Q3 2023 Caesarstone Ltd Earnings Call
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Greetings and welcome to the Caesar Stone third quarter 2023 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 to ask a question you May Press Star then one on your Touchtone phone to withdraw from the question queue. Please.
That's star then two.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Brad Cray Investor Relations. Thank you you may begin.
Thank you operator, and good morning to everyone on the line I am joined by Yorkshire, an easier SUNS, Chief Executive Officer, and the home Trust, He's just Ernst 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 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.
So quite filings with the SEC. In addition on this call the company will make reference to certain non-GAAP financial measures, including adjusted net loss income adjusted net loss or income per share adjusted gross profit adjusted EBITDA and constant currency.
Conciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found on the company's third 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 golf's to discuss our third quarter results.
I will discuss our business activity in the home will then cover additional details regarding our financial results before we open the call for questions.
I would like to start by expressing that we are saddened by the horrific axle ratios as violence and terrill the tape recording Israel on a total of seven.
We are confident that the Israeli will not only prevail, but will also exercise justice towards older who are.
We're involved in committing these tenuous crimes.
Our thoughts are with our employees customers and others impacted by these events.
We are focused on business continuity and our global operations are running smoothly with no material impact to our strategy.
Israeli production and our overall ability to continue serving customers globally.
The one aspect impacted the market in Israel, which accounted for about 5% of our revenues in the third quarter.
We remain committed to supporting the people of Israel and the rehabilitation of our affected townships and we have decided to donate 2000 kitchen surfaces to families in the south of Israel, whose homes have been lost or damaged during the war.
In addition to other supporting activities.
Now, we will move to our third quarter results.
We generated our third straight quarter of robust cash flow from operations, adding $28 2 million to a real today total just over $53 million.
We maintained our sharp focus on executing further against our global restructuring actions.
Our results improved sequentially as we moved through the quarter at the same time, we made significant progress with the implementation of various initiatives and our strategic plans to better utilize our resources improve our cost structure we.
Realign our workforce and optimize our production footprint.
In regards to production optimization, we are on schedule and transitioning production of lower price point, it skews towards strategic network of third party manufacturers.
We have now transitioned a significant portion of our production.
And expect roughly 40% of our products to be sourced by the end of the year.
In addition, we are reaping the initial margin benefits from the closure of all start to Yamana picturing facility, which we completed during the second quarter of this year.
In line with this progress we produced significant sequential recovery you know third quarter adjusted gross margin to 19, 8%.
When does this operating improvement translating into positive adjusted EBITDA of $1 $9 million.
Concurrently with another gating through complex market dynamics, including the competitive landscape challenging global economic conditions, and softer trends and innovation and remodel activity across our global footprint.
Well working through this challenging environment with an aim to drive higher sales.
We are addressing all the pricing structure investing prudently in sales and marketing and elevating our O N D airports.
Korea, it's an exciting area of innovative collections.
That are on track to launch in the coming months.
Now I would like to take a moment to comment on recent developments in Australia market.
Safe work, Australia in Australian governments statutory agency recently made its reports about engineered stone publicly available.
This report recommends that the Australian government to adopt a ban on engineered stone.
Commendation is bending federal and state government decisions on next steps.
At this time it is difficult to predict exact outcome of the Australian government's decision on the matter and whether the ultimate decision will be a total ban.
Oh sure Ben all other.
We are working diligently with our strongest study on team to maintain our market share in this market regardless of the decision.
In conclusion, I'm proud of our team and the work that was done this past quarter, both in terms of profitability improvements and restructuring actions.
I am confident we are moving in the right direction to transform our business. We now have a much stronger balance sheet.
We can leverage to execute those thought to G and create value.
Thank you and I will now turn the call over to the home to walk through the details of our financial performance.
Thank you Jos and good morning, everyone.
Looking at our third quarter results.
Global revenue in the third quarter was $142 $4 million compared to $187 million in the third quarter of last deal.
The decrease of 21, 2% was primarily driven by softer global market conditions.
Particularly in the North American renovation and remodel channels.
Mainly as a result of higher interest rate.
Which has impacted the residential spending.
In addition.
Our sales were also impacted by the competitive landscape for our products.
The impact of softer residential says look D V D, which slowed down commencing in the second half of 2022.
It's been multiple announced in our results since the second quarter of the seal.
On a constant currency basis third quarter revenue was down 23%.
The ZIP up one 9% difference between U S dollar revenues and the constant currency revenues.
Reflect the impact of stronger U S dollar against our revenues generated in all other markets outside of the U S.
In the U S.
That's a little down 24.8%, mainly tied to softer residential end markets.
Particularly for third party distributors.
This was partially offset by higher yields a real sales with big box customer miles and improve performance in our commercial business.
You know a lot of a lot of tomorrow kits.
Canada sales were lower by 17, 5% on a constant currency basis experiencing similar market dynamics is in the U S.
Australia sales were off by roughly eight 4% on a constant currency basis.
Reflecting slower market conditions, although to a lesser extent.
Looking at third quarter P&L performance.
I will start by noting that we produced a significantly higher sequential gross margin S formation.
Our gross margin was 19, 1% for the quarter.
And the adjusted gross margin was 19.8, which was similar to our gross margin of 19, 7% in the first quartile on lower revenues.
Gross margin was lower compared to the 23% in the part of your call too.
The year over year decrease in margin, mainly reflected the impact of lower revenues.
Increased manufacturing unit costs, driven by lower fixed cost absorption mainly related to lower capacity utilization.
These talked also will partially offset by lower shipping costs and the benefits of full impulse production footprint.
Operating expenses in the third quarter as well.
$29 $2 million compared to $38 $5 million in the prior year quarter.
Excluding legal settlements and loss contingencies and restructuring expenses.
Adjusted operating expenses were 23, 7% of flipping them.
Compared to 29% in the prior quarter.
The higher percentage, mainly resulted from lower revenues.
Adjusted EBITDA in the third quarter was $1 $9 million improved sequentially compared to the second quarter in line with our plan to get adjusted EBITDA back to profitability in the second half of the year.
The sequential improvement primarily reflects strong operating results for the quarter.
Turning to a little balance sheet.
She is a stone's balance sheet as of September 30th 2023 included cash cash equivalents.
In short term bank deposits and short term marketable securities of $79.1 million with a total debt to financial institutions of $6 $9 million.
During the third quarter, we generated positive cash flow form operations of $28 $2 million, mainly driven by inventory reduction efforts.
This compared to cash flow of $3 $5 million in the third quarter of 2022.
Our net cash position as of September 30th 'twenty, 'twenty, three or $72.2 million compared to $49 million as of June 30, 2023.
And $28 $2 million as of December 31st 2022.
In regards to distort the unplanned close hill, which occurred during the second quarter of 2020 three.
We maintain our expectation to realize annualized savings of approximately $10 million to $15 million.
We are still in the purpose of accepting beats to sublet bullshit, so of the noncancelable lease agreement associated with the unplanned.
Which will allow us to work with a nice potential case savings above and beyond the anticipated $10 million to $15 million.
You know, we got Starwood outlook.
We are reiterating that outlook for the full year of 2023 to generate positive cash flow form operations end to end the year with an improved net cash position.
This outlook is based on the inventory reductions and other working capital improvements.
Cost optimization at fault.
And that was the expectation for similar to adjusted EBITDA in the fourth quarter compared to the sales quota of 2023.
Yeah.
This outlook factors in a significant near term reduction in ancillary revenues.
Due to the wall on table.
As a reminder, could have an impact of up to 5% of our revenues.
In summary.
Our restructuring actions are progressing as planned.
We have not only a much stronger balance sheet, which leaves us well situated to unlock additional value in our business as we move forward.
With that we are now ready to open the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then to that first question is from Reuben Garner of the benchmark company. Please go ahead.
Thank you.
First of all our our thoughts and prayers are with the Caesars Sun team and everyone are impacted by.
What happened last month Oh.
I guess to start guys.
If if you don't mind I was kind of thinking that maybe there would be a you know not necessarily a step function, but kind of gradual improvement in the margins and you know from the third quarter or second to the third and then third to the fourth it sounds like the fourth is going to look more like the third quarter is that is that.
Mostly a function of the impact a of Israel or or is there any other factors that maybe are or not leading to show an improvement on a sequential basis.
Okay.
So in general how you Glenn Thank you.
In general are the 5% Oh.
Almost 5% up saying we will not.
Yeah.
It generates in the fourth quarter according to at least with the current situation.
In the Israeli market and will be missing in our overall results.
There is also seasonality impact.
Well sell so Q3, usually is higher than Q4.
So we expect lower revenues.
And on the other side, we expect better performance in terms of Oh costs.
Following our restructuring plan.
And in addition, we are going to invest.
Higher on marketing, so we will have higher marketing spend.
So all in all we expect a similar EBITDAR.
But better cost performance and a better set up for the future.
Okay, and so just to be clear your your expectation is based on your your your Israel business essentially going to zero in the near term does that is that right.
It's not zero, it's not zero, it's not zero, but it depends on what do we don't know yet you know and we don't know how the world will continue to develop we may yet on the positive side. When May you kill some positive a result beside it seems now the market is a quite frozen.
So when we took it as close to zero.
Understood.
Hey, Reuben, it's now come in and to head towards yourselves. So despite a near.
The near term reduction in diesel early revenues, we expect to see.
The normal seasonality that we used to seen in previous yields I mean before COVID-19.
Full away you know before any unusual events, but so despite the reduction in these really revenues, we expect to see the normal seasonality in Q4.
This is something that should be taken into consideration.
Got it.
And in the prepared remarks, you mentioned are up to 40% of your product being manufactured by third party vendors by year end, what would what would that number look like coming into 2023.
Okay.
A 40%. These are in terms of how was the production in terms of our in terms of sales its seats, it's a bit less because there is a time differences.
In terms of sales are coming into our 2023 it was around 20%.
And we see a gradual increase over the previous quarter.
And we expect to see another increase the gradual increase in AR in Q4 this year.
But again, 40% is is production and not say sales will be lower than Polk.
Okay.
And you mentioned pricing I can't remember the term you use whether it was pricing optimization or pricing initiatives of some kind and then I know you talked about marketing a couple of times or you know or are your is your product price.
Highly in the market to compete in this environment, what what exactly are you needing to there and then what you know are there specific geographies, where the marketing expenses being.
Ramp what's the what's the kind of I guess dollar spend and what the benefit is expected to be from those investments.
Yeah. So there are a few.
Aspects. So first of all the marketing expenses am mainly aimed at the <unk> in the U S market, but also to other or two other markets. So we are trying to increase our marketing spend.
In order to elevate the brand and to reach traditional customers.
In terms of.
<unk> of the production in our strategic partners.
And third party strategic partners. So we estimate next year.
It could be around a 50% 50% of our production will be produced by our partners.
So this will allow us to be a more competitive and this will allow us to approach additional channels and we are in the past we Uh huh.
We neglected.
And I'll now open to us.
And in addition to that we are investing a lot our innovation.
And this will allow us to compete better in across all the field also in the eye or in Midland and in the lower end. So so.
This is in a nutshell.
And it was the the channels does that is that big box retail in the U S is that what what channels are you alluding to.
No so channels.
Yeah, mainly the commercial China's when I say yeah.
And maybe not neglected, but maybe we went out of the most of the commercial channel in the states. So we are going to get back to there.
And but also to reinforce our other channel which includes the or.
Of course, the big box, but also retail.
And Beth.
And and stone suppliers, but also performed quite bad in the last year.
Great. Thanks for the detail guys and stay safe good luck through the rest of the year.
Thank you thanks.
The next question is from Stanley Elliott of Stifel. Please go ahead.
Hey, everybody are nice to hear your voice. Thank you for the question.
Can you talk about how you see working capital as a percent of sales longer term I mean, you've done a nice job of pulling inventory out you relative to historical levels. It will look like you'd still have some ways to go.
And you know now with the modeled transforming to more of a kind of a third party your import model for a larger part of the the revenue base.
Just curious where we think working capital could end up here for this for the business.
Hi, Stephanie it's not home and.
Really you know all the you know we improved working capital specifically in terms of the well in terms of the inventory levels that were elevated last year there was a big.
Now back to a normalized level more or less around a 120 inventory days and we believe as you said rightfully.
Is that the there is still a.
The room for improvement and we are aiming you know to be it's an area of around 100 days of inventory.
And in and in general in terms of a percentage of working capital out of revenues and we expect to be around 25% working capital out of revenues.
Perfect.
The comment on the competitive landscape.
Is that just market did you find you maybe where were were priced too high in certain SKU categories.
And then just kind of any detail around kind of price versus volumes in the quarter that you might've seen in the U S. Specifically.
So so certainly.
We believe that are the decreasing volume mainly related to the soft market conditions.
On the back of a higher inflation globally not only in the U S.
The results in other regions as well so it's on the back of higher inflation in and on the back of higher interest rate.
Which which results in a way you know in our residential customers postponing certain projects all innovation projects.
So this is the major impact that we saw globally and in the U S. On the other hand, we saw some positive signs as we said in the Big box channel were starting to see positive signs in the commercial channels as Yossi mentioned earlier. So this is on the other hand.
Yeah, the big box channel actually what's interesting comment I mean, if you I think they've talked about their days sales being down modestly. Your was your comment really more of of incremental skus. So you're doing better in that market or maybe it's just performing better than some of the the fabricators, which you mentioned were.
Or have you got a bit more of a struggle.
No. So you know all or a portion there is quite a it's quite small so we have a total spread potential growth.
And it's a matter of full course and offering the right offer to the different consumers, including big boxes, it's not only and also commercial are contractual and others.
So and and as to the market just to add to what <unk> said, so that a part of Oh the market decline of course also the competition.
The accident rates and these are situations because everybody is fighting for the same dollars.
So I think that's we want to say that we are we suffer from the market situation and also increasing competition. However, we are doing many things that we believe will allow us to perform better than the market in the future.
Great guys. That's it for me. Thanks, so much best of luck.
Thank you very much.
This concludes our question and answer session I would like to turn the conference back over to yes, sure round for closing remarks.
Thank you and thank you all for your attention. This morning, we look forward to updating you on our progress next quarter.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.