Q3 2024 Caesarstone Ltd Earnings Call
Speaker Change: Greetings and welcome to the Caesarstone Third Quarter 2024 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.
Speaker Change: Should you need assistance, please signal a conference specialist by pressing the star key followed by a zero.
Speaker Change: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cray of ICR. Thank you. You may begin.
Brad Cray: Thank you, Operator, and good morning to everyone on the line. I am joined by Yosef Shiran, Caesar Stone's Chief Executive Officer, and Nahum Trost, Caesar Stone's Chief Financial Officer.
Brad Cray: Certain statements in today's conference call and responses to various questions may constitute forward-looking statements.
Brad Cray: 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.
Brad Cray: In addition, on this call, the company will make reference to certain non-GAAP financial measures, including adjusted net loss income, adjusted net loss income per share, adjusted gross profit, adjusted EBITDA, and constant currency.
Brad Cray: The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's third quarter 2024 earnings release, which is posted on the company's investor relations website.
Speaker Change: On today's call, Yosef will discuss our business activity and to whom we'll then cover additional details regarding financial results before we open the call for questions. Thank you and I would now like to turn the call over to Yosef. Please go ahead.
Yosef Shiran: Thank you, Brad. Good day, everyone. And thank you for joining us to discuss our third quarter 2024 results.
Yosef Shiran: I want to begin by expressing my sincere appreciation to our global Scissorstone team for their dedication and resilience.
during what continues to be a challenging operating environment.
Yosef Shiran: Our third quarter performance reflects the significant pressure we are experiencing across our business, with revenues declining year over year amid persistent weakness in global renovation and remodeling activity.
Yosef Shiran: That said, our ongoing transformation efforts and manufacturing optimization initiatives have helped sustain gross margin improvement year-over-year on much lower revenues, which underscores the positive impact of our restructuring actions over the last year.
Yosef Shiran: We continue to make important progress on our strategic initiatives while our team is carefully managing expenses.
Yosef Shiran: We have successfully transitioned approximately 70% of our production to our network of manufacturing partners, compared to just 30% a year ago.
Yosef Shiran: These shifts has enhanced our operational flexibility allowing us to meet customers demand at various price points while helping to maintain margins even at lower volumes.
Yosef Shiran: Additionally, we have maintained strong working capital discipline and monetized non-core assets to generate healthy operating cash flow of $16 million in the quarter.
Yosef Shiran: To that point, we reached an important milestone with the completion of our previously announced sales of 69 acres of undeveloped land at our Richmond Hill facility for $10 million.
Yosef Shiran: We are actively pursuing opportunities to maximize value for the remaining 51 acres of developed land and structures at this site, which carry higher values per acre than the recently sold land.
Yosef Shiran: Looking at our markets, we are seeing consistent challenges across our regions. The renovation and remodeling market and large ticket items, in particular, remain pressured by factors including high interest rates and general economic uncertainty.
Yosef Shiran: While our commercial and big boxes business have shown some relative stability, residential activity continues to be significantly constrained in the current environment.
Yosef Shiran: In Australia, the transition to our zero-crystalline silica products is taking longer than expected. We now expect to have our full zero-crystalline silica collection in the market by the end of Q1.
This should help us to gradually recover revenues in Australia.
Yosef Shiran: In response to these conditions, we are intensifying our focus on operational efficiency while making targeted investments to strengthen our competitive position.
Yosef Shiran: We are directing resources toward brand development, expanding our marketing programs, and accelerating development of innovative products to help stimulate demand.
Yosef Shiran: We are also continuing to invest strategically in R&D and our premium postage and offering, which we believe positions us well for growth as market conditions normalize.
Yosef Shiran: While we expect market headwinds to persist in the near term, we are confident in our structural improvements we are making to our business, from our optimized production footprint to our enhanced product development capabilities.
Yosef Shiran: We remain confident in our strategy and will continue to take decisive actions to restore profitable growth.
Speaker Change: I will now turn the call over to Nahum to review our financial results in more detail.
Thank you, Yosef, and good morning, everyone.
Looking at our third quarter results.
Speaker Change: Global revenue for the third quarter was $107.6 million, down 24.8% on a constant currency basis.
Speaker Change: The decrease was primarily driven by lower volumes, which were primarily impacted by global economic headwinds, particularly in residential renovation and remodeling channels across our main regions.
This resulted in lower demand accompanied by competitive pressures.
In the U.S., sales were down 20.5% to $52.4 million.
Speaker Change: This decline was mainly driven by softer residential land markets and less favorable product mix.
Speaker Change: This was partially offset by better performance in our big box business.
Speaker Change: Canada's sales were down 23.8% on a constant currency basis, experiencing similar market dynamics as the U.S.
Speaker Change: Australia's sales were off by approximately 37.7% on a constant currency basis, mainly reflecting slower market conditions and the transition to alternative materials that comply with new regulations in Australia.
Speaker Change: Our EMEA region saw a decline of 26% on a constant currency basis due to slow market conditions in the UK, Sweden, and our indirect EMEA business.
Speaker Change: In Israel sales were off by 24.5% on a constant currency basis in the third quarter, mainly as a result of the war on terror, which has significantly reduced activity in the region.
Looking at our third quarter P&L performance.
Speaker Change: Gross Margin in the third quarter improved to 19.9% compared to 19.1% in the prior year quarter.
Speaker Change: Adjusted gross margin was 19.8% which remained stable with the prior year quarter.
Speaker Change: Operating expenses in the third quarter were $25.4 million or 23.6% of revenue, compared to $29.2 million or 20.5% of revenue in the prior year quarter.
The higher percentage is mainly due to lower revenues.
Speaker Change: Our restructuring expenses during the quarter included a capital gain of $6.9 million from the sale of undeveloped land at our Richmond Hill facility.
Speaker Change: Excluding legal settlements, lost contingencies and restructuring expenses, operating expenses were 28.1% of revenue compared to 23.7% in the prior year quarter.
Speaker Change: In absolute dollars, operating expenses were lower by $3.7 million, but were higher as a percentage due to the lower revenues.
Speaker Change: Adjusted EBITDA in the third quarter was a loss of $4.1 million compared to a gain of $1.9 million in the prior year quarter.
Now turning to our balance sheet.
Speaker Change: Our balance sheet remains strong with cash and short-term deposits of $114.1 million and a total debt of $5.2 million at quarter end.
Speaker Change: Our net cash position improved to $108.9 million from $83.5 million at the end of 2023.
Speaker Change: We generated operating cash flow of $16.3 million during the third quarter, driven primarily by the sale of land and continued working capital optimization.
Speaker Change: Now I'd like to provide some additional color on a few items.
Speaker Change: The closure of our Richmond Hill plant continues to contribute to improved operational efficiency as expected.
Speaker Change: However, the benefits are being offset partially by ongoing cost pressures from two key factors.
Speaker Change: First, the trade restrictions imposed by Turkey on exports to Israel continue to affect our Bar-Lev plant production bond cost.
Speaker Change: While we have successfully established alternative supply sources for materials like quartz and polyester, these arrangements come at higher costs.
Speaker Change: We've taken steps to optimize our source and strategy, but expect this higher input cost to persist through the remainder of this year.
Second.
Speaker Change: Elevated seafreight costs have begun to impact our results, adding approximately $2 million to our costs in the third quarter.
This impact is also reflected in our inventory.
Speaker Change: While we've seen some moderation in freight rates recently, we expect these costs to remain a headwind in Q4.
Speaker Change: These cost pressures combined with lower revenues are key factors in our revised fully readjusted EBITDA outlook that I'll discuss momentarily.
Speaker Change: Now with regard to bodily damages claims made by fabricators in the U.S.
Speaker Change: We are one of several defendants named in 79 lawsuits alleging that fabricators contracted illnesses, including silicosis, through exposure to silica particles while fabricating engineered stone products, including ours.
Speaker Change: As discussed in our Form 6K, filed in August 2024, a jury in Los Angeles County Court rendered a verdict in the first case litigated in California.
Speaker Change: Finding all defendants liable and awarded the plaintiffs $52.4 million in damages, with Scissorstone US apportioned 15%, subject to increase by certain post-trial adjustments.
We strongly disagree with this verdict.
Speaker Change: which we believe fails to acknowledge our long-standing commitment to safety education and proactive measures to protect fabricators.
We are pursuing various post-trial remedies, including a pill.
Speaker Change: During the third quarter, and in accordance with the U.S. Gap, we recorded an adequate provision and insurance receivable related to this verdict.
Speaker Change: While this single decision will not have a material adverse effect on the company,
Speaker Change: The company cannot provide assurance as to the outcome of the other pending litigations or that such litigations will not have a material adverse impact on our business, financial position, results of operations, or cash flows.
regarding our outlook.
Speaker Change: We continue to expect positive operating cash flow for the full year of 2024, entirely generated by cash flow from the first nine months of the year with a modest offset in Q4.
Speaker Change: We now expect to realize approximately $35 million in restructuring-related cost savings compared to 2023 levels.
Speaker Change: We remain on track to realize $20 million in savings this year, and we now expect an additional $15 million in savings annually thereafter.
Speaker Change: Given the persistence of macroeconomic pressures across our markets, particularly the challenging selling environment in Australia, as we transition our zero-crystalline silica collection,
We expect lower sequential revenues in Q4 compared to Q3.
consistent with our typical seasonal trends.
Speaker Change: Combined with elevated shipping and material costs in the second half of 2024, we are adjusting our fully readjusted EBITDA outlook to an expected loss in the range of $10 to $11 million.
As we look ahead,
While near-term market conditions remain challenging,
Speaker Change: We believe the fundamental improvements we've made to our cost structure and operational efficiency position us well to return to profitability as volumes recover.
Speaker Change: With that, we are now ready to open the call for questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star and 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
if at any time your question has been addressed.
if you would like to withdraw your question.
Speaker Change: please press star then 2. At this time we will pause momentarily to assemble our roster.
Speaker Change: Our first question comes from Reuben Gardner with Benchmark. Please go ahead.
Thank you. Bye-bye.
Speaker Change: Good morning. This is John McGlade on for Reuben Garner. Thank you for taking my questions. First off, I just wanted to ask if you could provide a big picture macro outlook by region. Any trends you're seeing? Areas that may be recovering faster than others?
Speaker Change: Hi, good morning. Thank you. So, in general, we see a negative trend in almost all the markets.
Speaker Change: which stem to our opinion because of the economical downturn mainly in renovation.
Speaker Change: following a high interest rate and also competition from the Far East, mainly India in the States and also India and China in other areas.
Speaker Change: However, despite this trend, we look at what we have accomplished so far in terms of building the company to be more agile.
Speaker Change: and ready for the future and we believe we had we have an a head start a compared with some of our main competitors
Speaker Change: and we believe that despite that this restructuring takes a bit of time
Speaker Change: There will come a time that we will reap the benefits, and we are quite confident with the steps that we are taking.
Speaker Change: So, this is a general statement, maybe. Yeah, if you are interested in any specific market,
Speaker Change: We can dive in, or Nahum, do you have anything to add? Maybe just to add on the Australian market that was impacted not only on the back of the macroeconomic, but also as a result of the transition in that market.
Speaker Change: and we now expect to have the full offering by the end of Q1 and to regain our leading position in that market down the road during 2025.
Speaker Change: Quartz products came earlier than expected in July and this forced us to accelerate
the transition into crystalline silica-free.
Speaker Change: and this transformation is taking a bit longer than we thought.
Speaker Change: So, we are fighting in the markets with half of the collection and we are improving the collection from month to month. By the end of Q1, we will have the full starting collection.
Speaker Change: And from then, we expect that the Australian performance will improve significantly to what we are seeing now.
Okay, thank you.
Could you just give a little color on...
pricing as these volume pressures continue and
Speaker Change: combined with the shipping rate factor, how you'd be able to offset in the future.
Yosef? Yeah.
Speaker Change: rises. We are not immediately changing the prices and this is the impact of that you've seen in H2 this year.
Speaker Change: So we, as we said before, we suffer about 6 million dollars, 5 million dollars from shipping rate increase in Q3 and Q4.
Speaker Change: and we expect to see the benefit of that starting in Q1. We are not, at the moment, we are not foreseeing any shipping increase, on the contrary.
and shipping rate increase, yeah.
Speaker Change: Alright, thank you for that. You also mentioned in your prepared remarks that there were some bright spots with U.S. big-box retailers. Are you able to provide any more details on kind of the trends you're seeing there? What products are more popular or less popular with them?
Speaker Change: I don't think it's a matter of product, but in general we see more resilience in the big boxes compared to the renovation area and you see this and this is reflected in our performance there.
Speaker Change: So maybe just to reiterate that the residential R&R is the most pressure channel that we see.
Speaker Change: And compared to that, the commercial business is a bit more resilient and the big box activity is also showing some positive signs, again, compared to the commercial and the residential channels.
Okay, thank you and just to
Speaker Change: Two short follow-ups just from from the conversation last quarter Curious if there's any potential deals in
Speaker Change: or on the horizon maybe for the Richmond Hill developed land. And just wanted to also verify that the .EM subletting timeline is still unchanged and you expect to see those cash flow benefits in Q1.
Speaker Change: Yes, so first of all we are pleased with the fact that we've completed the transaction on for the undeveloped land.
Speaker Change: in Richmond Hill during this quarter, and we are still And we are still you know looking for the for the right buyer for the developed for the developed land
Speaker Change: So, no update in this regard other than the fact that we are still looking for the right buyer. And with regard to ZotYam, so we are on track in accordance with our plan to establish
Speaker Change: most or the vast majority of the available of the available land in this site. So we are also on track in this regard.
Speaker Change: Alright, thank you. That's all I have. I appreciate your time.
Thank you very much. Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Yosef Shiran for any closing remarks.
Yosef Shiran: Thank you. Thank you for your attention this morning. We look forward to updating you on our progress next quarter. See you. Bye.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.