Q4 2022 Caesarstone Ltd Earnings Call
Speaker 1: The Lo.
Speaker 1: The.
Speaker 2: Greetings and welcome to the Caesarstone Limited 4th Quarter 2022 earnings conference call. This time all participants are in a listen-only mode.
Speaker 2: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cray from ICR. Thank you, Brad. You may begin. Thank you, operator, and good morning to everyone on the line. I am joined by Yuval Beguin, Easterstone's Chief Executive Officer.
Speaker 2: and Nahum Tros, Caesarstone's Chief Financial Officer. Certain statements in today's conference call in response 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, adjusted net income per share, adjusted gross profit, adjusted EBITDA.
Speaker 2: and constant currency. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's fourth quarter 2022 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, Val. Please go ahead. Thank you, Brad. And good morning, everyone. I'm proud of the entire C-System team's efforts as we finish 2022 with a record full year revenue of approximately $691 million. During the year, we focused diligently on executing our multi-pronged growth to support only three million viewers from two over 20,000,000 viewers. Two million people met today from the world's largest? space. And again. Thanks very much for tuning in to C-System.
Speaker 3: given these evolving market conditions.
Speaker 3: While we expect our pricing initiatives to help offset lower market volumes during 2023.
Speaker 3: We continue to believe long-term renovation and remodel fundamentals in our key markets remain strong. With this in mind, we are focused on optimizing our global structure during 2023 to operate more efficiently and improve our scalability for new growth opportunities.
Speaker 3: In order to do so effectively, we are focused on leveraging our projects within our global growth acceleration plan to rationalize our costs, more efficiently manage our working capital, intensify our marketing efforts, and expand our U.S. distribution footprint. Our lack now to discuss a few of the actions that we have underway to improve our results as we have into 2023.
Speaker 3: and functions.
Speaker 3: We expect to continue to monitor our SG&I costs through spending hold on non-essential expenses and administrative functions during 2023. Third, we are carefully evaluating our global supply chain for additional bottlenecks we can take out as necessary this year.
Speaker 3: As we said in the past, in recent years we have expanded our relationship with all Yemeni factors primarily based out of Asia.
Speaker 3: This has allowed us to not only diversify our supply chain, but also serve an increasing amount of the market at various price points.
Speaker 3: As a result, this has increased the portion of our products that are manufactured via OEM in low cost countries, which has allowed to better capture demand in new construction activity, which tends to favor more entry-level products.
Speaker 3: We remain committed to our technological and digital investments, such as our innovative CS Connect platform, which continues to be a bright spot and is accelerating our ability to improve customer experience and engagement throughout our business.
Speaker 3: And lastly, we plan to increase our marketing efforts in the US and expand our distribution footprint in attractive and economically sound markets. We are funding these marketing investments by reinvesting a portion of the savings from our headcount and working capital reductions and other cost mitigation actions. In addition to these actions, we plan to increase our marketing efforts by reinvesting a portion
Speaker 3: We have also increased selling prices during Q1 of 2023 in our main markets to mitigate the impact of higher cost in our margins. I would like also to reiterate that our multi-material product pipeline, including CISIS-Torn and branded porcelain slabs, provides us with encouraging growth prospects.
Speaker 3: as we look forward. We are excited to introduce our CISIS-Tone branded global post-colon collection to North America during the first half of 2023, following a launch in the UK, Israel and Australian markets during the second half of 2022. Over the next several years, we expect that post-colon will become a primary driver for our revenue growth in our key markets.
Speaker 3: Through our successful penetration into big box, our acquisition of strategic distributors such as Omicron and our ongoing organic expansion of seasonal distribution centers, we have significantly diversified our sales channels. We estimate that in the US business approximately a quarter of our sales
Speaker 3: our full independent distributors today compared to approximately half just a few years ago. We believe our broader channel exposure has allowed us to outperform the market and will continue to help us accelerate the success of new product introductions and our expanded multi-material offerings such as Paul Selam. I'd like to take a moment to comment on recent developments in Australia in regards to the...
Speaker 3: As a literary mismarket, we continue to actively train and educate fabricators, customers, and others in the value chain on safe material handling and installation practices, as well as expedite additional development of our own low silica product offerings.
Speaker 3: It is important to note that we have been one of the most active in regards to safety throughout the entire supply chain. We will continue to do our part to bring quite solutions to all stakeholders.
Speaker 3: In conclusion, we continue to take prudent actions, a cost organization, to drive additional efficiencies and rationalize our costs. The exciting projects we have planned for 2023 under our Global Growth Acceleration Plan give us confidence in our ability to achieve our objectives for this year. Looking ahead, we remain committed to strengthening our cost structure.
Speaker 4: morning everyone. I will start by discussing our fourth quarter results.
Speaker 4: The local revenue in the fourth quarter was $159.4 million compared to $171.1 million in the fourth quarter of last year.
Speaker 4: On a constant currency basis, all-quot revenue was lower by 2.1% compared to the same period last year.
Speaker 4: as a sales improvement in the APA region, was more than offset by software performance in all other regions, given the challenging macroeconomic conditions.
Speaker 4: Looking at our fourth quarter P&L performance, our gross margin was 19.4% for the quarter. Adjusted gross margin was 19.7% compared to 23.3% in the prior year quarter. The total gross margin was 19.4% compared to 23.3% in the prior year quarter.
Speaker 4: The true very different in gross margins, predominantly reflected in crisp manufacturing unit costs given by lower fixed cost absorption.
Speaker 4: The overall year difference in gross margins, predominantly reflected in risk manufacturing unit costs, driven by lower fixed cost absorption, resulting from lower capacity utilization.
Speaker 4: higher raw material and shipping costs and unbearable foreign currency exchange rates as a result of appreciation of the US dollar against all other currencies. This was partially offset by our several pricing actions. Looking ahead to 2023, we expect the unbearable impact of foreign exchange rates.
Speaker 4: high raw material and shipping costs in our P&L to persist. Primarily in the first half of the year, given that we started the year with higher unit costs in inventory, reflecting those previous periods of elevated material and shipping costs.
Speaker 4: In response, we have already taken action to partially mitigate this impact with additional porcelain crystals.
Speaker 4: building upon our previously enacted price increases during 2022. Additionally, we have already taken measures to align our production and inventory levels to new conditions in the market and we continue to take actions to reduce costs. Operating expenses in the fourth quarter were $106.1 million.
Speaker 4: compared to 36.3 million in the prior year quarter. Our operating expenses for the quarter
Speaker 4: included a one-time non-cash-impermanent charge of 71.3 million related to goodwill and long-lived assets.
Speaker 4: Given our current market capitalization, together with softer macroeconomic conditions,
Speaker 4: higher interest rates and lower production utilization. A review of our Good Will and Long Live asset balances is required.
Speaker 4: which resulted in the above mentioned impairment charges. Excluding legal settlements, loss contingencies and impairment charges adjusted operating expenses well, 22.2% of revenues compared to 21.9% in the prior real quarter. The adjusted EBIDA in the fourth quarter was $5.7 million.
Speaker 4: representing a margin of 3.6% compared to $11.5 million or a margin of 6.7% in the prior year quarter. The year-of-year difference primarily reflects the lower operating income. Now looking at our full-year financial performance highlight.
Speaker 4: The difference in the adjusted gross margin may reflect lower fixed cost of the option. The difference in the adjusted gross margin may reflect lower fixed cost of the option.
Speaker 4: high raw material prices, unfavorable foreign currency exchange rates, and shipping price increases which will partially offset by favorable product mix.
Speaker 4: and selling bi-secresses. Excluding legal settlements, lost contingencies, and the non-cash impairment charges we incur during the fourth quarter of 2022, adjusted operating expenses for the full year were 21.7% of revenue, and paid to 21.9% in the prior year.
Speaker 4: Our full year 2020 to adjusted EBITDA was $51.9 million, a $7.5% margin compared to $68.2 million last year, or a 10.6% margin, with the year of the year change in margin primarily reflecting the lower gross margin.
Speaker 4: $59.2 million with the total debt to financial institutions.
Speaker 4: of 31 million. Moving to our outlook.
Speaker 4: 31 million. Moving to our outlook. Even macroeconomic environment
Speaker 4: and lower ability to predict the situation, to slow down in global construction activity, we expect revenue for the fully of 2023 to be in the same range of the 2022 revenue. For 2023, we expect lower volume to be offset by pricing initiatives. Thank you.
Speaker 4: Additionally, we expect a gradual and moderate improvement in adjusted EBDA as a percentage of sales for the full year of 2020. Primarily due to pricing initiatives and cost optimization efforts which are expected to more than offset higher raw material and shipping costs in our inventory. Well, spot market costs for many of our major inputs.
Speaker 4: such as all materials and shipping have stabilized in recent months. At year end, our units in inventory were at a higher cost year over year. Given the slower market and prior supply chain inefficiencies, we also ended the year with more days of inventory on hand than is typical. We therefore expect our margins to be higher in the second half of 2023 compared to the first half as we work through higher unit costs in inventory. We believe that the outlook we are providing to you today
Speaker 4: is both achievable and appropriate given the level of uncertainty in the industry. We are well positioned and prepared to execute on the factors that are within our control. We believe we are taking a balanced and prudent approach that expectations and we will fully leverage all resources available to us to mitigate risk and capitalize on the market opportunities available to us. With that, let me turn the call back to Yuval for closing comment.
Speaker 4: and appropriate given the level of uncertainty in the industry. We are well positioned and prepared to execute on the factor that are within our control. We believe we are taking a balanced, important approach, that expectations, and we will fully leverage all resources available to us to mitigate risks and capitalize on the market opportunities available to us. With that, let me turn the call back to you while for closing comments. Thank you.
Speaker 3: and dedicated focus on driving results, we believe we are well situated to capture market share and unlock further value in our business. I look forward to updating you again on our progress in the coming quarters. Thank you and we are now ready to open the call for questions.
Speaker 5: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask questions, please press star 1 on your telephone keypad.
Speaker 5: Confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. For more information, please visit www.fema.gov.
Speaker 5: One moment please while we pull four questions. A reminder to participants if you wish to ask a question at this time, please press star and one on your platform now. We take a first question from the line up Ruben Garner with a Benzmar company please go ahead.
Speaker 2: Thank you. Good afternoon for you guys. Good morning everyone in the US. So maybe to start on the gross margin line, can you walk me through the bridge to how we got to from the peak? I thought that some of the FX pressures would have reversed with the current.
Speaker 4: You are not, I don't think that you are missing. Although the FX environment was slightly better in Q4 compared to Q3, still the US dollar is elevated compared to all other currencies in which we operate, especially when you compare it to Q4 of last year. And to add to that in the beginning of 2020...
Speaker 4: had a negative impact of 320 basis points.
Speaker 4: On top of that, Ruben, if we would like to complete the picture of the bridge, obviously the higher ASP and the pricing increases that we did along the year had a positive impact of more than 700 basis points.
Speaker 4: compared to last year I mean. This was more than offset by the higher-oh material cost, 250 basis points, higher logistics, and including the land-to-chipping cost of 210 basis points. And obviously the fact.
Speaker 4: that we reduced production in the second half of 2022, you know, because in order to align our inventory balances, had also a negative impact as there is a higher portion of unabsorbed expenses in our plans.
Speaker 4: So the higher overall in the plants reduce the gross margin by 270 basis points. This is more or less the bridge between the two fields. So the price offset...
Speaker 2: the volume declines and the logistics and the material insulation, but then you had an additional 300 or so based on its effects pressure. So if I look at that same mass or...
Speaker 2: and the logistics and the material insulation, but then you had an additional 300 or so base points of FX pressure. If I look at that same map for 2023,
Speaker 6: How does that look? I assume the first half looks similar and then the second half the FX, the anniversary of the FX impact so you'll have more gross margin expansion in the second half. You're right. Those indicators that are within our control we expect them to have a positive impact.
Speaker 4: as you know, gradually, as we said in our outlook over 2023. Currently, our inventory balance and the cost of our inventory is elevated, given the fact that they are still reflecting higher raw material cost. But as we will move along 2023,
Speaker 4: the higher inventory cost will flow to the P&L and we will begin to see a bit lower inventory cost as the prices of the raw materials over the last few months began to stabilize in the market.
Speaker 2: Okay, and then on the pricing side, what gives you confidence that you're going to be able to push price or hold the pricing increases that you've announced this quarter in the face of what appears to be a depressed volume?
Speaker 2: Okay, and then on the pricing side, what gives you confidence that you're going to be able to push price, or hold the pricing increases that you've announced this quarter in the face of what appears to be, you know, depressed volume environment.
Speaker 3: Hi, Robert and Chivvall. First, it's first to say that the price increases actions that we took in 2022, relatively well received in the market. We are not planning for further measure increases in 2023. Our price increase for Q1 was a low single digit price increase globally, so we are moving to more annual price increases approach.
Speaker 3: as other industries to mitigate some of our costs from the year before. We are not expecting further price increases during the rest of the year. Okay, and then if I'm hearing your outlook right for the full year, it sounds like gross margin is probably going to be under...
Speaker 6: pressure and you're going to get to EBITDA margin expansion by kind of tightening the belt on spending. Is that the fair way to think about it? And what does that do for your growth outlook? I mean, you ramped up the spending the last couple of years to try to drive growth with the market.
Speaker 3: continue to push for the gold engines we already launched. We are not cutting marketing in 2020. Actually we will be investing a bit more in the US business of ours where we are recognizing the biggest opportunity for our company.
Speaker 3: And the margin improvement would be coming. I also put side cost control on the rest of the markets of ours, but also we are expecting to improve our cogs, cofugood self, expand as well. So in addition, Ruben taking to consideration the departing action.
Speaker 4: We are expecting gradual, moderate improvement in the cost of goods sold as we go through 2023. So it will come also from higher margins in growth margins as well. Okay, so the gross margin...
Speaker 6: pressures in the first half can be made up as the year progresses to get to something splatter up on the gross line. Thanks.
Speaker 6: Okay I think that's all that I have. I'll pass it on guys. Thank you. Thank you Thank you, Ruben. Thank you, Ubin.
Speaker 5: Okay, I think that's all I have all personal. Thank you. Thank you, Ruben. Thank you, Thank you. I'll remind the departments of a wish to ask a question.
Speaker 6: question, please press star 1 now. We take the next question from the line up Brock Cannon with SPIFIL, please go ahead. Hi everyone, this is Brock Cannon filling in for Stanley Elliott today. I'm just going to get right into it here. So looking at your porcelain roll out in the US and Canada, what kind of price point are you expecting there compared to other counter top materials?
Speaker 3: and going along with that, what kind of relative margin you're expecting? Hi, good morning. First, it's a good direction to where we are taking the company to. We are definitely becoming more and more a multi-material countertop company. We launched last year the post-en offering in the UK, Australia and Israel.
Speaker 3: And now in the second quarter of this year we are moving to the launch in North America, US and Canada. Price points will be similar to what we see in the market related to the countertop industry. But I may say that as a whole the post-salem category in our business is margin-accretive. So we are building on some gross margin improvements.
Speaker 6: as we are progressing the penetration of porcelain into the market and as part of our business. Okay, great. Thank you. And then moving on here, could you provide any update on how CS Connect is going and the adoption there?
Speaker 3: Yeah, sure, although still starting from a small base, we are expecting to double, if no tripling the revenue of 2022 this year in 2023. As you remember, we launched yesterday's connect in our three major markets, the US Canada and Australia and the momentum that we experienced in Q4.
Speaker 6: is continuing into 2023. So this is definitely acting as the gold engine, and we are looking forward to be servicing more and more customers in these three major markets of ours as they leap progresses. Great to hear that. And then last thing here, could you possibly provide any color on how things have been trending so far in the U.S. through February , possibly?
Speaker 4: anything on volumes or on our activity? Although we are not providing guidance for Q1, but we continue to see the same trends in the US market as we saw it in Q4. So after a strong Q1 of 2022, we begin to see...
Speaker 4: the housing market decline in the second half of 2022, especially in Q4 of 2022. And so far we see basically the same print. And thank you. I should take my questions and good luck going forward. Thank you very much. Thank you, book. Thank you. Thank you.
Speaker 5: Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back over to Yuval Dakin, CEO for closing comments. Over to you, sir. Thank you for your attention this morning. We look forward to updating you on our progress next quarter. Thank you. Thank you. Thank you all. Great.
Speaker 5: Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation. Thank you for your participation.