Caesarstone Ltd. (CSTE), a leading manufacturer of high-quality engineered quartz surfaces, reported its first-quarter earnings for 2024, acknowledging that results did not meet expectations. The company cited several contributing factors, including global economic pressures, regulatory changes in Australia, and regional conflicts affecting its operations in Israel. Despite these challenges, Caesarstone is undergoing a strategic transformation, moving away from a manufacturing-centric model towards a focus on research, development, marketing, and branding. This shift includes transitioning over half of its production to global partners, which has begun to yield gross margin improvements. The company also anticipates significant annual savings following the closures of its Sdot Yam and Richmond Hill plants.
Key Takeaways
- Caesarstone's Q1 2024 earnings were below expectations due to various global and regional issues.
- The company is transitioning to a more R&D and marketing-focused strategy, with over 50% of production now outsourced.
- Plant closures are expected to save Caesarstone around $30 million annually starting next year.
- Despite regulatory hurdles in Australia, Caesarstone is developing alternative products and aims to maintain its market leadership.
- The company expects positive EBITDA and operating cash flow for the full year, with savings from cost-cutting measures already being realized.
Company Outlook
- Caesarstone did not provide specific revenue guidance for the year but highlighted the expected seasonal trend in revenues.
- Management anticipates higher profits and margins following the completion of inventory sales from the Richmond Hill plant and the impact of restructuring efforts.
Bearish Highlights
- The company faced lower volumes and an unfavorable product mix, impacting margins.
- High interest rates were mentioned as a factor affecting the performance in the residential segment.
Bullish Highlights
- Caesarstone has seen benefits from its restructuring actions, including a stronger platform and expanded gross margins.
- The company's performance in big box stores outpaced the residential segment.
- New porcelain product offerings in the US market show promise for future growth.
Misses
- The company's earnings fell short of expectations in Q1 2024.
- Regulatory challenges in Australia and the conflict in Israel have negatively influenced performance.
Q&A Highlights
- Nahum Trost announced an expected $20 million in savings within a quarter from the Richmond Hill plant closure.
- Yosef Shiran discussed the relative strength of big box stores versus the residential market, attributing the difference to high interest rates.
- The company is actively expanding efforts across all channels, including contractors and developers, to improve sales.
Caesarstone's strategic pivot towards a more brand-centric and innovative approach is a response to the evolving market demands and current economic landscape. The company is proactively addressing the regulatory changes in Australia and remains optimistic about retaining its market dominance in the region. With the restructuring and cost optimization measures already in place, Caesarstone is poised to leverage its new operational model to drive future sales growth and profitability. The company's management team expressed their gratitude to stakeholders and indicated their eagerness to share further developments in the next quarterly update.
InvestingPro Insights
In light of Caesarstone Ltd.'s (CSTE) strategic shift and recent earnings report, several metrics and insights from InvestingPro can shed additional light on the company's financial health and stock performance. According to InvestingPro data, Caesarstone's market capitalization stands at $205.84 million, which reflects the market's current valuation of the company.
An important InvestingPro Tip to consider is Caesarstone's high shareholder yield, which suggests that the company has been effective in returning value to its shareholders. This could be a positive sign for investors looking for companies with a shareholder-friendly approach. Additionally, Caesarstone's valuation implies a strong free cash flow yield, indicating potential for investment returns based on the company's cash generation abilities.
Despite the challenges faced, Caesarstone has shown a strong return over the last three months, with a price total return of 43.48%. This performance may interest investors looking for companies with recent positive momentum in their stock price.
Investors may also take note of the following InvestingPro Data metrics:
- P/E Ratio (Adjusted) as of Q1 2024: -2.8, reflecting the company's earnings relative to its share price.
- Revenue Growth as of Q1 2024: -20.58%, showing a decline in sales which aligns with the company's acknowledgment of economic pressures and regional conflicts.
- Gross Profit Margin as of Q1 2024: 17.82%, which may be of interest when evaluating the company's profitability and operational efficiency.
For those interested in a deeper analysis, there are an additional 9 InvestingPro Tips available for Caesarstone at https://www.investing.com/pro/CSTE. And remember, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription to gain access to these valuable insights.
Full transcript - CaesarStone Sdot-Yam Ltd (NASDAQ:CSTE) Q1 2024:
Operator: Greetings, and welcome to the Caesarstone First Quarter 2024 Earnings Conference Call. Today, all participants will be in a listen-only mode. [Operator Instructions] 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.
Brad Cray: Thank you, operator, and good morning to everyone on the line. I am joined by Yosef Shiran, 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, Yosef will discuss our business activity and Nahum 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 Yosef. Please go ahead.
Yosef Shiran: 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 Sdot 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 U.S. 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 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 markets 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.
Nahum Trost: Thank you, Yosef, 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 U.S., 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 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 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 excess inventory sold mainly in Australia and from our Richmond Hill plant 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 Bar-Lev 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 cost at our Bar-Lev 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. Caesarstone 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 totaled 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 leaner 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 Sdot Yam 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 Sdot Yam manufacturing facility, which will allow us to recognize additional cash inflows on top of the plant 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 initiative to aim to enhance our sales and marketing initiative, production efficiency and drive growth in our top-line. With that, we are now ready to open the call for questions.
Operator: Thank you. [Operator Instructions] And today's first question comes from Reuben Garner with The Benchmark Company. Please proceed.
Reuben Garner: Thanks. Good afternoon, guys. So...
Yosef Shiran: Hi, Reuben.
Reuben Garner: 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 24%-plus level is as we go through the rest of '24?
Nahum Trost: Hi, Reuben, it's Nahum. So, the gross margin mostly reflects the restructuring actions that we already took in the last year. We mentioned roughly 260 basis points of excess inventory that we expedited sales 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 certain inventory items. So, these items are 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.
Yosef Shiran: Reuben, 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 will -- we estimate that we will continue to see the benefits of that in -- also in the gross margin.
Reuben Garner: So, how much revenue -- how much did revenue benefit from the accelerated sales in terms of some of those products you have in inventory?
Nahum Trost: So, Ruben, can you repeat please? The line was breaking.
Reuben Garner: Sorry about that. Yeah. Can -- how much did revenue benefit from the accelerated sale of that inventory?
Nahum Trost: So, it was 260 bps -- 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.
Reuben Garner: Okay. I got it. And your outlook for the full year to be breakeven on EBITDA, what sort of revenue number do you need to achieve that? 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?
Nahum Trost: 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, 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 be -- 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 are taking more significant -- 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.
Reuben Garner: How much of the $20 million in savings has been realized thus far?
Nahum Trost: The $20 million is the number for the full year. So, 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.
Reuben Garner: Okay. Thanks, guys. Appreciate it. Good luck.
Nahum Trost: Thank you.
Yosef Shiran: Thank you.
Operator: And your next question comes from Stanley Elliott with Stifel. Please proceed.
Unidentified Analyst: Hey, guys. This is [Andrew] (ph) 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.
Yosef Shiran: Hi, and thanks. Yeah, so in general, we performed better in the big boxes than on the residential segment. We cannot say that we have the global analysis of why is it happening. We believe that high interest rates reduce or depresses the activity on the residential side. On the other hand, big boxes are still doing well and so ourselves 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 segment, and we hope that step by step, we will also see improvement in the residential segment.
Unidentified Analyst: 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?
Yosef Shiran: So, are you relating to the rollout in the States or in other areas?
Unidentified Analyst: U.S.
Yosef Shiran: U.S.
Unidentified Analyst: Yes.
Yosef Shiran: 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 [indiscernible]. So, it's not significant yet in terms of numbers, but it is very important in terms of the potential for the future of Caesarstone.
Unidentified Analyst: And then last one for me. I wonder 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.
Yosef Shiran: 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 earning. But -- 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 Richmont Hill.
Unidentified Analyst: Thank you.
Nahum Trost: Thank you.
Yosef Shiran: Thank you.
Operator: And at this time, this concludes our question-and-answer session. I would now like to turn the conference back over to Yosef Shiran for any closing remarks.
Yosef Shiran: 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.
Operator: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
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