by costs related to the ramp up of both lines in our US manufacturing facility and the impact of significant negative exchange rate fluctuations, which were partially offset by favorable product mix and lower raw material costs.

Operating expenses in the fourth quarter were $25.6 million, or 20.1% of sales versus $25.9 million last year, which was 22.8% of sales. This margin improvement was due primarily to scale benefit as well as some favorable currency impact.

Operating income was $22.6 million or 17.8% of revenue compared to $23 million last year, 20.2% of revenue. This decrease was primarily a result of lower gross profit.

Adjusted EBITDA in the fourth quarter, which eliminates the impact of share-based compensation, the excess cost of acquired inventory, legal settlement and loss contingency expenses, and other non-recurring items, increased by 8.2% over the prior year to $30.4 million. This was a margin of 23.9% versus margin of 24.8% last year.

Finance expenses in the fourth quarter were $0.7 million compared to finance income of $0.9 million in the prior year. This year, we had lower net gains related to foreign exchange rate fluctuations compared to last year.

Our taxes in the fourth quarter were $2.6 million, 11.7% of income before taxes, compared to 13.9% rate last year. The decrease in effective tax rate is mainly due to two factors. One relates to a larger portion of production in Bar-Lev, where tax rate is only 9% compared to production in Sdot-Yam where tax rate is 16%.

The second relates to a US tax credit on an interest payment of an intercompany loan provided to the US manufacturing plant as part of its capital structure.

Adjusted net income attributable to controlling interest in the fourth quarter was $19.7 million compared to $21 million last year. Adjusted diluted earnings per share this quarter were $0.55 compared to $0.59 last year.

Now, I would like to highlight some of our full-year financial performance. Sales for the full year were up 11.6% and up 22.1% on a constant currency basis. Gross margin was 40.1% in 2015, compared to 42.4% last year. The decrease was primarily driven by excess cost related to the ramp-up of our production lines in the US manufacturing facility and the impact of significant negative exchange rate fluctuations, which were partially offset by favorable product mix and lower raw material costs.

Operating margin was 19.3% this year compared to 21.2% last year. The decrease was primarily due to lower gross margins and to the $4.7 million non-cash expense related to legal settlement and loss contingencies.

Our adjusted EBITDA grew by 7.8% to $125.7 million, a 25.2% margin, down 90 basis points from last year margin. Adjusted diluted earnings per share grew by 1.3% to $2.36.

Our year-end balance sheet was strong with cash, cash equivalents and short-term bank deposits of $62.8 million compared to $54.3 million in the prior year. Our cash flow from operations for the full year was $85.7 million compared to $76 million in 2014.

With respect to our 2016 guidance, at current exchange rates, we are expecting revenue in the range of $550 million to $565 million and adjusted EBITDA in the range of $138 million to $145 million. We believe our business will accelerate following the single-digit first quarter year-over-year growth rate, both in the US primarily as we expect a stronger business with IKEA and worldwide because of the year-over-year currency impact.

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

(Operator Instructions) Stephen Kim, Barclays.

Thanks very much, guys, and yes, congrats on pulling out a good quarter. What if --

Hi guys, this is actually Trey. It sounds like Steve's breaking up. So we were wondering if you could possibly parse out for us the quantification in margin or in dollar terms of the FX impact on your margin in the quarter as well as the start-up costs from the plant in the US?

Okay. The general picture is that the decrease in the quarter in gross margin was due to the US manufacturing ramp-up with around 500 basis points impact. The FX impact of approximately 300 basis points was offset by product mix and lower raw material cost, each contributing approximately 200 basis points. This is for Q4.

Same picture is for the year with slightly different numbers. US manufacturing ramp-up impact was approximately 350 basis points and FX was approximately 200 basis points. Main offsetting positive drivers were product mix which impacted our margin positively by around 200 basis points and lower raw material cost of approximately 150 basis points.

Got you. Thanks. That was helpful. And looking forward to 2016, could you give us a sense for guidance in terms of your D&A and your tax rate that you're expecting?

Yes. We are expecting tax rate in the range of 17% to 20%, given a better utilization and higher throughput of our US manufacturing plant. With regards to D&A, it should grow quite a bit compared to this year. I'm not sure that we want to quote accurate numbers here.

Got it. All right, guys, thanks for the help.

Thank you.

Michael Rehaut, JPMorgan.

Thanks. Good morning, everyone.

Morning.

Or good afternoon. The first question, just wanted to dig into the thoughts around the first quarter for growth. I believe you said single digits for the US and overall. And just to think about the US for a moment, what that growth might have been excluding the still difficult comp that you're facing in the first quarter with IKEA and what the growth should accelerate to in the rest of the year?

Hi, Mike. So there are two factors that will make the first quarter softer than the rest of the year. The first is in the US. Well, the US core business continues to grow at solid rates and just mention that in Q4, it grew very nicely. In Q1, it will grow less than Q4 but still in a solid rate.

We expect IKEA to be significantly down versus last year and IKEA's kitchen promotion events, which are an important part of our volume with IKEA, will be resumed in March, but the positive impact of it will be seen starting in the second quarter.

The second factor is currency. Given that there has been continuous FX deterioration through 2015, the biggest negative impact occurs in the first quarter comparison, given current rates. Now, as we move through the rest of the year, we expect to have the benefit of a normal IKEA business in the US, a decreasing FX differences and on the bottom line, ongoing improvement in our utilization and margin in the new facility in the US. So, this will also help us see stronger results as the year progresses. I hope this answers your question.

Well, I don't know if it's possible, Yos or Yair. I was asking more just to try and quantify what the FX impact might be in the first quarter and for the full year to quantify that. And also from a US growth rate, if you expect single-digit growth and I assume that means mid-single-digit growth in the US, what that might accelerate to as you work past the IKEA comparison in the first quarter?

So not by quarter but for the full year, based on exchange rates at the beginning of February and this is extremely volatile these days, but based on early February, the FX impact on revenue is at least $16 million for 2016.

That's one-six?

Yes.

Okay. Okay. Second question. I was hoping you could kind of discuss the leadership change in the US and what initiatives you are expecting under the new Head of the business and what perhaps you feel he brings to the table to take the organization to the next level relative to Sagi that's been running the business for the last couple years, and if there was any areas in the last year or two where you felt that there were some good room for improvement? I'll leave it at that.

Yes. Sagi did a good job and implemented very well our growth strategy in the US and we are happy to have him with us going forward to lead the other business initiatives. And we moved Dan from Canada, who is an experienced, skilled executive and we believe that he is the right person to take this business to the next level.

Any specific initiatives that you want to highlight?

Not specific initiatives. I think that the business is becoming bigger and bigger and we expect it -- of course, we have quite aggressive long-term growth initiatives. Hopefully, they will be matured; of course, there are no assurance, but we expect a lot from the American market, and in a way, it's a different magnitude and it requires different skills.

All right. Thank you.

Thanks.

Mike Dahl, Credit Suisse.

Hi, thanks for taking my questions. Wanted to start with some of the guidance on EBITDA margins and maybe break it down a little more if we can into gross margin versus some of the SG&A line items. I guess on the gross margin line, obviously as you outlined a lot of negative impacts that, some of which abate as we go through this year.

So if we're looking at EBITDA margins, kind of flat to up modestly, could you give us a sense of how much in plant start-up costs you expect in 2016 versus 2015; and then should we expect gross margin to be up and how meaningfully; and then the reverse on SG&A, what should we expect in terms of leverage or additional areas of spend there?

Yes. Well, basically, we expect our utilization in the US plant to improve significantly next year and this better utilization is expected to slightly contribute to gross margin in 2016, but a bit more to adjusted EBITDA given that we take out the depreciation aspect. Basically, on the adjusted EBITDA, the improvement, if you take the mid-range, 24.5%, it's 0.2 percentage points improvement. Basically, the story behind it is FX headwinds of around [110] basis points offset with a better utilization in the US plant and some savings on lower raw material costs, mainly polyester.

Got it. And then I think, Yos, you mentioned in your opening remarks some comments around competition and it's still being primarily contained to the low-end or at least the increased competition. I think we had heard maybe some of your higher-end competitors had actually raised price recently. So, could you talk about kind of the competitive dynamics in pricing in particular, actually with two of your larger premium competitors?

I think overall, as I said, the quartz segment is growing and with it, the competition is growing. Now, as I said before, I think we've lived with competition in the last, let's say at least 15 years and we are used to competition and will continue to operate in a competitive landscape.

I believe what we saw this year is that quartz penetration also expanded into lower segments and most of the competition occurs there. But the competition also expands into and impacts also higher segments including ours. We live with it, okay. Our ASP was even improved a little bit and we achieved this by all the core competitiveness of Caesarstone's, like all the differentiation factors, like design, quality, innovation and so on and we will continue to do so. So, of course, there is no assurance, but we expect to continue and perform well with the competition.

That's great. Thank you.

Thank you.

George Staphos, Bank of America.

Hi everyone. Good day. Thanks for the details. I guess I want to pick up on that question on competition. The increase in competition at the low end, has it been more from foreign entrants and here, I am thinking specifically within the US, or has it been the existing players also going down market in terms of what they are pursuing? That's question number one.

Question number two. Can you talk to any investments that you're planning or may need on customer service as you continue to grow out the US piece of the portfolio?

And then, third, I just want to come back to the question on the organizational evolution, recognizing that you made some changes and that you don't necessarily want to advertise what you're going to do for your competition to know. Are there any specific changes? If we're having this conversation 12 months from now on your fourth quarter comps call for 2016, what will you have hoped to have achieved from these management changes in terms of things that we would see from where we sit? Thank you.

So in terms of competition, we don't have an accurate data of who does what. But what we see is a lot of Chinese imports coming to the lower-end and we see also other players of course responding and compete. So this affects all the competitive landscape.

But again, as I said, we managed in the past to live with it and we still feel very good with our strategy. So this is what I can say on competition. Again, as I said, I don't have an accurate data. It's all based on our Company impression.

In terms of what we need to add in terms of customer service, there is nothing particular that we need to add. But of course, as the Company grows, we will need to add more salespeople and we do. And of course, we added people in the factory in the United States last year. So these are for the two first things that you asked.

Now, what was the third one? (multiple speakers). Yes, regarding the leadership change in the States. So as I said, first of all, Sagi did a very good work and he is a good manager and he executed very well our growth strategy there.

Basically, the business grew in the last few years from $70 million to $223 million this year and now it's a hundreds of million dollars business. So we would like to set the infrastructure for growth and to make sure the procedures are adequate for this -- and all the aptitude that needed to take this business forward. Again not that Sagi couldn't do it, he could do it, but we thought that we can use his skills to other things better and we thought that Dan is a very good manager that is very suitable for this mission and this is why we did it.

Okay. Thank you very much. Good luck in the quarter.

Thank you. Thanks.

Susan Maklari, UBS.

Hello?

Hi.

Hi.

Can you talk a little bit to the share repurchase authorization that you also announced this morning? Have you bought back any shares using it already and sort of any thoughts on the timing for those in 2016?

So, it is our intention to execute the authorization relatively quickly though that's dependent on market conditions among other things. And, the Board strives to consider all alternatives to drive value for shareholders and this is our first repurchase and under current circumstances, our Board found it to be proper use of capital and we haven't started it yet.

Okay. And then, in terms of the US plant, it certainly sounds like you made some further progress on that in the last quarter. Can you just kind of talk a little bit to where the lines are in terms of production and perhaps how you're thinking about them coming through as we go through the year?

I think we have gone a long way in 2015. It cost us also a lot of money. We saw the impact on Q4. Without the negative impact of the factory in Q4, we could have achieved an additional 500 basis points in gross margins, which is a lot.

But side-by-side with that, the factory becoming more efficient and the throughput is growing. So, in 2016, we expect to have a significant throughput from the factory in the States, and we expect it to be much more efficient.

So this is what we can say in general about the factories there. Other than this, the progress is good. It costs more than we thought a little bit, but the progress in terms of quality, efficiency is improving.

Okay. Thank you.

Thank you.

John Baugh, Stifel.

Thank you. Good afternoon. A great quarter. I was wondering we could talk a little about Canada and Australia and maybe talk local currencies excluding FX, and I guess for Canada excluding IKEA. Can you tell us what you're seeing in those markets? Results are obviously good and sort of what the outlook for 2016 is in those markets?

I think both markets did very good during 2015. Canada is, as you said and as we said, the results are also affected by the addition of IKEA. But of course, also without IKEA, it was a very good year and also in Australia. The Australian performance was good because of quartz penetration, because of our product mix and of course the execution there and also it was backed up by a strong housing market, which is going to change in 2016.

So overall, we expect of course continued growth in Australia, but not as strong as it was in 2015 and the same goes for Canada. We expect continued growth. Again, we don't know what will be the impact of FX, but both markets performed very well.

In Canada again, the impact of IKEA will be lower next year, because we operate in all the IKEA stores in 2015. So again, we'll have lower growth rates now when you compare same-store sales on the IKEA part. So, again, overall, two very good markets, a very good performance and we expect it will continue but in a lower growth rate.

Great. Could you talk about the US, the advertising plans, you, I think, ramped that up in the fourth quarter. Any comments on the effectiveness of that campaign and what you plan to do in 2016 to drive the topline of the US business further?

So, I cannot relate to specific campaign. I think overall, we operate to enhance the Caesarstone brand and I think this is done in a very successful manner and we will continue with this next year. As some of you maybe have seen in Las Vegas in the KBIS, we have a few new products that we are going to launch in the States. And we expect of course a lot from these products, although as always, there is no assurance, we have to wait.

But the Statuario Maximus, for example, we launched in Australia and the reaction from the market is very, very good and this is going to get to the States soon. And Nobel Grey, if some of you again have seen in our booth in Las Vegas, won to be the number one countertop. We got the award to be the number one countertop by with the Consumer Reports. So again, a very nice product that incorporates our special technology and we are going to launch it down the road in the States also.

So we have few very special products that we are going to continue and launch in the States. We are going to continue increase the sales force and we believe that if we work consistently along all channels, we will continue to see growth there.

Great. And my last question, could you comment here on capital spending, if not just for 2016, but thoughts around 2017 or refresh us on what's maintenance and when you think you might start spending again on capacity? And then, was line seven fully depreciating within the fourth quarter? Thank you.

With regards to CapEx next year, we believe it will be lower than this year. We have this general rule of around $3 million per line maintenance CapEx.

Regarding the timing of the second phase in the US, it's still not determined. Our aim is to try and increase efficiencies and increase throughput and delay this as much as possible. So not yet an accurate time and we will announce when time comes.

Regarding depreciation, I believe that Q4 times four is probably -- you have to add some more depreciation to come to an expected depreciation for next year.

Thank you for that color. Good luck.

Thanks.

Thanks.

Michael Rehaut, JPMorgan.

Thanks. Couple of my questions have been answered, but just wanted to go back to the US for a moment and, I think like as George said, I guess appreciate the fact that you don't want to show your hand and kind of review the different new initiatives, the new strategies that you might be putting in place over the next year or two. At the same time, perhaps you could kind of give us a sense of the background of the new manager and his experience set and what impressed you to give the reins over to this new manager? Sorry, I forgot the name, Dan. I couldn't hear the last name. But just review --

Clifford.

Clifford. But just to review again his experience set and what he's done and why that impresses upon you?

So we brought Dan last year to Canada from the States, where he spent around 13 years in the States running companies like Rexnord, Vermont Castings, I don't know if you're familiar with those. He worked also for Whirlpool before and he has a lot of experience in consumer products and knows very good the channels and the different channels, the retail, also the commercial side, also the big boxes.

And he did very well in Canada. So basically, after one year in Canada, he understands and he knows Caesarstone very well and we had enough time to know him and we believe that he is the right person in the right place to take the Company to the next stage, as I said before. So, we believe that it will be a good addition to the US team. We believe that it will be a good -- there will be -- out of this test, there will be a good contribution for the whole Company and this is what I can say to that matter.

Great. Thank you.

Thanks.

And at this time, I'd like to turn the call back to Mr. Yos Shiran for any closing remarks.

So thank you for your continued interest in our Company. Despite some turbulent events we experienced this year, it was a very fruitful year for Caesarstone. We are pleased with the quarter and annual results and I look forward to sharing more with you next quarter. Have a great day. Bye.

This does conclude today's conference. We thank you for your participation.