Q3 2020 Caesarstone Ltd Earnings Call
[music].
Greetings and welcome to the Caesarstone third quarter 2020 earnings Conference call. At this time, all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation if.
And once you require operator, let's turn the conference. Please press Star zero on your telephone keypad. As a reminder, this conference is being recorded you didn't know my pleasure to introduce your host Brad real price here. Thank you you may begin.
Thank you operator, and good morning to everyone I.
I'm joined by you bought the game either stones, Chief Executive Officer.
No fear you Cobian Caesarstones Chief Financial Officer.
Certain statements in todays conference call and responses to various questions may constitute forward looking statements.
We caution you that such statements reflect only the companys 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 FCC.
In addition on this call the company will make reference to certain non-GAAP financial measures include.
Including adjusted net income loss.
Adjusted net income loss per share adjusted gross profit.
Adjusted EBITDA in constant currency.
A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's third quarter 2020 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 you. All please go ahead.
Thank you Brad and good morning, everyone.
The benefits of all the teams collective efforts are managing with visible progress evident in our third quarter results.
During the quarter, we were encouraged with the sequential improvement in you over the years sales trends compared to the second quarter 2020.
We also effectively controlled cost to accomplish over the higher adjusted EBITDA and margin in over two years.
Furthermore, we generated substantial cash flow from operation of $28.2 million further strengthening albeit available financial resources.
I was strong working capital management.
Both of those we have significant flexibility to continue executing against our strategic plan.
In addition, following the improvement the performance of our business. We have resumed several initiatives that will postponed for look at the onset of cold we think didn't pandemic.
With a mission to be the first global brand of choice for Countertops, She's a sound strategy includes three pillars premium.
Premium multi material offerings Gus.
Customer experience and engagement.
And global footprint expansion.
These three such a big deal is integral to unlocking she just the potential and the old managed onto our global growth acceleration plan.
The majority stake acquisition overly yoli I produce cutting edge porcelain countertop slips represents a major milestone you know objective to become a leading global multi material premium countertops brand of choice.
Well so it's one of the fastest growing countertop categories and this acquisition provides an attractive opportunity to complement caesarstone established presence in the engineered <unk> surfaces.
The only use located in the central opinions pull sort of pump equipped with top of the line you tell him in effect into college and.
And the cost effective vertically integrated operation to efficiently supply porcelain countertop products.
The only use directly aligned with our strategy to leverage our brand distribution sales and global scale to efficiently and large addressable markets and to further advance caesarstone as the brand of choice for Contador around the world.
We will provide premium multi material content offerings as we move through 2021 with both of them being marketed alongside clubs in all regions and the other with a leading global Caesarstone brand.
In addition, we are investing in technology and user engagement tools.
We expect to launch in civil markets in the coming months to significantly strengthen our sales and marketing capabilities, which we believe we didnt handset customers experience.
Well the whole openings progressing outperformance is improving we have really talent in place to fill to execute those strategies.
Our confidence in the prospect of all business as the recovery continues.
With that let me turn the call over to a field, we provide details on our results and outlook.
Thank you all and good morning, everyone.
I will start by discussing our third quarter results.
Oh, the filled quota of Twentytwenty.
Revenue was $123.9 million compared to $142.8 million into first quarter of last year.
On a constant currency basis third quarter revenue was lower by 14.4% compared to the same period last year.
The majority of the adverse revenue impact were primarily business disruption related to COVID-19 in our Americas region.
Sure I would further detail shortly.
However, we are encouraged to see business activity improving in the first quarter compared to the second quarter and expect further improvement in the year over year a trend in the fourth quarter.
Okay got out markets.
In the Americas.
Our largest region.
Inconsistent state and local children place guidelines continue to have an ongoing impact on business activity.
In the U.S. in Canada, the effect that Ikea stores were closed for the majority of the second quarter significantly reduced our order backlog, which naturally that non favorable impact and accounted for approximately half of our north American sales declined in the quarter.
He seemed back to our Big books, China was partially offset by increased activity at U.S. home depot stores, where we have an expanding presence.
Core sales were down due to show during plays guidelines and social distancing practices limiting installations at some residential guilt sites.
India BRIC region, let's try that accounts for the majority of our says and performance has been better than our expectations. That's.
That said the soft market conditions that existed prior to the pandemic continue to be on favorable factors impacting that market.
In the EMEA region, both far indirect and direct sales were impacted by the aftermath of the first look though.
Recent government restrictions are also reemerging in certain parts of Europe and may slow the recovery.
News right a second pandemic shudder in place order was issued in the second half of September and resulted in slight year over year decline in revenues.
He's older was partially lifted during the second half of October but he is expected to impact Q4.
Performance into everything.
Looking at our first quarter PNM performance.
Our improved third quarter margin performance and bottom line results benefited from our focused execution of initiatives to improve efficiencies across our business.
Adjusted gross margin was 31.4% compared to 29.9% in the prior year quarter.
Yeah, I have year over year, adjusted gross margin, mainly reflects improved product mix lower raw material costs and improve efficiency.
Partially offset by the impact of lower says volume lower selling prices and less favorable regional mix.
We continue to evaluate our level of production capacity to meet expected demand.
To date, we are pleased with our ability to flex capacity and control inventory, which has helped us to carefully manage our working capital.
However, it.
It is important to note that the effective capacity utilization of our plant is currently running at less than 70%.
And as we ramp up production in future quarters, we likely have favorable impact on our gross margin.
To that point, we expect our fourth quarter gross margin to be lower quarter over quarter, but slightly higher year over year.
Excluding legal settlements and loss contingencies operating expenses for the quarter were 18.8% and benefited primarily from previous efforts of our global girlfriend Celleration plan.
Uhhuh efficiencies.
Find with tight cost control from our business continuity measures driving lower marketing and sales expenses as well as lower general and administrative expenses.
As we see an improved business environment, we expect to increase all sales and marketing expenses to support our brand and future growth.
Adjusted EBITDA in the third quarter was $23.7 billion, presenting a margin of 19.1% compared to $22.5 million a margin of 15.8% in the prior year quarter.
This performance primarily reflects the higher gross margin compared to last year. In addition to lower operating expenses, excluding legal settlements and loss contingencies.
Adjusted diluted earnings per share in the quarter were 41 cents compared to 29 cents in the same period last year on a similar share account.
Looking at our balance sheet.
Our prudent efforts to control cost manage our production capacity and working capital and improve our operational efficiency have collectively allowed us to generate strong cash flow from operations entries have substantial cash position.
These include cash cash equivalent and short them back in the bank deposit and short and long term marketable securities of $155.7 million at the end of the first well do we have no debt from financial institutions.
Accordingly, the company's dividend policy and based on our net income performance during the third quarter and first nine months of Twentytwenty. Our board declared a dividend of 14 cents per share. We have a record date of November 18 payment date of December 9th Twentytwenty.
As we move forward, we remain confident that the strength of our balance sheet provides us with sufficient flexibility to continue executing against our strategic plan.
With that let me turn the call back to Bob for closing comments.
Thank you all for you.
In closing we remain encouraged by the ongoing disciplined execution of our global growth acceleration plan and we are excited by the tremendous potential of our business.
I'm grateful for the significant contributions of all our team members across the globe and appreciate the dedication during these unique coins.
Looking ahead as we can to get the Yodlee and make additional progress on other initiatives. Although I was threatened you will.
We are confident that we are on the right path to improve the long term trajectory of the business.
Look forward to updating you further on our progress next quarter.
Thank you.
And we're now ready to open the call for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad, a confirmation tone will indicate your line in the question queue. You May Press Star two if you would like to remove your question from the Q.
Participants using speaker equipment, it may be necessary to pick up your handset before question to start <unk>.
One moment, please while we poll for questions.
Our first question is from Rubin Garner with the benchmark company. Please proceed with your question.
Thank you good morning, or I guess excuse me good afternoon guys.
HM.
I wasn't enough to know.
Maybe we could start with.
The topline trend you mentioned, an expectation that it would continue to improve in Q4 I know, there's a lot of puts and takes with with different.
Countries, having toby shutdowns and that sort of thing maybe maybe could you help walk through the progression you know the month by month.
Progression in Q3, how did the year over year decline a improved through the quarter and what you. What you saw in October and you know on the first part of the fourth quarter so far.
Yeah, Hi, everyone. Good morning.
Indeed, we are quite pleased with the sequential improvement over that it's important to water when our sales although the global sales of improving indeed, there is a change between the regions, but all regions on improving for the if you like but some level that is seen Sam <unk> 2000.
In the in the 20 this year.
We do see the improvement to from quarter to quarter end from month to month.
Nothing that is including the fourth quarter, we just started.
And and is there any way to quantify that theory I mean, you cut your law you that you've got the decline and by more than half from Q2 to Q3, I mean can we expect a similar trajectory in Q4 or maybe you know you you're down mid single digits or as we approached 21.
And then you know potentially next year, you can return to growth.
Well, we don't provide guidance for Q4, we just want to say that you know we are improving here, we do see improvement in the trend Oh, you mentioned, a there's a lot of on sendas, he's dealing that and they mean, many yea parts Oh.
Our global footprint, if you take Europe, where we see a.
Softer shutdowns in they need in many major countries. We mentioned these wells that we have been locked down since the mid September and we see that it was not still fully lifted so there's going to be a cautious about that providing good guidance in this uncertain environment at the moment, but we do expect to see improvement.
I mean the trend.
Year over year and.
And though I'm also rubin inline with a this is a this improvement and although its strong financial results. We also released the well was human investment.
So Matt I.
Projects the resources to boost the revenues even further for next year.
Okay.
Understood and I want to ask a question about that before I get there.
The margin turned around in the third third quarter was.
Pretty a remarkable so can you maybe help us with kind of a a bridge from it looks like the biggest change was on the gross margin right.
And you kind of bridges from where you were in Q2 from a margin standpoint, a Q3 or is it better to look at it on a year over year basis, I mean to show you showed margin improvement year over year with a 13% revenue decline I just help us walk through what the different pieces or to get there and how to think about those as we move forward.
Yeah, Yeah, I mean, we relocated there compared to last a year and a year over year basis than that and I think personally I'm very very pleased with the performance a and then Howard you mentioned, the gross margin or <unk> Campbell from from a phone med D. I think mainly a combined one.
We had a better product mix and we sold the more premium product it very well, we command, a higher premium and better or margin.
That was the main there I mean, the main component here, though there was a a bit of a all material prices coming from better at sourcing and lower.
Prices and we've seen that improved efficiency in our operations. These were the.
On the positive side when do the main area.
A burden on the gross margin is coming from the lower sales volume, we all right.
It seemed a higher it'll just extend it costs per unit because of lower volume.
Well, we cannot we mitigate the volume decline and this was something that we hope will you want the Olympics.
Volume picks up again, we see a yeah, we see here right and favorable the improvement.
And so lower selling price and and regional mix between <unk> and less favorable Duff was on that when the negative.
I would also mention here that gets people walking around the 70% that capacity in our a decision of our factories. We she's also were in a unfavorable impact on our gross margins.
Margins go.
These these are the <unk> because you haven't said was the main contributor.
Contributor for the Bloomington babies are you more rent than day be demolishing.
In addition to that we a it did the growth that's who we are.
Controlling cost and Oh, I've seen ER and.
The cost.
Reductions that they know picks up the well was also helpful to improve our EBITDA margin, having said that they're looking at Q4, and we are expecting good gross margin.
Yeah to be lower than what you've seen this quarter and slightly better than the performance we had in there.
If you wait and see in Q4 last year in terms of the EBITDA margin and we are going to see more normalized level said the marketing a GSK as we already Youve All mentioned did we all right.
Preparing and then any reinvesting gave you know the Delaware.
Hey, boost a say in the coming period, so we need to where bhutto's a investor.
This man.
And then they hence we are expecting EBITDA and margin to be most similar to what we've seen in Q4 and 90.
Rubin, if I may add another dimension to two I would answer.
If you remember in a I might may draw attention to the gross margin and they'd be though.
In Q1 and quarter one of this year. This was a relatively healthy as well against the same quarter do you have before and what you see actually in Q3 is actually a nice leaders all around the world insist on acting with them.
He is a and discipline to mitigate the cost and spend to the current demand.
Well I think if these it maybe mean, especially now resulting in Q3.
Got it that'll that'll make sense its helpful. What ER so what.
Talk about those investments to drive growth can you can you elaborate on maybe the amount of the that's been investing and what exactly are you investing and is it more sales people is that is it just marketing in general and then what do you expect to be the outcome. I mean is it is it euro.
Up in the U.S. are increasing penetration primarily that you're focusing in on just just help us understand what are the investments or maybe quantify if you could and then what the benefits you expect from them.
[noise] sure Rubin so maybe.
The three areas all the M. investments, all adding resources to work to boost the growth into a and revenues. It first we just may close.
Close the deal with the well completed the deal with the the Liolios ceramic a company.
So we just added another category to a business.
[noise] addressing well it doesn't get bigger markets.
No body by offering both of them and wants to do.
Well one of the customers in the coming years. In addition, we continue to invest behind our sales team in the U.S., mainly wouldn't be on expanding our presence in many of the markets in the U.S. as we started to do at the beginning of the year. That's had a continuous effort to a industry we've been doing it to do and.
Schools, a a few well many projects that we have under the global growth acceleration plan and some of which all around the new technologies that we are heading and.
Probably a it will be launching that in the coming months in the civil markets. If I was to improve engagement and experience will phone customers and consumers.
Okay, Great and then I'm going to I'm going to sneak one more in if that's all right. The the you just closed on the deal what talk talk talk to me about what the pipeline looks from an M&A perspective, you do you anticipate.
You know more of those how many a year I mean is the size and scale of the acquisition you just made a reasonable expectation for others in the future and that's kind of the play book to build out your countertop or you're kinda countertops plan is to kind of pick off.
Similar size different materials and roll them up into your distribution network.
Yeah, Mike I may start with a with a mission then almost.
Our mission is a full system brand to become the first brand of choice in Canada do play all around the World and I'm told this mission we have a we have a threat to June three main pillars.
One of the pillars. These is that having a multi material offering can mean, a premium content dope.
The other piece <unk>, he's too as I mentioned to improve it because she when customer engagement and experience and lastly, too.
To expand I will be able to footprint than to go direct in that some other markets and obviously all the M.F. thoughts in terms of the M&A, though it firstly everywhere around the multi modal offering which will be a.
Completed by having these sales and these you know posed to them as part of offering going forward under the the other focus of ours would be on that.
Covering old I look for global presence in a in and some of those regions.
Regions around the World, where we are still working with distributors and we would love to have a one a presence in the market.
Great. Thanks, guys. Congrats on the results and good luck through the rest of the year.
Thank you very much Rubin. Thank you.
And again as a reminder, if you have any questions. You May proceed star one on your telephone keypad. Our next question is from Ashley <unk> Sun Valley with Oppenheimer. Please proceed with your question.
Hey, guys. So first of all just congratulations on a great quarter no like medical conditions.
I guess it also doesn't have to start on the margin front yep.
Gross margins for the quarter were the highest since I think about Twoq you 18 money looks back you know with with this being kind of depressed levels.
Revenues and you also mentioning that you also had some headwinds from lower volumes or pricing, maybe some unfavorable geographic mix do you think that the better product mix. This quarter was totally one time, because you know maybe a bit mixed signal.
Because you're guiding for a lower margin sequentially, which is still solid I guess, you know 26, and a half Clos before Q, but you know how should we be thinking about a normalized run rate where should we be thinking about kind of.
Where the company is where the goal is here for 2021 2022, when when sales normalize. It did is it kind of high Twentys near term above 30 medium term.
Yes, that's a good question I think that you know it's it's a.
Quite a you know a hectic period that is a changing things and I think that the product mix that we've seen.
Hey, it's hard to say, whether its something that we should expect a good to see a in India in the coming quarters as well.
Our estimate is that it's there are.
Because we let it will normalize and there we see I'm over a reasonable.
Oh, well normalize that.
And mix it having said that I think that's a you know we didn't change and our long term goal and I think that once we are back to our two a a volume that is a more well known well like we used to see me in previous years and it's no less important.
Moving both and well move back to a full utilization of our facilities. They don't then goal that we've set up that'd be to do were at 35% is something that we believe is a it isn't good enough, even though and I think that what we also saw in this quarter is that it.
As many improvement in Oh, Opendata Kb I am coming from all the.
Well I think on the global warming solutions, and we believe that contributed to a improve our gross margin and that's we feel that we are on the right track a two.
We do get they say.
Yeah ill talk it all goes up you said, but the main thing to see a higher volume of sales and hopefully we live here once the economy recovers, we will get there just to support it itself with another dimension the yeah.
In addition to the latest addition to of the portfolio. When she is the porcelain he's the accretive in gross margin and EBITDA margin and that will be contributing to our future growth will say gross margin in the future.
Okay, Great and I know that yeah, I guess, if you could just kind of more of the old he kind of naturally here, we can kinda financials. It's a couple of percentage points. The top line now if I recall correctly.
Where do you guys want to get that you know how should we be thinking about you know you guys grow within the only business should we be thinking about this a year ahead. She had you know should I be looking forward to the to the 20, Yeah I see you know what what the situation is what will I get any kind of segmentation.
Can break down between horse laying in courts.
Any color there would be helpful.
Yeah sure, obviously, it's a bit too premature to give it a bit more color and at the moment on under these new.
And you've got to go we know business. Obviously, there is a the posed to them and categories is expected to be a going in that you know, 10% CAGR to him in the coming years. So we are joining a category, which is which is growing at the right time, we're gonna be utilizing our current assets too.
To address a bigger bigger market size and namely all with the L. logistics is so full supply chain.
The distribution companies that we have it's all but would be now we're serving a M. A bigger markets. It would be say a fulsome offering the ramp up over the same category would be starting next year. As we are now integrating the only to all business and obviously next year they'll be easier for us to advise on the on the go.
In the end to end the different the launches of new products and in the you know post an offering.
Okay. Any specific reason that you guys had chosen what's the line was it just that the target made sense happened to be parcel and then it's just you know that your first in in a multimaterial approach.
And there are multiple to approach a wheel.
Under this strategy, we are focusing on stone and if it's still an area you have it it was which is primarily a a main business posted on a natural stone.
Posted on these there's a natural way of feet tall business as it's.
Hey, manufacture and install one is is that both of them different there so as Nick was different technology, though.
So we see it as a as a natural fit to a business, but we'll continue to work to look on the on expanding all the material offerings in the in that used to come.
Okay, Great and I guess, just another question on the only because I think you know as we look forward. This is gonna be thought of kind of the the countertop company and maybe less so as you know kind of specifically of course company.
How are you guys kind of you guys have a focus or any kind of direction.
As to if you want a manufacturer increasingly in emerging markets.
I really asking this because I think most people are aware of that.
You know your core courts business.
Came under pressure at one point from low cost manufacturer you being you know you're now manufacturing having that facility in India theoretically you could move.
Some of your manufacturing there, maybe not near term, but any color there on where future targets would be located or where your furniture facility that you don't get it.
[noise] and that's something we'll we'll kind of already are utilizing that capacity in the east in the in the quarter and about 15% of all business is already been.
Hold on their voice is slabs volume has been acquired in China. So we all would be balancing Oliver and manufacturing cost by by utilizing some low cost manufacturing sites to support I will and good competitive position in the market obviously the decision to Uh huh.
Luke on the on the porcelain production well when you're factoring in a place like India is weve.
We've seen up looking forward, if you like to make sure that we will.
Remain competitive in the in the coming years in their producing paulson.
Okay. That's helpful.
And I guess last question here is when we look at the the sales trends I'm on a constant currency basis, you know for example or for Australia.
The Threeq your number is actually showing not much of a difference relative.
Q what are you guys were pretty Cove it.
Even on a year over year basis is this sustainable are you are you guys, even having any maybe positive impact.
From maybe less competition from China have you know I'm looking at Australia, only down 7% that.
That was the levels, we were even seeing double digit decline 2019, so negative 7% isn't that terrible number any color there would be helpful.
Sure two dimensions to it might to my answer to all of them. So first indeed, we are all in a stronger competitive position this year than ever before in the countries like Australia, and Canada, and Israel by utilizing all of them and all your math is right. So we are in a better competitive.
Position at the same time, the you know the business environment to incorporate 19 is it used to be different from country to country. So at the beginning of the beginning of the year, Israel and Australia, the impacted less by that and you can see that the revenues, though the relatively strong then you know we then looked only ma'am you may begin.
Oil, which is a very long look don't even though you're one of the states in it in Australia. Yeah. There is a great doing but now it's being there and he is also where it's more on the on the market conditions and the and the activity in each and every country.
And it's really I use a is and you know having the same the same situation is all those and we see over the other and demand and volumes.
And you know up and down according to the market activity.
Okay, if I could actually just ask another question, maybe the cadence of revenues through the quarter you know how was.
July August September looking like was there a gradual improvement how do you guys feel through now effectively you know the beginning of November.
We addressed it earlier and I think the.
The only had been doing pool that we do see a gradual improvement from a month to month, and obviously from quarter to quarter and we expect that to be continued.
Okay, great. Thank you.
Thank you also.
And we have reached the end of the question and answer session and I will now turn the call over to you all nagging CEO for closing remarks.
Thank you for your attention. This morning, we look forward to updating you on our progress next quarter.
We have reached the end of the conference you may disconnect. Your line at this time.
Thank you and have any day.
Thank you very much.