Q2 2023 Caesarstone Ltd Earnings Call

Good day and welcome to the <unk> second quarter 2000, Twenty's, Great Conference call. All participants will be in a listen only mode should you need assistance. Please press star one to reach the operator.

After today's presentation, there will be an opportunity to ask a question to ask a question you May press target one to withdraw your question. Please press Star then two please note. This event is being recorded.

During the conference over to Mr. Brad Great Investor Relations. Please go ahead Sir.

Thank you operator, and good morning to everyone on the line.

I am joined by Youll, Chevron Caesar Stone Chief Executive Officer.

The home Trust.

<unk> Chief Financial Officer.

Certain statements in todays conference call and responses to various questions may constitute forward looking statements.

Caution you that such statements reflect only the company's current expectations and that actual events or results may differ materially.

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 in constant currency.

Conciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's second 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 second quarter.

I will discuss our business activity in the home will then cover additional details regarding golf financial results before we open the call for questions.

Looking at our performance we were pleased to produce a second straight quarter of strong operating cash flow and increase our net cash position.

Both of which remain significant focus so yes, foresees a stone.

We are working hard to restructure the business and reignite profitable growth with a goal to offset the ongoing headwinds from challenging global economic conditions.

And the competitive landscape.

Have resulted in lower demand.

During the quarter, we devoted significant operational investments.

Behind new products as well as reengineering existing collections using alternative and varying blends of materials aimed to address expected Australian regulations.

Previously mentioned on recent calls.

We are in the final stage of completing these costly project.

Green Junior the full Australian portfolio in only a few months.

Yeah.

Separately.

You know call core products, we are investing significantly in our R&D efforts to create an exciting array of innovative collections.

In the second half of 2023.

It will be launched next year.

Additionally, we are focused on investing further in sales and marketing, which we believe that combined with improvements in our pricing strategy will drive improved revenue performance in future periods.

Particularly in the U S.

We are moving swiftly with implementation of a comprehensive restructuring plan and are taking many important steps as part of our strategic cost reduction efforts to improve our results, which we believe will become increasingly evident in the coming quarters.

The closure of the OTR manufacturing facility Mark that people don't step proceeds on stone.

The groundwork for improved efficiencies and streamline production within our manufacturing infrastructure.

We are also working simultaneously to shift an increasing mix of production to our strategic network of third party manufacturers in the far east.

This is expected to further reduce our costs and better align production to meet demand.

In regards to other strategic cost saving actions.

We have enacted several changes within our organization and structure, including the consolidation of several senior management positions we.

We're also transitioned the work that was being done at our smaller samples and book plant to our network of third party manufacturers and far east.

These actions are expected to further improve our cost structure commencing in 2024.

Looking ahead, we are in trucks to improve their financial position.

Including our cash flow and we expect to significantly improve our profitability in Q3 and Q4 gradually.

Well grateful for their hard work of all our team members.

Well execute think I'll stop there to create a more agile innovative and profitable company as we strive to deliver growth in our top line and solid results for our shareholders as we move forward.

Thank you and I will now turn the call over to whom to walk through the details of our financial performance.

Thank you Yosef and good morning, everyone.

Looking at our second quarter results.

Global revenue in the second quarter was $143 $7 million.

Compared to $183 million in the second quarter of last deal.

Decrease of 23%.

On a constant currency basis second quarter revenue was down 18, 4%.

Mainly due to lower volume, partially offset by the benefit of previously unoccupied parts injections.

The one 9% difference between U S dollar revenue and constant currency revenues.

Reflecting the impact of the stronger U S dollar against the real generated revenues in all markets outside of the U S.

I will note that our second quarter with 2023 revenues reflects two factors.

One is the impact of the challenging prior year comparisons.

Domingo, which we realized a number of price increases.

In a period of stronger market activity.

The other factor is the impact of the residential sales activity, which slowed down commencing in the second half of 2022.

The result of that slowdown is now more pronounced in our results.

Therefore second quarter revenues were impacted by softer global market conditions.

And the competitive landscape of our product.

Market pressure was most severe in the residential renovation and remodeling channels in North America, and with Destocking activity at many third party distributors.

In the U S central down 25, 4%.

Mainly tied to softer residential end markets, particularly for third party distributors.

How are you satisfied with the big box customer meals and better performance in our commercial business were positive for the quarter.

You know where the other allowed to markets, Canada sales were off about 15, 3% on a constant currency basis is experiencing similar dynamics as the U S.

Australia filled relatively better with sales down roughly five 3% on a constant currency basis, owing to less severe market Bush them.

Looking at our second quarter P&L performance.

I will start with gross margin, we saw a significant drop off in the second quarter largely related to several factors many of which are temporary factors as I will discuss.

Our gross margin was eight 3% for the quarter adjusted gross margin was nine 6% compared to 26, 4% in the prior you won't do.

And 19, 7% in the first quarter of 2023.

While lower revenues will certainly pinpointing, a little margin for the quarter.

When factoring out a number of other non typical and we believe trends are totally impacts during the quarter too.

We estimate that gross margin was around 15%.

As reported.

Do you have a real difference in gross margin reflects several factors.

The first factor was the activity at our plant <unk>.

Including those mentioned by yours accounting for roughly 510 basis points for the margin decline.

We experienced lower fixed cost absorption.

Starting in Ohio manufacturing unit cost.

Global productivity related to closing of distillate yarn plant was all sorts of talk though.

In addition.

As he also mentioned we invested heavily in reengineering existing collections, which consumed a significant amount of resources and resulted in our throughput and margins coming under pressure you need for it.

Our teams work tirelessly to develop and Ginny test refine entertain the capability to manufacture those products previously produced in the plant.

As well as those aimed to meet evolving Australian regulation, it's a little bit left facility and he's led.

We saw reduced throughput and high yield manufacturing unit cost due to this mix shift.

Second fucked always concerning inventories.

We were impacted on two fronts first a large portion of the units sold do you want to call to form our higher cost inventory on hand at the beginning of the year.

Combined with an inventory write down during the quarter.

These two factors represented 11% of the gross margin difference.

These factors were partially offset by previously inactive Boston injections.

And the benefits from lower shipping costs.

We are confident that many of these margin challenges are addressable and our gross margin should improve during the second half of 2023 as we gain additional efficiencies from our restructuring efforts and the wind down of higher cost inventory.

We also expect to benefit from lower raw material and sea freight expenses compared to last year.

Operating expenses in the second quarter was $58 $8 million.

Compared to $41 2 million in the prior year quota and included an impairment and restructuring expense of $23 $6 million related to distort the arms plant closure.

Excluding the legal settlements and loss contingencies, and the expenses related to the plant closure.

Adjusted operating expenses were 24, 3% of revenue compared to 22, 1% in the prior year quarter.

Adjusted EBITDA in the second quarter was a loss of $17 $4 million compared to adjusted EBITDA of $17 1 million in the prior year quarter.

The difference primarily reflects lower operating income.

Turning to our balance sheet.

So there's just some balance sheet as of June 30th 2023 included cash cash equivalents and short term bank deposits and short term marketable securities.

$57 $3 million with a total debt to financial institutions of $83 million.

We generated during the quarter positive cash flow from operations of $17 $2 million.

Mainly driven by our inventory reduction efforts.

This compared to cash used in the amount of $4 $5 million in the second quarter of 2022.

Yeah.

During the quarter, we paid down our lines of credit for me Israeli banks and ended the quarter with full availability on our lines of credit.

Our net cash position as of June 30th 2023 was $49 million compared to $73 3 million as of March.

The first 2023 and $28 $2 million as of December 31st 2022.

Before turning to our outlook is still down plant closures has gone as planned overhaul.

The plant closed in may and costs associated with the closure of a total to $23 6 million during the quarter.

The majority of that was related to the write down on a long term noncancelable lease agreement related to the facility with a term ending in 2032.

We also incurred cash costs.

$2.6 million.

We now expect the total cash cost related to operations to come within a narrow band.

$5 million to $7 million, which we estimate to incur by mid 'twenty 'twenty four.

As a result of the facility closure as mentioned it also in the previous call.

We expect to realize the annualized savings of approximately $10 million to $15 million.

Above and beyond those savings we are in the process of accepting bids to sublet bullshit. After noncancelable lease agreement that I've mentioned earlier.

The one time write them on the lease is in part based on our estimates so far with the ability to establish spots of this don't jump volatility.

We expect the remaining cost associated with the lease would it be increasingly offset by sub leases over the time.

I will mention again that cashless used home executing sub leases.

Represent cost savings above and beyond our anticipated 10 to 15 million of annualized cost savings.

In regard to Starwood outlook.

We are reiterating our outlook for the full year of 2023 to generate positive cash flow from operations and to end the year with an improved net cash position.

This is based on the inventory reduction and other working capital improvements along with the cost optimization efforts.

Additionally, we anticipate significant improvement in adjusted EBITDA in the second half of 2023 compared to the first half of ticket.

Adjusted EBITDA should step up sequentially.

For year end, resulting in third quarter better than the second quarter and the fourth quarter adjusted EBITDA to show additional improvement.

While revenues are likely to remain pressured through year end, we basically what assumption for significant sequential improvement in the second half adjusted EBITDA and adjusted EBITDA margin on several factors.

We have already sold through most of our higher cost inventory.

The operational investments that we have made to develop and re engineered products.

Largely behind us.

The closure of the <unk> facility in May will give us a full quarter of higher asset utilization on the remaining assets.

Increasing portion of our products would be produced at our third party manufacturer a little fuzzy.

And finally, we.

We will start benefiting from local shipping cost and raw material buses that they have eased over the last few months expected to have a positive impact in the third quarter and more evident in the fourth quarter of 2023.

In summary, we don't play over there I think I will focus on taking actions that will make seasonal stone demolition company.

Produce stronger cash flow as we look to drive long term value for our shareholders.

With that we have.

We're now ready to open the call for questions.

Yeah.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your touch standpoint, if you are using a speakerphone. Please pick up your headset before crashing defeat you've got inside your question has been address and you would like to withdraw your question.

Thanks, Brad it's burdened too at this time, we will pause momentarily to assemble our roster our first grassroots conference call Rubin Gardner the benchmark company.

Thank you good afternoon guys.

Hi, Good morning, Hi, Ruben.

Maybe to start.

Hum you kind of gave some pieces on what's going on with the gross margin, but can you help me with the bridge sequentially from Q1 to Q2.

Revenue went down about $7 million.

And gross profit fell about.

What 16 million, what what I mean.

There are several pieces you called out can you quantify how much is.

Competitive pricing dynamic how much is.

You know the inefficiencies from closing the plants and anything else, that's causing that the write down anything else, what's causing that that kind of 10 point decline that we saw.

Yeah.

So so Q2, Oh Q2 reflected several temple of the items.

That we that we recorded during this quarter.

You said it you said it accurately one of them is a is the inventory items. So.

During the second quarter, we recorded a slow moving provision on our inventory items, that's had an impact of.

Almost 600 basis points of negative impact of almost 600.

Basis points.

And in addition, as we mentioned also Q2 reflected a significant investment in the range of nearing a lounge.

A large portion of our portfolio and this reduced the utilization in our plan.

Resulted in additional expenses, which includes bill denied.

And are those factors the negative impact of around.

500 basis points. So if you.

Take those two factors main factors into consideration you have around.

11% of decline.

Which are the main items from the 19, 7% gross margin that we generated in Q1.

Okay.

Those items did not recur in the back half of the year. So does that mean that if revenue is.

Your volume or revenue.

Mid one forties range that your actual baseline for gross profit is north of 20%.

And any any improvements in efficiencies or volume growth from there would would take you above 20.

Q3.

Alright, and pilot Q3 will still reflect some some.

Investments, especially in July and August .

Last portion of the project to reengineer the.

Product so it will be it will still be a it's still and the impact on Q3 results. In addition to that.

You know are the higher cost of product is expected.

To be.

Completed and washed out again during the beginning of Q3, so taking those two factors into consideration.

I think our Q3 should look much more like.

Like the first quarter.

Q3 should look more like the first quarter, so closer to 20.

Yes.

There are positives are indicators you know like a reduction in the syphilis expenses that we are paying we will still benefit from lower raw material prices. This will become more evident as we are progressing in the second half of 2020.

Okay and then.

These.

Restructuring or however, you frame and are there any.

G&A savings that are on the come from that you know it looks like G&A was down a touch.

Really from Q2 to Q3, but it's still kind of near the highest levels that it's been is that something is that a number that we'll see come down to kind of offset some of the topline headwinds.

We do expect our restructuring is not only related to you know to the <unk> closure.

<unk> is much more way wider plan that includes several factors some of them also relates to G&A for.

So for example consolidation of several our positions in the management.

So yeah.

Yeah, we do expect our G&A.

To slightly up to slightly come down.

Second up.

Robin I would like John I, just like to it'd be a little bit to explain about the reengineering because this all this work is associated with our regulations in Australia.

Related to the Ukrainian collection only.

So we anticipated we anticipate anticipated in anticipating that change.

In the regulation in Australia, and we hate to change the combination.

The raw materials of the product and this is a very expensive.

Process.

To sounds form all the Australian collection.

We don't know yet what will be the Australian decision so in a way.

This is something that we are doing according to our best estimation.

But anyway, we have decided to take these steps.

And yeah and cure the costs, but are you know being a better position for future development in Australia. So this is one thing that is important to understand.

The second one is connected to the restructuring plan, which is a part also may may consider this strategic move.

And he says multi dimensional aspects.

So it's not only a of course the closure of both young but the other stuffed up enough who mentioned other marketing and sales.

Improvements that we are doing it.

And of course, other savings, mainly because of the shift to the and strategic partners in the far east.

So just a few clarifications.

Okay, great. Thanks for the detail guys I'll jump back in queue.

Thank you.

Our next question comes from when he started Stanley Elliott Stifel.

Hey morning, everyone, you'll talked about kind of improved profitability as the year progresses.

You just kind of help.

To kind of frame it out kind of given the the the starting point, where we are in the first half.

You did about roughly maybe let's call. It a 5% sort of margin last year in the second half do you think that you will be.

Above that or below that.

Okay.

Hi, <unk> good.

Good morning, and.

I think we should look are we are starting the second half as I mentioned earlier and you should look at the first quarter.

Margin gross margin is a more indicative are there more indicative number this quarter.

Now reflects several a temple of the items and.

And doing and during the second half, we expect to see a gradual improvement in our gross margin from formed several factors are the restructuring plan the low of the raw material prices. The global shipping costs that will will be that is currently baked in our inventory balance.

In the balance sheet, but will become a.

More significant <unk>.

We will as we will progress in Q3 and more and stronger during Q. During Q4, we expect a gradual improvement over there as well.

So it sounds like probably negative or kind of flattish towards the EBITDA for 423, and then kind of really focus more on 24 with with some of the restructuring and some of the other initiatives you have underway to kind of return to profitability.

I suddenly we are looking.

And its from quarter to quarter, because we are in the middle of Oh for very big restructuring plan.

And then we'll start seeing we are starting to see the benefits of what we've already done and there is a lot more to do.

So we expect a gradual improvement as we said between Q3 to Q4 and we are.

And we will have to and refine.

The internal projection of course to the extent our projection.

During the call.

On Q4.

But we definitely see a gradual improvement.

Has enough of them.

<unk> said bear in mind that we are suffering for a long period of time.

Because of the high inventory level.

That's Uh huh, where and that were produced during last year.

With a very high cost of raw material prices and shipping prices.

So this is almost a washed out so we see definitely an improvement in Q3. In addition to the other improvement.

And that's where we'll start to benefit.

From like the you know in the big cost cutting that we're doing.

Got you.

And you're with the inventory work down is there a way to kind of size, what we should think about from a dollar basis.

Through the balance of you know kind of on a year over year basis, a reduction of inventory or.

Any ballpark on cash flow targets in either the second half or all of 'twenty three.

Yeah. So as you said the cash flow from operating in the net cash position is still our focus for this year and as we mentioned also in the outlook, we expect to to continue and to generate a positive cash flow from operating.

<unk> not only on the basis of a lower inventory, which came down nicely joined.

During the first half from you know from the starting point.

Around 180 days.

Almost 180 days to the current level of 120 days and we expect to continue and a reduced the days of inventory.

As the year progresses, and as we continue with our restructuring plan, so, but not only that not not only on the back of a lower inventory, but also on tighter cost control are better prices on our raw material shipping costs. So we expect to continue to generate a positive.

Cash flow also in the second half.

Perfect guys. That's it for me.

Right.

Thanks.

Thanks.

Thank you. This concludes our question and answer session I would like to turn the conference back over to Mr. Neil Sherman for any closing remarks.

So thank you for your attention. This morning, and we look forward to updating you on our progress next quarter Goodbye.

Yeah.

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

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