Caesarstone Ltd.

Greetings and welcome to the Caesarstone first quarter 2024 earnings conference call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for 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 a touchtone phone. If you would like to withdraw your question, please press star, then two. Please note that today's event is being recorded. I would now like to introduce you to our host for today, Brad Cray of ICR. Thank you, and you may begin, sir.

Thank you, operator, and good morning to everyone on the line. I am joined by Yos Sharan, Caesarstone's Chief Executive Officer, and Nahum Trost, Caesarstone'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-F 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 loss income, 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 2024 earnings release, which is posted on the company's investor relations website. On today's call, Yos will discuss our business activity and whom will then cover additional details regarding financial results before we open the call for questions. Thank you, and I would now like to turn the call over to Yos. Please go ahead.

Thank you, Brad. Good day, everyone, and thank you for joining us to discuss our first quarter 2024 results. Our first quarter results are aligned with our goals to deliver a full year of positive adjusted EBITDA and cash flow from operations. Our team has demonstrated resilience and adaptability to start off 2024 in the face of persistent global economic headwinds, regulatory changes in Australia, and the ongoing conflict in Israel. Yet, our revenues fell short of our expectations in the first quarter, and we are working decisively to improve execution and resume revenue growth. Despite these challenges, we have made significant progress in our strategic transformation, shifting from manufacturing-centric approach to a strategy that prioritizes research and development, marketing, and branding to drive revenue growth. We are successfully transforming our manufacturing footprint, having transitioned over 50% of our production to our global network of production business partners. This should allow us to better align production levels and sources with the demand for our products. Although we are making this shift, we still have strong production capabilities in quartz and growing capabilities in porcelain. We are beginning to see the benefits of these restructuring actions, which contributed to the first quarter gross margin expansion. The Stot Yam and Richmond Hill plant closures are on pace to have a more pronounced impact on our results in the second half of 2024 and should ultimately save us approximately $30 million annually by next year compared to 2023. These savings are getting partially reinvested into additional innovation and marketing efforts to drive higher revenues. Since announcing our restructuring plan last year, One of our primary financial objectives has been to generate positive cash flow from operations and improve our net cash position. We have made solid progress on this initiative and plan to continue delivering positive cash flow from operations. With a fortified balance sheet and ample net cash, we are well positioned to continue executing on our strategic objectives in 2024. Furthermore, we have separated our US and Canadian leadership teams to allow each team to better focus on the opportunities in their respective markets. Regarding the shift of the Australian market to free crystalline silica products, we have been proactive in the development of alternative products that comply with the new regulations and have begun offering them in the market. By the end of the second quarter of 2024, a majority of our collection will consist of alternative products, with a full collection of compliant products available by end of the year, which we believe will allow us to retain our leading position in the Australian market. In conclusion, As we progress through 2024 and navigate current market dynamics, our strategy is firmly focused on enhancing innovation and brand development while further refining our production footprint. We're committed to reducing our manufacturing cost base while increasing investment in R&D, marketing, our brand, and the expansion of our premium porcelain offering to drive sales growth and profitability across the business. We remain confident that Caesarstone can rise to its potential. Thank you, and I will now turn the call over to Nahum to walk you 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 $118.3 million compared to $150.6 million in the first quarter of last year. On a constant currency basis, sales were down 21%. The decrease was primarily driven by lower volumes due to softer global market conditions. In addition, our sales were impacted by competitive pressures. In the US, sales were down 19.8%, mainly tied to soft residential end markets, and less favorable product mix resulted in lower ASP related to the impact of the higher interest rates on housing market and renovation projects, partially offset by our commercial and big-box channel revenues. Canada's sales were lower by 9.9% on a constant currency basis, experiencing similar market dynamics as the U.S., but to a lesser extent. Australia's sales were off by approximately 17.5% on a constant currency basis, mainly reflecting slower market conditions and an air pocket in sales as we introduce alternative materials that comply with new regulations during the first half of 2024. In Israel, sales were off 39.3% on a constant currency basis in the first quarter, mainly as a result of the war on terror, which has significantly diminished regional activity. On a sequential basis, sales in Israel improved 68.9%, which is encouraging. Looking at our first quarter P&L performance, our gross margin was 24.5% for the quarter. Adjusted gross margin was 24.4% compared to 19.7% in the prior year quarter. The notable improvement in our margins on a year-over-year basis is partially due to the enhanced efficiency of our production footprint, a result of our previous restructuring efforts. We believe these enhancements to margin are sustainable and should continue to ramp through 2024. The gross margin also reflects roughly 260 basis points of benefits related to the timing of access inventory sold, mainly in Australia and from our Richmond Hill plan during the first quarter. I would like to take a moment to address the recent trade restrictions imposed by Turkey. We have been sourcing raw materials for several years from Turkey, and the recently announced trade restrictions could have a negative impact on our Barlev plant production in the short term. We are actively seeking alternative sources for raw materials to minimize any potential disruptions. While we anticipate an increase in production costs at our Barlev manufacturing facility, due to these restrictions, we do not foresee currently a significant negative impact on our overall financial results. Our operating expenses in the first quarter were $34.6 million compared to $35.5 million in the prior year quarter. Excluding legal settlements and loss contingencies, adjusted operating expenses were 28.6% of revenue compared to 24.5% in the prior year quarter. The higher percentage mainly resulted from the lower revenues. Adjusted EBITDA in the first quarter was $0.6 million, relatively stable compared to the $0.7 million in the prior year quarter. Turning to our balance sheet. Silverstone has a strong balance sheet with ample liquidity to support our planned strategic objectives. As of March 31, 2024, cash, cash equivalents, and short-term bank deposits total to $96.2 million, with a total debt to financial institutions of $6.8 million. During the first quarter, we generated another quarter of positive cash flow from operations of $8.7 million. Our net cash position as of March 31, 2024 was $89.4 million, compared to $83.5 million as of December 31, 2023. In regards to our outlook, based on our significant restructuring initiatives underway, our linear operations, and our focus on profitability, we are reiterating our outlook for adjusted EBITDA to be positive in the full year of 2024. In addition, we continue to expect another full year of positive cash flow from operations. Historically, we see a sequential increase in revenues in the second quarter compared to the first quarter, due to seasonality. In regards to the Zotiam plant closure, which occurred during the second quarter of 2023, and Richmond Hill plant closure, which occurred during January of 2024, we reiterate our expectation to realize savings of $20 million in 2024 and $30 million thereafter. We have begun to sublet portions of our non-cancellable lease agreement associated with the Zdot Yam manufacturing facility, which will allow us to recognize additional cash inflows on top of the planned cost savings. We are also looking for the best alternative to monetize our Richmond Hill site. In conclusion, our strategic actions to restructure the business and to optimize our cost structure have begun to yield financial benefits. Reflected in this quarter mainly in our improved gross margin, and sustained positive cash flow even on lower volume. We remain committed to our strategic initiatives that aim to enhance our sales and marketing initiatives, production efficiency, and drive growth in our top line.

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

We will now begin the question and answer session. As a reminder, to ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star then two. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Ruben Garner with the Benchmark Company. Please proceed.

Thanks. Good afternoon, guys. So, I guess to start, pretty strong gross margin performance despite what was, I think, a weaker volume environment than expected. Can you talk about what kind of surprised you to the upside there and how sustainable that that 24% plus level is as we go through the rest of 24?

Hi Ruben, it's Nafin. So the growth margin mostly reflects the refraction actions that we already took in the last year. We mentioned roughly 260 basis points of excess inventory that we expedited itself in connection with the closure of the Richmond Hill plant and in connection with the future regulations in Australia, so we expedited the sale of of certain inventory items. So these items is significantly higher than usual, the 260 basis points, but other than that, we benefited from the restructuring actions, specifically from favorable production source mix, better prices on raw materials, and landed cost, basically. This is on the positive side. On the other hand, as you also mentioned, the volume was a negative impact, and also the significant unfavorable product mix that resulted in lower margins.

May I just? Ruben, may I just add that in general, it also reflects the heavy restructuring that we have been going through in the last year. And I think that our platform is stronger and we estimate that we will continue to see the benefits of that also in the gross margins.

So how much revenue, how much did revenue benefit from the accelerated sales of some of those products you had in the inventory?

Sorry, Ruben, can you repeat, please? The line was breaking.

Oh, sorry about that. Yeah, how much did revenue benefit from the accelerated sale of the inventory?

So it was $260 how much revenue. In terms of revenue, it wasn't that significant, but those items were fully covered with inventory provision, so it had a significant impact mainly on the gross margin.

Okay, I got it. And your outlook for the full year to be break-even on EBITDA, what sort of revenue number do you need to – I mean, you were breakeven in the first quarter at $118 million. I know you had a little bit of help from the one-time inventory item, but how do we think about that? What full-year revenue target do you need to hit to achieve that breakeven goal?

So we do not provide specific guidance on revenues for the full year, but as we discussed also previously, we do expect to see the same seasonality trend that we used to see in previous years, meaning Q1, you know, the lowest quarter and then improvement in Q2 and Q3 and Q4. is slightly lower than the second and the third quarter. This is in terms of revenues. And we do expect to show higher profits or higher margins as we continue through 2024, as we complete the more expensive inventory that came from Richmond Hill plant. and as our restructuring actions will give us a more significant impact on the overall results. And with regard to the outlook, we reiterated that we expect a positive EBITDA for the full year and also a positive operating cash flow.

How much of the $20 million in savings has been realized?

thus far? The $20 million is the number for the full year.

So, you know, basically one quarter. And we expect to benefit and we expect to gain more and more savings as we continue through 2024.

Again, on the back of closing the Richmond Hill plant. Okay. Thanks, guys. Appreciate it. Good luck. Thank you. And the next question comes from Stanley Elliott with Stifel.

Please proceed.

Hey, guys. This is Andrew on for Stanley. Thank you for taking my question. I think you said that U.S. big box stores were holding up relatively better than other parts of the business. I'm wondering if you could expand on that. What's your outlook for repair and remodel? for this year, and then do you have any commentary on inter-quarter trends or even trends you've seen for U.S. volumes into April? Thanks.

Hi, and thanks. Yeah, so in general, we perform better in the big boxes than on the residential segment. We cannot say that we have, you know, the global analysis of why is it happening. We believe that high interest rates reduce or depress the activity on the residential side. On the other hand, big boxes are still doing well. and so our sales within these channels. And again, going forward, we will continue to expand our activity and our efforts in all the channels in the States as well as in other places, in other markets like Canada, like Australia. In the States specifically, we will see more effort on the contractors developer developer segment and we hope that step by step we will also see improvement in the residential segment and then I'm wondering if you could give us an update on the porcelain rollout how is that going and what has early feedback from customers been like so far So are you relating to the rollout in the States or in other areas? U.S. U.S. So, yeah, we started to offer the porcelain in the States. Overall, the porcelain activity is still small for Caesarstone, but very promising. We are investing a lot in expanding the collection, improving it, offering additional products within the porcelain realm. So it's not significant yet in terms of numbers, but it is very important in terms of the potential for the future of Scissorstone.

And then last one for me. I was wondering if you could quantify how much inventory is left at the Richmond Hill plant and when you would expect that to hit cash flows or earnings. Thanks.

So the majority of the inventory was sold and digested through Q1, and it is also reflected in the gross margin, as we discussed in the earnings, and to a lesser extent in Q2. So basically, most of it is done in Q1.

Let's say that after Q2, we will not see the negative impact of the old inventory of Richmond Daily.

Thank you. Thank you.

And at this time, this concludes our question and answer session. I would now like to turn the conference back over to Yos Sharan for any closing remarks.

Yeah, thank you. And thank you all for your attention this morning, and we look forward to updating you on our progress next quarter.

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