Caesarstone Ltd.

Good morning and welcome to the Caesarstone Limited first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Brad Cray, Investor Relations. Please go ahead.

Thank you, Operator, and good morning to everyone on the line. I am joined by Yosha Ran, Caesar Stone's Chief Executive Officer, and Nahum Trost, Caesar Stone's Chief Financial Officer. Certain statements in today's conference call and responses to various questions may constitute forward-looking statements. We caution you that such statements reflect only the company's current expectations and that 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-S and subsequent filings with the SEC. In addition, on this call, the company will make reference to certain non-GAAP financial measures, including adjusted net income loss, adjusted net loss income per share, adjusted gross profit, adjusted EBITDA, and constant currency. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's first quarter 2023 earnings release, which is posted on the company's investor relations website. Thank you, and I would now like to turn the call over to Yos. Please go ahead.

Thank you, Brad. Good day, and thank you, everyone, for joining us to discuss our first quarter. I will discuss our business activity and Nahum will then cover additional details regarding our financial results. Since rejoining the company in mid-March, I've spent time connecting with our team members and business partners, visiting production facilities and reviewing our product portfolio. It is clear that Caesarstone has been lagging behind in its ability to generate profits and increase value for its shareholders, and we aim to decisively and diligently improve on these fronts. We are moving quickly with our global teams to conduct a thorough review of all aspects of the business so we can refine our strategic approach and enhance the trajectory of our results. We believe that swift actions, taking as part of a comprehensive restructuring plan, will allow us to leverage our strong brand and best-in-class products to address our challenges, gain market share, and get back to profitability. A major part of our effort is focused on improving our cash flow, and we have already started to reap some benefits with positive cash flow from operations of approximately $8 million and an improved net cash position in the first quarter of this year. We see opportunities in many places. Some will take time, and for others we have already begun to take direct actions to implement necessary changes. We believe that these actions will improve our efficiency, competitiveness, and maximize our ability to expand our share in our end markets moving forward. In regards to driving production cost efficiencies, we are focused on optimizing our manufacturing footprint. As a first major step in our restructuring plan, We have stopped production at our Stot Yam manufacturing facility in Israel and are taking actions to permanently close this site. While this is a very difficult decision, we believe it is a necessary step which is expected to improve efficiencies and allow us to create a more agile company as we streamline our production. The Stot Yam facility is our oldest plant. and once consolidated with our more advanced remaining facilities, combined with our network of third-party manufacturers, we have adequate capacity and flexibility to better serve our customers. Although it will take some time to complete this significant step, once fully implemented, we expect to achieve annual estimated run rate savings of $10 to $15 million. Additionally, Our global teams have already started a review of the necessary changes to improve our productivity, accelerate our decision-making, and increase our responsiveness to customer needs. We look forward to working with the teams across our business along with our customers and suppliers to get our business back on solid footing. We are confident that our company can rise to its potential and we expect to deliver improved results in the years to come. We will continue to innovate, optimize our infrastructure, and enhance our competitive edge to improve our long-term growth and profitability. Thank you, and I will turn the call over to Nahum to walk through the details of our financial performance.

Thank you, Yos, and good morning, everyone. Looking at our first quarter results, Global revenue in the first quarter was $150.6 million, compared to $170.4 million in the first quarter of last year, a decrease of 11.6%. On a constant currency basis, first quarter revenue was down 8.9%, mainly due to lower volume, partially offset by the benefit of previously enacted pricing actions. Revenues were impacted by the global economic headwinds, mainly in the renovation and remodeling channels in North America and in Israel. The 2.7% difference between U.S. dollar revenues and the constant currency revenues reflects the impact of a strong U.S. dollar against our generated revenues in all markets outside of the U.S. In the U.S., sales were down 10.8%, driven by decrease in the renovation channel volume, partially offset by higher selling prices. In Canada, our sales were down 17.6% year over year on a constant currency basis, driven by decrease in volume in all channels, mainly as a result of soft market conditions. In Australia, constant currency sales were up 5.6% year over year, with higher volumes offsetting lower price. Our EMEA region experienced a constant currency sale growth of 10.7%, primarily reflecting strong performance in our EMEA indirect business. In Israel, on a constant currency basis, sales decreased by 21.6% in the first quarter, partially resulting from slow market conditions, which impacted both volume and average selling prices. Looking at our first quarter P&L performance, our gross margin was 19.7% for the quarter. Adjusted gross margin was also 19.7% compared to 25.4% in the prior year quarter. The year-over-year difference in gross margin predominantly reflected increased manufacturing unit costs driven by lower fixed cost absorption resulting from lower capacity utilization, higher raw material and shipping costs, and unfavorable foreign currency exchange rates as a result of appreciation of the U.S. dollar against all other currencies. This was partially offset by our previously enacted pricing actions. We continue to expect the unfavorable impact of foreign exchange rates higher raw material costs and shipping costs in our P&L to persist through the second quarter of 2023. Recall that we started the year with higher unit costs in inventory, reflecting those previous periods of elevated material and shipping costs in 2022. We also ended the year with more days of inventory on hand than is typical. As more expensive inventory is sold off, we expect our margins to be higher in the second half of 2023 compared to the first half. We are also taking significant measures to align our production and inventory levels to current market demand. Operating expenses in the first quarter were $35.5 million compared to $36.2 million in the prior year quarter. Excluding legal settlements and loss contingencies, Adjusted operating expenses were 24.5% of revenue, compared to 21.7% in the prior year quarter. This higher percentage resulted from the lower revenues generated in Q1 of 23. Adjusted EBITDA in the first quarter was $0.7 million, representing a margin of 0.5%, compared to $15.7 million, or a margin of 9.2% in the prior year quarter. The difference primarily reflects lower operating income.

Turning to our balance sheet.

Zero-Sum balance sheet as of March 31st, 2023 included cash, cash equivalents, and short-term bank deposits and short-term marketable securities of $51.7 million, with a total debt to financial institutions of $18.4 million. The company's net cash position as of March 31st, 2023 was $33.3 million compared to $28.2 million as of December 31st, 2022. Before turning to our outlook, we'd like to take a moment to comment on our planned restructuring actions that we announced today. At this time, it mainly consists of the closure of our oldest manufacturing facility in Zdot Yam, Israel, including a reduction in headcount of approximately 150 employees, mostly associated with the facility, and is expected to result in significant cash savings. In connection with the Zdot Yam facility closure, we expect to incur estimated cash costs of $4 to $8 million related to operations, beginning in the second quarter of 2023 and continuing through the next 12 months. Once fully implemented, we expect to realize annualized cash savings of approximately $10 to $15 million thereafter. The property associated with DotYam facility is under a non-cancellable long-term lease agreement with the term ending in 2032. The estimated cash closure costs do not include a potential non-cash write-down on the value of the non-cancellable lease agreement. We expect that the remaining costs associated with the lease will be increasingly offset by sub-leases, which we will look to obtain over time. The $10 to $15 million of previously mentioned savings does not include any potential upside from cash inflow related to any future sublease we are able to execute over time. Therefore, cash received from executing subleases would represent cash savings above and beyond the 10 to 15 million cost savings. We plan to maintain our high level of customer service to our remaining manufacturing facilities and our network of third-party manufacturers. Overall, this action is intended to streamline global production, drive additional cost efficiencies, and improve our profitability and cash flows. In regards to our outlook, for the full year of 2023, we expect to generate positive cash flow from operations and to end the year with an improved net cash position. This is based on inventory reductions and other working capital improvements, along with cost optimization efforts. Given headwinds such as a complex macroeconomic environment and volatile business trends, which may be offset by tailwinds including lower raw material and shipping prices and our restructuring efforts, it is difficult at this stage to continue providing an outlook for fully revenues and adjusted EBITDA margins. We want to make sure that the company has the flexibility to take the actions necessary to best position the business for success in 2023 and beyond. This is a pivotal time for ScissorStone, and we look forward to build value for all of our stakeholders.

With that, we are now ready to open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question is from the line of Ruben Garner with Benchmark Company. Please go ahead.

Thank you. Good morning, everybody, or good afternoon, guys. Hi, Robin. Maybe to start... Hello. Maybe to start, can you talk about what your capacity utilization is like, including the Israel plant, and then how much capacity comes out or comes offline with this action?

Yeah, so... Hi, Robin.

So... Our remaining capacity, just as a reminder, we have five lines, three in our second site in Israel and two production lines in Richmond Hill. And we have additional OEM capacity with OEM. During the first quarter, we operated at roughly two-thirds of utilization in our own production lines.

Okay, and how much comes out with this closure?

So once this Dot Yam plant is closed, we will have a much healthier level of utilization of our own production plants.

Okay, and then the $10 to $15 million in savings, what's How do you guys view the plan with that? Is that to flow directly through to the bottom line? Does it allow for more competitive pricing or investment in trying to gain market share? How do you guys view the savings?

The $10 million to $15 million that we mentioned as cost savings should flow to the bottom line. and help us to be a more efficient company and to invest behind our brand and other initiatives. And just as a reminder, if we will be able to sublease a portion, and this is our aim, to sublease parts of our facility, we will be able to save beyond the 10 to 15 range that we provided.

Got it. How about the market, excuse me, the multi-material approach that you've taken in the last couple of years? Is that under review currently, or is that still the strategy going forward?

Hi, it's Yossi.

So in terms of multi-material, we have today mainly quartz and then a little of porcelain and more little natural stone. So we will continue with all the three type of materials. Quartz is by far the bigger, porcelain is the next, and we intend to increase it a lot. And Natural Stone, we got together with the acquisition of Omicron, and we'll see how it develops.

Okay, and last one for me, the growth strategy in the U.S. in recent years is kind of a new go-to-market approach. Is that also under review, or do you feel like that's the right path?

No, I don't think that we are on the right path, but I think we have a very good team and I think we have a very strong infrastructure there. And we definitely intend, like we are doing in all the fronts of the company activities and business, so we intend to review it and to take the necessary steps to improve it. So we are working very closely and very diligently with the team in the States to improve results and we believe that we have definitely a good position there with a strong brand and a very good team and also operation which is located across the United States.

Great. Thanks for the detail, guys, and good luck going forward. I'll pass it on. Thanks a lot. Thank you.

The next question is from the line of Stanley Elliott with Cecil. Please go ahead.

Hey, everybody. Thank you for the questions. I guess, for starters, can you talk about what your expectations are for FX headwinds for the business, just so we'll have something to kind of use as a guidepost for the full year?

Yeah. Hi, Stanley. The FX was a headwind in the first quarter compared to last year. We're still experiencing stronger U.S. dollars against most of our currencies in which we are generating revenues. So other than the Israeli shekel, which is also a currency in which we incur expenses, and therefore we see a benefit from a stronger dollar, for all other currencies, we see a negative impact, especially against the Australian and Canadian dollar.

And then you mentioned kind of more days inventory on hand than typical, you know, How is inventory in the channel and the markets that you serve, either the retail or, you know, big box? Just curious about that and trying to get a sense for where inventory levels can ultimately get, you know, over the year.

So I think we should, you know, our aim should be around less than 100 days of inventory, and currently we are way above that.

Can you talk about, I guess, the confidence of being able to sublease the portion of the facility when, you know, certainly residential markets look to be under pressure and global markets as a whole? You know, help us maybe with some of the discussions you've had thus far and really just try to get a sense of the confidence level in being able to sublease that

So just as a reminder, Stanley, we are here in this facility in Zotiam. We are operating under a non-cancellable lease agreement with a term until 2032. We are aiming to sublease a portion or a whole of this facility. Obviously, it will take time and it will be, I guess, a gradual process, but More important than that is that the range of 10 to 15 million of cash savings that we provided does not take into consideration the possible impact of subleasing this facility. So it should be above and beyond that range.

And then maybe could you kind of high level give us some thoughts around Where do you see the repair and remodel market trending in the U.S.? Maybe some anecdotes from CS Connect or retail point of sales. What are you seeing within the R&R markets in North America currently and maybe even your outlook?

Yeah, so I think we cannot determine the trend yet. We see a little softness in the markets as the year began. Of course, the interest rate is a headwind for the whole construction business. However, you know, quartz is still growing in the States. And in some places we have also good signs despite the overall lower performance. So I think we will have to wait and see where the markets coupled with our actions are taking us.

Could you tell us how the North American market trended maybe by month and then maybe even into April?

We are not providing, you know, we are not providing information about April, but the second quarter, you know, started to reflect the same trend, let's say, of Q1. And in Q1, we saw, as Jos mentioned, we saw softness mainly in the R&R market, partially also on the back of the higher interest rates and inflation.

And then lastly, for me, as part of kind of some of the restructuring, you know, how should we think about CapEx this year as a way to kind of lever that to help generate additional free cash flow?

We expect to incur a lower amount of investment behind our CapEx, obviously, because we are shutting down two lines And as discussed previously, as a rule of thumb, we had $3 million per manufacturing line per annum, so you can do the math and understand that this year it will be a bit lower, given that we are already in the middle of the year, but nevertheless closing two production lines.

Great. All right, guys, that's it for me. Thanks so much, and best of luck.

Thank you. Thank you very much, Danny.

This concludes our question and answer session. I would like to turn the conference back over to Jos Charan for any closing remarks.

Thank you and thank you for joining us this morning. We look forward to updating you on our progress next quarter. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.