Q1 2023 Caesarstone Ltd Earnings Call
Okay.
Good morning, and welcome to the Caesars still limited first quarter 2023 earnings conference call.
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I would now like to turn the conference over to Brad Cray Investor Relations. Please go ahead.
Thank you operator, and good morning to everyone on the line I am joined by Youll, Shuren Caesar Stone, Chief Executive Officer, and the home Trust, either stones, 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 SEC.
In addition on this call the company will make reference to certain non-GAAP financial measures, including adjusted net income loss adjust.
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 yes. Please go ahead.
Thank you Brad Good day, and thank you everyone for joining us to discuss our first quarter.
I will discuss our business activity and the home will then cover additional details regarding our financial results.
So joining the company in mid March I've spent time connecting with our team members and business partners.
I think production facilities and reviewing our product portfolio.
It is clear that sees US dawn has been lagging behind in its ability to generate profits and increase value for each of those.
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 then hence the trajectory of our results. We believe the Swift actions taken get as part of a 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 airport 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 then improve net cash position in the first quarter of this year.
We see opportunities in many places.
So I'm going to take time and for all of those we've already begun to take direct actions.
We 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 is the first major step in our restructuring plan.
We have stopped production its always still tell manufacturing facility in Israel.
And taking actions to permanently close these sites.
Well. 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 stockyard facilities all the splint.
<unk> 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 well.
Although it will take some time to complete the 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.
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 would even tell the court over two and a home to walk through the details of our financial performance.
Thank you Jos and good morning, everyone.
Looking at our first quarter results.
Global revenue in the first quarter was $156 million compared to 170 point for me that although in the first quarter of last year.
A decrease of 11, 6%.
On a constant currency basis first quarter revenue was down eight 9%, mainly due to lower volume, partially offset by the benefits of previously announced pricing actions.
Revenues were impacted by the global economic headwinds, mainly in the renovation and remodeling channels.
If America any newsletters.
The 2.7% difference between U S dollar revenues on the constant currency revenues.
It reflects the impact of a stronger U S dollar against that'll generate the revenues.
In all markets outside of the U S. In.
In the U S sales were down 10%.
Even by decreasing their innovation 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 decrease in volume in all channels.
Mainly as a result of soft market conditions in Australia constant currency sales went up five 6% deal for you.
With the higher volumes offsetting lower the price or email region experienced the constant currency sales growth of 10, 7%.
Mentally reflecting strong performance in all of it.
Email 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 a 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.
Hi, all 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 old previously enacted pricing actions.
We continue to expect the unfavorable impact of foreign exchange rates.
Hydro on material costs and shipping costs in our P&L to persist through the second quarter of 2020 three.
Recall that we started the year with a higher unit cost and inventory, reflecting those previous periods of elevated materials and shipping costs in 2022.
We also ended the year with a more days of inventory on hand than is typical.
It's the most expensive inventory you sold off we expect our margins to be higher in the second half of 2023 compared to the first half.
We have also taken 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 aimed at pottery a quota.
Excluding legal settlements and loss contingencies.
Adjusted operating expenses were 24, 5% of revenue.
Compared to 21, 7% in the prior year quarter.
Besides the percentage resulted from the lower revenues generated in Q1 of 'twenty three.
Adjusted EBITDA in the first quarter was zero point $7 million, representing a mountain of 0.5% compared to $15 $7 million or a margin of nine 2% in the fiery a quota.
The difference primarily reflects lower operating income.
Turning to our balance sheet.
There was some balance sheet as of March 31st 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 31st 2023 was $33 $3 million compared to $28 $2 million.
December 31st 2022.
Before turning to our outlook.
I would 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 closer it'll follow the oldest manufacturing facility and start the Army's later.
Including a reduction in head count of approximately 150 employees.
Mostly associated with the facility and is expected to result in significant cost savings.
In connection with the 30th facility closure.
We expect them to 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 cost savings of approximately.
$10 million to $15 million thereafter.
The property associated with both young facility is under a noncancelable long term lease agreement with a term ending in 2032.
He estimated cash closer costs do not include a potential noncash write down.
On the value of the noncancelable lease agreement.
We expect the remaining cost associated with the lease would it be increasingly offset by sub leases, which we will look to obtain all the time.
The $10 million to $15 million of previously mentioned savings.
It 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 sublease it would represent cost savings.
Above and beyond the 10 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.
Although all these section is intended to streamline global production.
Drive additional cost efficiencies.
And improve our profitability and cash flows.
You know he got up Starwood outlook for the full year of 'twenty to 'twenty three we expect to generate positive cash flow from operations and to end the year with an improved net cash position.
This is based on the inventory reductions and other working capital improvements along with cost optimization efforts.
Given headwinds such as the complex macro economic environment and volatile business trends.
Which may be offset by tailwind, including lower raw material and sheep and 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 'twenty two 'twenty three and beyond this is the people at those times, we'll see some stone and we look forward to build value for all of our stakeholders.
With that we are now ready to open the call for questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
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At this time, we will pause momentarily to assemble our roster.
The first question is from the line of Reuben Garner with Benchmark company. Please go ahead.
Okay.
Thank you good morning, everybody or good afternoon guys.
Hi.
Start Hello.
Can you talk about what's your.
Capacity utilization is like including Israel plant and then how much capacity comes out or it comes offline with this action.
Yeah, So I hope that's helpful.
So oh the remaining capacity are just as a reminder, we have five lines.
A second site in Israel, and two production lines in our interventional deal.
And we have additional OEM and capacity with OEM.
During the first quarter, we operated a roughly two.
Two thirds of our utilization.
In our in our own production lines.
Okay, and how much comes out.
With this closure.
So hum.
Once a once a dot yarn plant is closed we.
We will have a we will have a much healthier level of utilization of our own production one production plant.
Yeah.
Okay, and then the the $10 million to $15 million in savings what.
How do you guys view the plan with that is that to flow directly through to the bottom line does it allow for more competitive pricing or investment in trying to gain market share or how do you guys view the savings.
And the $10 million to $15 million debt that.
That we mentioned is the cost savings should flow to should flow to the bottom line and and help us to be a more efficient company and ER and then to invest behind a little blend and.
And other initiatives.
And just as a reminder, the if we and if we will be able.
To sublease.
Portion.
And this is our aim to sublease bouts will follow a facility, we will be able to save a beyond the 10 to 15 range that we provided.
Got it.
How about the the market Oh excuse me in the multi material approach that you've taken in the last couple of years is that under review currently or is that still the strategy going forward.
Hi.
Yes.
So in terms of multi material. We are we have today, mainly quotes and then a little of both alone and in Mali and natural stone.
So we will continue with all the three a typo.
<unk> materials.
Core <unk> is by far the bigger parcel on a.
The next in a we are intend.
We intend to increase it a lot and natural stone.
And we got together with the acquisition of Formic Ron.
And we'll see how it develops.
Okay.
Okay, and then last one for me the growth strategy in the U S.
In recent years that kind of the new go to market approaches is that also under review or do you feel like that's the right path.
Oh, no I don't think that we are on the right path, but but I think we have a very good team and I think we have a very strong infrastructure there and we definitely intend like we are doing are in all the fronts of the company activities and in business. So we intend to.
I'll review, it and to take the necessary step.
<unk> two to improve it.
So we are where we are working very closely and very diligently with the team in the states to to improve results and we believe that we.
We have definitely would position them with a strong brand and in a very good team.
And also operation, which is and located across the United States.
Great. Thanks for the detail guys and good luck going forward I'll pass it on.
Thanks, a lot. Thank you.
The next question is from the line of Stanley Elliott with Stifel. Please go ahead.
Hey, everybody. Thank you for the questions I guess for starters can you talk about what your expectations are for FX headwind.
The business just that we'll have something to kind of use as a guidepost.
For the full year, Yeah, Hi, Sterling it's no.
And the FX was a it was a headwind.
In the first quarter compared to last year and.
We still are experiencing.
A stronger U S dollar against.
Most of all of the currencies in which we are generating revenues.
So other than the Israeli shekel, which is also a currency in which we.
<unk> incurred expenses and therefore, we see a benefit from.
From a stronger dollar for all other currencies.
We see a negative impact, especially against the Australian and Canadian dollar.
And then you mentioned kind of more days inventory on hand than typical.
How is inventory in the channel in the markets that you serve either the retail or you know a big box just curious about that and trying to get a sense for where inventory levels can ultimately get you know over the over the year.
So I think we should you know our aim should be around less than 100 days of inventory and currently and we are way above.
Yeah.
You talk about I guess, the confidence of being able to sublease a portion of the facility when.
You know certainly residential markets look to be under pressure in global global markets as a whole.
Help us maybe with some of the discussions you've had thus far and really just trying to get a sense of the confidence level in being able to sublease that.
Yeah.
So so just as a reminder, Stanley we all well healing in these facilities. Both young we are the we are operating under a noncancelable lease agreement with a term until the.
2032.
We we will we are aiming to sublease the bullshit overhaul of Oh. This facility obviously it will take it will take time and it will be I guess, a gradual process but.
More important than that is that the range of 10 to 15 million of cost savings that we provided does not take into consideration the possible impact of a sub leasing this facility in may and.
Yeah. So so we should be above and beyond that range.
Oh, and then maybe could you kind of high level give us some thoughts around your where do you see the repair and remodel market trending in the U S.
You'll maybe youll kind of some anecdotes from C. S connect or your retail point of sales what are you seeing within the R&R markets in North America.
Currently in and maybe even your outlook.
Yeah.
Yeah. So so I think it's we cannot determine the trend.
Yeah, It's a we see a little softness in the market.
As the year began.
Of course, the interest rate is a headwind for our for the all the.
Construction business.
However, a you know quality is still growing in the states.
And in some places we have are also.
Also good signs despite the overall nor performance. So I think we will have to wait and see.
Where the markets are coupled with our actions.
King.
Could you tell us how the north American market trended, maybe by month, and then maybe even into April .
Oh, we we.
We are not providing oh, we are not providing information about April but ER.
And the second quarter say you know started the study reflects the same trend, let's say of Q1 and and end in Q1, we saw as Yossi mentioned, we saw softness mainly in the oven novel market.
Partially also on the back of the higher interest rates and inflation.
And then lastly for me as part of kind of some of the restructuring.
You know how should we think about capex this year as a way to kind of lever that to help generate additional free cash flow.
We expect to.
<unk> carefully low L, a and a lower amount of investment behind that were the topics. Obviously, because we are shutting down two lines and and as discussed previously we know as a rule of thumb, we had so $8 million pair up their manufacturing lines to bid on them.
You can you know you can do the math and understand that this year it will be a bit lower given that we are already in the middle of deal, but nevertheless closing to two open two production lines.
Okay I got that.
Is it for me thanks, so much and best of luck.
Okay.
Thank you very much then.
This concludes our question and answer session.
I would like to turn the conference back over to Sharon for any closing remarks.
Okay.
Thank you and thank you for joining us. This morning, we look forward to updating you on our progress next quarter Goodbye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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