May 8, 2024
Operator
Greetings, and welcome to the Caesarstone First Quarter 2024 Earnings Conference Call. [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 Yos 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.
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.
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 first quarter 2024 earnings release, which is posted on the company's Investor Relations website. On today's call, Yos will discuss our business activity and whom 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 Yos. 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 in line 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 of 2024 in the face of persistent global economic headwinds, regulatory changes in Australia, and the ongoing conflict in Israel.
Yosef Shiran
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.
Yosef Shiran
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 courts 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.
Yosef Shiran
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 fortified balance sheet and ample net cash, we are well positioned to continue executing on our strategic objectives in 2024.
Yosef Shiran
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 the 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 [indiscernible] will allow us to retain our leading position in the Australian markets.
Yosef Shiran
In conclusion, as we progress through 2024 and navigate current market dynamics, our strategy is firmly focused on enhancing innovation and brand development, while further refining our production footprint. We are committed to reducing our manufacturing costs 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.
Yosef Shiran
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, Yos, 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 book channel revenues.
Nahum Trost
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 then [indiscernible] in sales as we introduced alternative materials that comply with new regulations during the first half of 2024. In Israel, sales were up 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.
Nahum Trost
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.
Nahum Trost
The gross margin also reflects roughly 260 basis points of benefits related to the timing of access 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.
Nahum Trost
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.
Nahum Trost
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 the 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.
Nahum Trost
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.
Nahum Trost
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 noncancelable lease agreement associated with the Sdot-Yam manufacturing facility, which will allow us to recognize additional cash inflows on top of the planned cost savings.
We are also looking for the best alternative to monetize our Richmond Hill site.
Nahum Trost
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 initiatives to aim to enhance our sales and marketing initiatives, production efficiency and drive growth in our top line.
With that, we are now ready to open the call for questions.
Operator
We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Reuben Garner with The Benchmark Company.
Reuben Garner
Thanks. Good afternoon, guys.
So I guess to start, a pretty strong gross margin performance despite what was, I think, a weaker volume environment than expected. Can you talk about what kind of surprised you to the upside there?
And how sustainable that 24% plus level is as we go through the rest of '24?
Nahum Trost
Reuben, it's Nahum. So the gross margin mostly reflects the restructuring actions that we already took in the last year.
We mentioned roughly 260 basis points of excess inventory that we expedited its sales in connection with the closure of the Richmond Hill plant and in connection with the future regulations in Australia. So we expedited the sale of certain inventory items.
So these items is significantly higher than usual, the 260 basis points.
Nahum Trost
But other than that, we benefited from the restructuring actions, specifically from favorable production source mix, better prices on raw materials and landed cost basically. This is on the positive side.
On the other hand, as you also mentioned, the volume was a negative impact and also the significant unfavorable product mix that resulted in lower margins.
Yosef Shiran
Reuben may I just add that in general, it also reflects the heavy restructuring that we have been going through in the last year. And I think that our platform is stronger, and we will -- we estimate that we will continue to see the benefits of that in -- also in the gross margin.
Reuben Garner
So how much revenue -- how much did revenue benefit from the accelerated sales of some of those product share and inventory?
Nahum Trost
So can you repeat, please? The line was breaking.
Reuben Garner
Sorry about that. Yes.
Can you -- how much did revenue benefit from the accelerated sale of that inventory?
Nahum Trost
So it was 260 -- how much revenue? In terms of revenue, it wasn't that significant, but those items were fully covered with inventory provision, so it had a significant impact, mainly on the gross margin.
Reuben Garner
Okay. Got it.
And your outlook for the full year to be breakeven on EBITDA, what sort of revenue number do you need to achieve that? I mean you were breakeven in the first quarter at $118 million.
I know you had a little bit of help from the onetime inventory item, but how do we think about that? What full year revenue targets you need to hit to achieve that breakeven?
Nahum Trost
So we do not provide specific guidance on revenues for the full year. But as we discussed also previously, we do expect to see the same seasonality trends that we used to see in previous years, meaning Q1 the lowest quarter and then improvement in Q2 and Q3 and Q4 is slightly lower than the second and the third quarter, in terms of revenues.
Nahum Trost
And we do expect to be -- to show higher profits or higher margins as we continue through 2024. As we complete the more expensive inventory that came from Richmond Hill plant.
And as our restructuring actions are taking more significant most -- will give us a more significant impact on the overall results. And with regard to the outlook, we reiterated that we expect a positive EBITDA for the full year and also a positive operating cash flow.
Reuben Garner
How much of the $20 million in savings has been realized thus far?
Nahum Trost
The $20 million is the number for the full year. So basically 1 quarter.
And we expect to benefit and we expect to gain more and more savings as we continue through 2024, again, on the back of closing the Richmond Hill plant.
Operator
The next question comes from Stanley Elliott with Stifel.
Andrew Maser
This is Andrew on for Stanley. I think you said that U.S.
big-box stores are holding up relatively better than other parts of the business. I'm wondering if you could expand on that.
What's your outlook for repair and remodel for this year? And then do you have any commentary on intra-quarter trends or even trends you've seen for U.S.
volumes into April?
Yosef Shiran
Thanks. Yes.
So in general, we performed better in the big boxes than on the residential segment. We cannot say that we have the global analysis of why is it happening.
We believe that high interest rates reduces or depresses the activity on the residential side. On the other hand, big boxes are still doing well, and so our sales within these channels.
Yosef Shiran
And again, going forward, we will continue to expand our activity and our efforts in all the channels in the states as well as in other places, in other markets like Canada, like Australia, in the States specifically, we will see more effort on the contractors developer segment. And we hope that step-by-step, we will also see improvement in the residential segment.
Andrew Maser
And then I'm wondering if you could give us an update on the porcelain rollout. How is that going?
And what has early feedback from customers been like so far?
Yosef Shiran
So are you relating to the rollout in the States or in other areas?
Andrew Maser
U.S.
Yosef Shiran
Yes. So yes, we started to offer the porcelain in the states.
Overall, the porcelain activity is still small for Caesarstone, but very promising. We are investing a lot in expanding the collection, improving it, offering additional products within the porcelain are.
So it's not significant yet in terms of numbers, but it is very important in terms of the potential for the future of Caesarstone.
Andrew Maser
And then last one for me. I wonder if you could quantify how much inventory is left at the Richmond Hill plant and when you would expect that to hit cash flows or earnings.
Nahum Trost
So the majority of -- so the majority of the inventory was sold and digested through Q1, and it is also reflected in the gross margin, as we discussed in the earnings but -- and to a lesser extent in Q2. So basically, most of it is done in Q1.
Let's say that after Q2, we will not see the negative impact of the all inventory of Richmond Hill.
Operator
And at this time, this concludes our question-and-answer session. I would now like to turn the conference back over to Yos Shiran for any closing remarks.
Yosef Shiran
Yes. Thank you.
And thank you all for your attention this morning, and we look forward to updating you on our progress next quarter. Bye.
Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.