Caesarstone Ltd. (NASDAQ:CSTE) Q1 2024 Earnings Call Transcript May 8, 2024
Caesarstone Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Caesarstone First Quarter 2024 Earnings Conference Call. Today, all participants will be in a listen-only mode. [Operator Instructions] Please note that today’s event is being recorded. I would now like to introduce you to our host for today, Brad Cray of ICR. Thank you. And you may begin, sir.
Brad Cray: Thank you, operator, and good morning to everyone on the line. I am joined by Yosef Shiran, 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 loss/income, 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 2024 earnings release, which is posted on the company’s Investor Relations website. On today’s call, Yosef will discuss our business activity and Nahum will 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 first quarter 2024 results. Our first quarter results are aligned with our goals to deliver a full year of positive adjusted EBITDA and cash flow from operations. Our team has demonstrated resilience and adaptability to start off 2024 in the face of persistent global economic headwinds, regulatory changes in Australia and the ongoing conflict in Israel. Yet, our revenues fell short of our expectations in the first quarter and we are working decisively to improve execution and resume revenue growth. Despite these challenges, we have made significant progress in our strategic transformation, shifting from manufacturing-centric approach to a strategy that prioritizes research and development, marketing and branding to drive revenue growth.
We are successfully transforming our manufacturing footprint, having transitioned over 50% of our production to our global network of production business partners. This should allow us to better align production levels and sources with the demand for our products. Although we are making this shift, we still have strong production capabilities in quartz and growing capabilities in porcelain. We are beginning to see the benefits of these restructuring actions, which contributed to the first quarter gross margin expansion. The Sdot Yam and Richmond Hill plant closures are on pace to have a more pronounced impact on our results in the second half of 2024 and should ultimately save us approximately $30 million annually by next year compared to 2023.
These savings are getting partially reinvested into additional innovation and marketing efforts to drive higher revenues. Since announcing our restructuring plan last year, one of our primary financial objectives has been to generate positive cash flow from operations and improve our net cash position. We have made solid progress on this initiative and plan to continue delivering positive cash flow from operations. With a fortified balance sheet and ample net cash, we are well-positioned to continue executing on our strategic objectives in 2024. Furthermore, we have separated our U.S. and Canadian leadership teams to allow each team to better focus on the opportunities in their respective markets. Regarding the shift of the Australian market to free crystalline silica products, we have been proactive in the development of alternative products that comply with the new regulations and have begun offering them in the market.
By the end of second quarter of 2024, a majority of our collection will consist of alternative products, with a full collection of compliant products available by end of the year, which, we believe, will allow us to retain our leading position in the Australian market. In conclusion, as we progress through 2024 and navigate current markets dynamics, our strategy is firmly focused on enhancing innovation and brand development, while further refining our production footprint. We’re committed to reducing our manufacturing cost base, while increasing investment in R&D, marketing our brand and the expansion of our premium porcelain offering to drive sales growth and profitability across the business. We remain confident that Caesarstone can rise to its potential.
Thank you. And I will now turn the call over to Nahum to walk you through the details of our financial performance.
Nahum Trost: Thank you, Yosef, and good morning, everyone. Looking at our first quarter results. Global revenue in the first quarter was $118.3 million compared to $150.6 million in the first quarter of last year. On a constant currency basis, sales were down 21%. The decrease was primarily driven by lower volumes due to softer global market conditions. In addition, our sales were impacted by competitive pressures. In the U.S., sales were down 19.8% mainly tied to soft residential end markets and less favorable product mix resulted in lower ASP related to the impact of the higher interest rates on housing market and renovation projects, partially offset by our commercial and big box channel revenues. Canada sales were lower by 9.9% on a constant currency basis, experiencing similar market dynamics as the U.S., but to a lesser extent.
Australia sales were off by approximately 17.5% on a constant currency basis, mainly reflecting slower market conditions and an air pocket in sales as we introduce alternative materials that comply with new regulations during the first half of 2024. In Israel, sales were off 39.3% on a constant currency basis in the first quarter mainly as a result of the war on terror, which has significantly diminished regional activity. On a sequential basis, sales in Israel improved 68.9%, which is encouraging. Looking at our first quarter P&L performance. Our gross margin was 24.5% for the quarter. Adjusted gross margin was 24.4% compared to 19.7% in the prior-year quarter. The notable improvement in our margins on a year-over-year basis is partially due to the enhanced efficiency of our production footprint, a result of our previous restructuring efforts.
We believe these enhancements to margin are sustainable and should continue to ramp through 2024. The gross margin also reflects roughly 260 basis points of benefits related to the timing of excess inventory sold mainly in Australia and from our Richmond Hill plant during the first quarter. I would like to take a moment to address the recent trade restrictions imposed by Turkey. We have been sourcing raw materials for several years from Turkey, and the recently announced trade restrictions could have a negative impact on our Bar-Lev plant production in the short term. We are actively seeking alternative sources for raw materials to minimize any potential disruptions. While we anticipate an increase in production cost at our Bar-Lev manufacturing facility, due to these restrictions, we do not foresee currently a significant negative impact on our overall financial results.
Our operating expenses in the first quarter were $34.6 million compared to $35.5 million in the prior-year quarter. Excluding legal settlements and loss contingencies, adjusted operating expenses were 28.6% of revenue compared to 24.5% in the prior-year quarter. The higher percentage mainly resulted from the lower revenues. Adjusted EBITDA in the first quarter was $0.6 million, relatively stable compared to the $0.7 million in the prior-year quarter. Turning to our balance sheet. Caesarstone has a strong balance sheet with ample liquidity to support our planned strategic objectives. As of March 31, 2024, cash, cash equivalents and short-term bank deposits totaled to $96.2 million, with a total debt to financial institutions of $6.8 million.
During the first quarter, we generated another quarter of positive cash flow from operations of $8.7 million. Our net cash position as of March 31, 2024 was $89.4 million compared to $83.5 million as of December 31, 2023. In regards to our outlook, based on our significant restructuring initiatives underway, our leaner operations and our focus on profitability, we are reiterating our outlook for adjusted EBITDA to be positive in the full year of 2024. In addition, we continue to expect another full year of positive cash flow from operations. Historically, we see a sequential increase in revenues in the second quarter compared to the first quarter due to seasonality. In regards to the Sdot Yam plant closure, which occurred during the second quarter of 2023, and Richmond Hill plant closure, which occurred during January of 2024, we reiterate our expectation to realize savings of $20 million in 2024 and $30 million thereafter.
We have begun to sublet portions of our non-cancellable lease agreement associated with the Sdot Yam manufacturing facility, which will allow us to recognize additional cash inflows on top of the plant cost savings. We are also looking for the best alternative to monetize our Richmond Hill site. In conclusion, our strategic actions to restructure the business and to optimize our cost structure have begun to yield financial benefits, reflected in this quarter mainly in our improved gross margin and sustained positive cash flow even on lower volume. We remain committed to our strategic initiative to aim to enhance our sales and marketing initiative, production efficiency and drive growth in our top-line. With that, we are now ready to open the call for questions.
Operator: Thank you. [Operator Instructions] And today’s first question comes from Reuben Garner with The Benchmark Company. Please proceed.
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