May 8, 2013
Executives
Yosef Shiran - Chief Executive Officer Yair Averbuch - Chief Financial Officer
Analysts
John Baugh - Stifel Nicolaus Peter Lisnic - Robert W. Baird
Operator
Good day, and welcome to the Caesarstone Sdot-Yam Limited First Quarter 2013 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to (Inaudible). Please go ahead.
Unidentified Company Representative
Thank you, Aja, and good morning to everyone. Certain statements in today's conference call in responses to various questions may constitute forward-looking statements.
We wish to caution you that such statements, reflects only the company's current expectations and that the actual events or results may differ materially. For more information, please refer to the risk factors contained in the company's period filings with the Securities and Exchange Commission.
In addition, the company will make reference to certain non-GAAP financial measures, including adjusted gross margins, adjusted operating expenses, adjusted net income, adjusted net income per share, adjusted EBITDA and various metrics that maybe presented on a pro forma basis. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's first quarter earnings release, which is posted on the company's IR site.
With that, I would now like to turn the call over to Yos Shiran, Chief Executive Officer. Yos?
Yosef Shiran
Thank you. Good day and thank you for joining us to discuss our first quarter results.
We had very good start for the year with a strong first quarter both, for sales and profitability. I would like to start with some highlights for the quarter.
Revenue in the first quarter increased by 13.5% to $76.4 million. This was led by strong growth in North America and is a record performance for first quarter.
Adjusted EBITDA in the first quarter was $17.6 million and our margin improved to 23.1%, almost three, [four] points better than last year. With the growth, we continue to capture the benefits of scale.
We've also benefitted from the Super Natural line rollout, which had been very well received by consumers around the world and provides higher margins. Adjusted net income for the first quarter was $11.3 million, up 52% from last year's first quarter.
Our first quarter adjusted earnings per share were $0.32. We are pleased with our strategy and execution so far and we are excited to see many investors appreciating our company as we completed our secondary offering few weeks ago.
I would like to quickly update you on our performance in each region around the world. I'll start with North America.
First quarter sales in North America grew by 25% to $34.4 million. U.S.
becoming our biggest market grew 26% to $23.7 million and Canada grew 22% to $10.7 million. In these markets, the consumer awareness of quartz is a premium material continues to grow and we believe that Caesarstone is developing a reputation as the best brand in the quartz market.
Australia grew 2% to $19.4 million, 4% on a constant currency basis. Our team there continues to do good job of rising above the tough market conditions.
I would note that the market reception to our Super Natural products has been also very good in Australia. Israel grew by 14% to $10.6 million, 12% on a constant currency basis.
While this is a mature market for us, we are pleased to see such growth supported by significant ASP improvements due to the introduction of new products, primarily the Super Natural. In Europe, where the economy remains challenging, sales grew by 3% to $5.9 million, 2% on a constant currency basis.
We continue to expect this market to remain challenging throughout the year. Revenue in the rest of the world was up 8% to $6.2 million in the first quarter.
We believe that there is a meaningful opportunity for us in a variety of markets around the world and we are pleased to see continued success. We are happy with the global success of our Super Natural designs, which was enabled by our strong R&D, deep understanding of the markets and consumer preference and good execution on manufacturing and marketing.
Innovation, quality and design our Caesarstone is known for and the Super Natural line is additional evidence of that. In summary, things are going well across the business.
We are capture growth in our key markets, building new capacity, delivering innovative new products and reinforcing our brands. Yair will now take you through the numbers in more detail.
Yair Averbuch
Thank you, Yos, and good morning to everyone. I will start with our income statement for the first quarter.
Revenue in the first quarter increased to $76.4 million, a new first quarter record. This represents a growth of 13.5%, compared to $67.3 million in the first quarter last year.
On a constant currency basis, revenue increased by 13.9%. Gross margin in the quarter was 44.8%, up three percentage points from 41.8% in the first quarter of last year and now 1.8 percentage points, eliminating last few IPO bonus for manufacturing employees.
The increase was primarily driven by the benefit of scale, the higher margin associated with the rollout of Super Natural and a favorable regional mix. Operating expenses in the first quarter were $21.1 million, 27.7% of sales.
This is 3.5 points better than last year first quarter expense rate or 31.2% of sales. I would note that last year operating expenses, included $1.1 million for the IPO bonus and $0.8 million for management fees.
Operating income in the first quarter was $13.1 million, compared to $7.2 million last year. Our operating margins were 17.1%, up from 10.6% in the first quarter of last year.
Adjusted EBITDA in the first quarter increased by 28.9% over prior year and was $17.6 million, 23.1% margin. Finance expenses in the first quarter were $0.2 million, compared to $1.5 million a year ago, which was mostly related FX impacts.
Our taxes in the first quarter were approximately $2.2 million, 16.9% of income before tax. This compares to a tax rate of 13.2% in the first quarter last year.
Tax charges this quarter included $0.5 million were from adjustment on deferred tax assets related to the reduced tax rate in Israel. Excluding this impact, our effective tax rate would have been 12.9% this quarter.
Net income attributable to controlling interest more than doubled to $10.5 million from $4.8 million last year. Earnings per share in the quarter were $0.30 on 35 million shares outstanding.
Last year, earnings per share were $0.18, but on a weighted average of 27.5 million shares. Adjusted net income in the first quarter was $11.3 million, compared to the prior year level of $7.4 million.
Adjusted earnings per share were $0.32 compared to $0.27 last year. Turning to our balance sheet, it continues to be strong.
Cash and bank deposit at the end of the quarter were $73.2 million. Net cash balance grew by $3.1 million from December, 2012 and now stand at $52.9 million.
Receivables at the end of the quarter were $46 million. DSO was 65 days this quarter, in line with previous levels.
We were able to utilize Q1 seasonality to build up our finished goods inventory, which will help the continued strong demand for our products. Inventory at the end of the quarter was $64.2 million, up compared to 60.6 million at year end.
Now, with respect to our guidance. We are reiterating our revenue guidance for the year in the range of $330 million to $340 million.
With regard to adjusted EBITDA, given the strong profitability in the first quarter, we now believe that our results will be in the upper part of the range of $76 million to $80 million. Thank you.
We are now ready to open the call for questions.
Operator
(Operator Instructions) We'll go first to Stephen Kim at Barclays.
Unidentified Analyst
It's [John], actually filling in for Steve. Just wanted to maybe get a little more color on what you are seeing on Australia.
A lot of your competitors or not competitors other building product companies have seen pretty dramatic decreases in volumes there. Can you give us an idea how volumes in Australia trended and how mix played a role in this quarter's results?
Yosef Shiran
Hi, Steve. So, I think in Australia as we reported, we managed to grow year-over-year in this quarter, mainly supported by the Super Natural success and also by the overall quartz story and material conversion.
It's true that the market that the market in Australia is depressed in the last two years, but even with that we managed to find our way for this turbulent market conditions, and we believe that we can continue with this trend in Australia.
Unidentified Analyst
Okay. And, just get a better sense of where are you guys as far as capacity utilization.
Then, since you are under levered, have you given thoughts of possibly adding debt here or bank loan facility in order to kind of pull forward some of your capacity additions that you have outlined for us?
Yosef Shiran
So, I think in terms of capacity, and I don't recall exactly from our last discussion what's exactly we discussed, but I think there has been improvements. And, as we said in the past, even though we don't buy two lines even until today, we managed to increase our capacity in the last few years by main two things.
First of all, investments in additional improvements within the line, but also improvement in the processors, so far we feel good with this capacity seems we managed to increase it with the current four lines. The fifth line is going to full steam ahead and is supposed to be due on time.
So, as we reported, by the fourth quarter we intend to start to operate it. So, we feel okay as far as the capacity concern.
Unidentified Analyst
Great. Thank you, guys.
Good quarter.
Operator
Yosef Shiran
Thanks.
Operator
We'll go next to Michael Rehaut at JPMorgan.
Unidentified Analyst
Good morning. It's actually [Will Loh] on for Mike.
How are you guys?
Yosef Shiran
We are good.
Unidentified Analyst
Great quarter. My first question is regarding the gross margin expansion.
On a year-over-year basis, you had mentioned that it was driven by new products, regional mix and also operating leverage. I was just wondering if you could provide a little bit more color in terms of year-over-year improvement.
What the main drivers were in terms of, was it the new products, was it the regional mix or was it the operating [rates]. If you could just provide some more color on that, that would be great.
Yair Averbuch
So, the volume impact, the benefit of volume was pretty good contributor of the three and the regional mix and the new product impact, the Super Natural impact was more or less the same.
Unidentified Analyst
Okay. Great.
And, in terms of the U.S. specifically, which channels are you guys seeing the most expansion, in which channels are you more excited about over the next 12 months?
Yosef Shiran
I think that in general, our growth in the States is related this year around 50% to new home starts. Today, 35% through remodeling and about 15% through commercial, so of course new home start supports these trends.
On the other hand the repair and remodeling is not growing in the markets, not for us, and commercial is also not growing so much in the market. So, we are enjoying of course the new home start in the residential area, in the multistory building and in the houses.
And also, we are benefitting from the material conversion and the quartz increasing penetration in all of the segments, so this is what we see in the space. Basically, not much different from what we saw at the beginning of the year.
Unidentified Analyst
Okay. Great.
Then just last question on the gross margins. Just going back to that for a second.
You guys were up 44.8% this quarter. Is that something that you think is at level where you can maintain it for the rest of the year?
Just given that, I think last year as we went through the quarters, you saw your gross margins pick up and there was seasonality in the second and third quarter. Is that something that we can expect this year as well?
Yosef Shiran
I think, we are providing the EBITDA numbers and the gross margin, which is derived from these numbers is what we currently believe that we can achieve or whatever it will be, so just according to the policy, we cannot provide gross margins' or operating margins' projection.
Unidentified Analyst
Okay. Great.
Thank you.
Yosef Shiran
Thanks.
Operator
We'll move next to John Baugh with Stifel Nicolaus.
John Baugh - Stifel Nicolaus
Thank you. Terrific quarter.
Great start to the year. Quickly on Super Natural, when you introduced that and we saw the product being made for the first time, your production speeds were slow and you pricing it at a significant premium.
I am curious as to whether your speeds or yields have improved and your thought process about pricing going forward.
Yosef Shiran
So, I think, overall every new product and of course specifically with new technologies, sometimes it takes time until production process is matured and you can reap all the benefits from it and then yes we did have quite a tough start last year. It was reflected in Q4 results, and we are improving with the time.
So, what you see here, the impact of the Super Natural in Q1 you see two things. One, you see that we are selling more of it at least for the time being and also the improvements in the production rates and methods of total products.
John Baugh - Stifel Nicolaus
And, Yos, how do we think about maybe longer term to next two to three years about how this product line, because it's just getting introduced in the U.S. if I understand correctly.
I assume, we'll see it in New York in a couple of weeks here, but how do we think about this product line influencing overall both, revenue and gross margin through time. And, again, sort of getting back to the pricing question where you remain at a significant premium to your core product line.
Thank you.
Yosef Shiran
John, I don't think I am able to reply in detail to the question. Overall, I think, the idea is to present superior products and to understand the demand curve and to play it right in the market and this is demonstrated with Super Natural.
We will continue to launch additional products of this nature and of other nature, and we believe that the quality that we are developing definitely will help us to improve our performance, again, as far as this related. And avoiding all other matter that's could or could not, I mean I don't know what will happen in the market and all the other thing, but this is specific, I mean the market externally not Caesarstone, so specific products, you will see more products of this nature and also new products and I believe that this strategy is the right strategy and it supports Caesarstone, and the brand and the performance.
John Baugh - Stifel Nicolaus
Maybe lastly, if you could comment on two things? One, any changes in raw material outlook.
And then secondly, is there ample supply inventory of Super Natural in the United States, and is that launch in the U.S. more or less on the timing path that you had outlined.
Thank you.
Yosef Shiran
So, for the Super Natural, we started to launch the Super Natural in the States in March, and the progress is very good so far, so I don't know if have not managed to see it in New York, so maybe we can refer you to some more specifics, but it's available in the market not to full extent. It takes time until the launch to the whole country will be completed, but this is in progress.
In terms of raw material, we don't see any major changes. John?
Yosef Shiran
Thanks.
Operator
(Operator Instructions) We'll go next to Peter Lisnic at Robert W. Baird.
Peter Lisnic - Robert W. Baird
Good morning, gentlemen.
Yosef Shiran
Hi. Good morning.
Peter Lisnic - Robert W. Baird
First question is the quick modeling one. Tax rate looked a little bit higher than we had modeled.
What's the outlook for tax rate as we look to 2013 for the rest of the year?
Yair Averbuch
Yes. So, as I mentioned, we had kind of one-time adjustment this quarter of $0.5 million related to the adjustment of our deferred tax assets related to the reduced tax rate in Israel, so (Inaudible) if you take into side, the tax rate this quarter is being 12.9%, and I believe that we are anywhere between 10% to 15% range for the rest of the year.
Peter Lisnic - Robert W. Baird
Okay. Great.
Then if I look at the gross margin expansion, very nice expansion versus last year. Strong start to the year.
As you start to ramp capacity or put in some of the new capacity additions here, how should we think about your ability to expand gross margins relative to either last year or prior levels? What sort of impact should we kind of be thinking about in terms of cost when it comes to some of the capacity additions as you start to put those on the ground?
Yosef Shiran
Yes. When we built the new line now in Israel, first of all, we captured some expanses ahead of time.
We hire people ahead of time, train them and do a lot of investment before the line is fully equipped and this is taken into account within our guidance. We do expect that when we open a line there is a temporary inefficiency at the beginning, because these aren't just open it and running full.
[Deliverabilities] will be minor and short in term. So, and again this year I don't think that there will be a significant impact.
I expect that there will more significant impact when we open a production facility in the U.S.
Peter Lisnic - Robert W. Baird
Okay. And, is there any way that maybe give us at least some color commentary on how significant might be when that U.S.
production is begun?
Yosef Shiran
We didn't quantify it externally, but on the other end you should remember there are other factors such as Super Natural, a new product mix and there is volume leverage in general on both, margin and operating expenses. So, overall, I hope that we will be able to continue and maintain strong EBITDA margins.
Peter Lisnic - Robert W. Baird
Okay. And, then if I remember right, you are kind of at the early days with an ERP implementation.
Was there any cost that you've booked for that in the first quarter that didn't quantify or what the impact might be for the rest of '13 would be helpful as well.
Yosef Shiran
So, we did go live in Israel and in Canada at the beginning directly with our new ERP system, and so far it was kind of a construction in progress, so to speak accounting wise and we'll start depreciate it now, so that will become [increasing share] and its goal with that, and I believe that there will be certain expenses to bring it up to the level that we want. When you launch an ERP, you still have some work to do and to improve it.
So, there will be some of it and again it's all baked into our guidance.
Peter Lisnic - Robert W. Baird
All right. Thank you.
That was helpful.
Yosef Shiran
Thanks.
Operator
And that does conclude today's conference. I would like to turn it back over to Yosef Shiran for closing remarks.
Yosef Shiran
So, thank you everyone for taking the time for the call today. We are very pleased that we started the year with a good quarter and think we have an excellent opportunity to sustain a strong business and an ability to create value for our shareholders.
We are looking forward to talking to you again, and have a good day.
Operator
And, that does conclude today's conference. Again, thank you for your participation.