Caesarstone Ltd. (NASDAQ:CSTE) Q1 2023 Earnings Call Transcript

Caesarstone Ltd. (NASDAQ:CSTE) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good morning, and welcome to the Caesarstone Limited First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brad Cray, Investor Relations. Please go ahead.

Brad Cray: Thank you, operator, and good morning to everyone on the line. I am joined by Yos 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 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.

Yosef Shiran: 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 have 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 taken as part of 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 the first major step in our restructuring plan, we have stopped production at our Sdot-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 Sdot-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 million 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.

Nahum Trost: 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 a 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 sales 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 cost 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 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 2023. 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. Caesarstone balance sheet as of March 31, 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 31, 2023, was $33.3 million compared to $28.2 million as of December 31, 2022. Before turning to our outlook. I’d like to take a moment to comment on our planned restructuring actions that we announced today. At this time, it is mainly consists of the closure of our oldest manufacturing facility in Sdot-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 this Sdot-Yam facility closure, we expect to incur estimated cash cost of $4 million 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 million to $15 million thereafter. The property associated with Sdot-Yam facility is under the noncancelable long-term lease agreement with the term ending in 2032. The estimated cash closure costs do not include a potential noncash write-down on the value of the noncancelable lease agreement. We expect that the remaining costs associated with the lease will be increasingly offset by subleases, which we will look to obtain over time.

The $10 million 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 million to $15 million cost savings. We plan to maintain our high level of customer service through 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 full year 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 Caesarstone, and we look forward to build value for all of our stakeholders. With that, we are now ready to open the call for questions.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Reuben Garner with Benchmark Company. Please go ahead.

Operator: The next question is from the line of Stanley Elliott with Stifel. Please go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Yos Shiran for any closing remarks.

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

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