Caesarstone Ltd. (NASDAQ:CSTE) Q4 2022 Earnings Call Transcript

Caesarstone Ltd. (NASDAQ:CSTE) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Greetings, and welcome to the Caesarstone Limited Fourth Quarter 2022 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. 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.

Brad Cray: Thank you, operator, and good morning to everyone on the line. I'm joined by Yuval Dagim, Caesarstone's Chief Executive Officer; and Nahum Trost, Caesarstone's Chief Financial Officer. Certain statements in today's 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 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 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 Yuval. Please go ahead.

Yuval Dagim: Thank you, Brad, and good morning, everyone. I'm proud of the entire Caesarstone 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 strategy as we navigated through a challenging demand environment that softened during the second half of 2022. Increasing interest rates and inflation, pressured housing starts and remodeling expenses, particularly impacting our U.S. and the Israeli business in Q4 2022. In addition, certain customers are lowering their inventory levels and therefore, we adjusted our production and are balancing SKUs as necessary. Our fourth quarter results were below our expectations given these evolving market conditions.

While we expect our pricing initiatives to help offset lower market volumes during 2023, 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. 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, intensifying our marketing efforts and expand our U.S. distribution footprint. I would like now to discuss a few of the actions that we have underway to improve our results as we had into 2023. We are temporarily reducing the effective capacity of our manufacturing facilities to meet the current demand, which should provide improved working capital.

Second, we took actions during the second half of 2022 to reduce our head count globally by approximately 9% across all business units and functions. We expect to continue to monitor our SG&A 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. As we said in the past, in recent years, we have expanded our relationship with OEM manufacturers, primarily based out of Asia. This has allowed us to not only diversify our supply chain, but also serve an increasing amount of the market at various price points. 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 product.

Fourth, we remain committed to our technological and digital investments, such as our innovative CSConnect platform, which continues to be a bright spot and is accelerating our ability to improve customer experience and engagement throughout our business. And lastly, we plan to increase our marketing efforts in the U.S. 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 have also increased selling prices during Q1 of 2023 in our main markets to mitigate the impact of higher costs in our margins. I would like also to reiterate that our multi-material product pipeline, including Ceasarstone-branded porcelain slabs, provides us with encouraging growth prospects as we look forward.

We are excited to introduce our Ceasarstone branded global porcelain collection to North America during the first half of 2023 following a launch in the U.K., Israel and the Australian markets during the second half of 2022. Over the next several years, we expect that porcelain will become a primary driver for our revenue growth in our key markets. Through our successful penetration into Big Box, our acquisition of strategic distributors such as Omicron and our ongoing organic expansion of Caesarstone distribution centers we have significantly diversified our sales channels. We estimate that in the U.S. business, approximately a quarter of our sales are through 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 multimaterial offerings such as porcelain. I'd like to take a moment to comment on recent developments in Australia in regards to increasing government attention on the engineered store market. Various Australian federal and state authorities are exploring ways to mitigate the risks associated with fabrication of engineered stone, such as more rigorous licensing standards for fabricators as well as limiting the sale of engineered stone with high level of silicon. As a leader in this market, we continue to actively train and educate fabricators, customers and others in the value chain, all safe material handling and installation practices as well as expedite additional development of our own low silica product offerings.

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 quant solutions to all stakeholders. In conclusion, we continue to take prudent actions across the 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, elevating our multi-material product portfolio and positioning our business for improved results in the quarters to come. With that, I will now turn the call to Nahum to discuss more details on our financial results and outlook.

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Nahum Trost: Thank Yuval, and good morning, everyone. I will start by discussing our fourth quarter results. Global revenue in the fourth quarter was $159.4 million compared to $171.1 million the fourth quarter of last year. On a constant currency basis, fourth quarter revenue was lower by 2.1% compared to the same period last year as sales improvement in the APAC region was more than offset by softer performance in all other regions given the challenging macroeconomic conditions. 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 year-over-year difference in gross margin predominantly reflected increased manufacturing unit costs driven by lower fixed cost absorption resulting from lower capacity utilization, higher raw 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 our several pricing actions. Looking ahead to 2023, we expect the unfavorable impact of foreign exchange rates, higher 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 cost in inventory, reflecting those previous periods of elevated material and shipping costs. In response, we have already taken actions to partially mitigate this impact with additional price increases, 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 compared to $36.3 million in the prior year quarter.

Our operating expenses for the quarter included a one-time non-cash impairment charge of $71.3 million related to goodwill and long-lived assets. Given our current market capitalization, together with softer macroeconomic conditions, higher interest rates and lower production utilization, a review of our goodwill and long-lived asset balances is required, which resulted in the above mentioned impairment charges. Excluding legal settlements, loss contingencies and impairment charges, adjusted operating expenses were 22.2% of revenues compared to 21.9% in the prior year quarter. Adjusted EBITDA in the fourth quarter was $5.7 million, representing a margin of 3.6% compared to $11.5 million or a margin of 6.7% in the prior year quarter. The year-over-year difference primarily reflects the lower operating income.

Now looking at our full year financial performance highlights. Sales for the full year were up 7.3%, and on a constant currency basis, sales were up by 10.8% driven by growth in the United States and Canada. Adjusted gross margin for the year was 23.8% compared to 26.8% last year. The difference in the adjusted gross margin mainly reflects lower fixed cost absorption, higher raw material prices, unfavorable foreign currency exchange rates and shipping price increases, which were partially offset by favorable product mix and selling price increases. Excluding legal settlements, loss contingencies and the non-cash impairment charges we incurred during the fourth quarter of 2022, adjusted operating expenses for the full year were 21.7% of revenue compared to 21.9% in the prior year.

Our full year 2022 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-over-year change in margin primarily reflecting the lower gross margin. Turning to our balance sheet. Ceasarstone balance sheet as of December 31, 2022, included cash, cash equivalents, short-term bank deposits and short and long-term marketable securities of $59.2 million with a total debt to financial institutions of $31 million. Moving to our outlook. Given macroeconomic environment and low ability to predict the duration, the slowdown in global construction activity, we expect revenue for the full year of 2023 to be in the same range of the 2022 revenue. For 2023, we expect lower volume to be offset by pricing initiatives.

Additionally, we expect a gradual and moderate improvement in adjusted EBITDA as a percentage of sales for the full year of 2023, 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, while spot market cost for many of our major inputs, such as raw 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 difficult. 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 is, also 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 comments.

Yuval Dagim: Thank you, Nahum. Overall, as we look to 2023, we remain optimistic about our prospects for future growth as we work to transform Caesarstone into a leading premium multi-material countertop company. We have a large and addressable market opportunity in countertops combined with solid positioning in attractive geographies. 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. With our world-class brand multi-material countertop offerings, innovative go-to-market initiatives 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.

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