May 6, 2015
Executives
Allison Townsend - ICR Yos Shiran - Chief Executive Officer Yair Averbuch - Chief Financial Officer
Analysts
Stephen Kim - Barclays Capital Ben Miller - UBS John Baugh - Stifel Nicolaus & Company
Operator
Good day and welcome to the Caesarstone First Quarter 2015 Earnings Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Allison Townsend of ICR. You may begin.
Allison Townsend
Thank you, operator and good morning to everyone. Certain statements in today’s conference call and responses to various questions may constitute forward-looking statements.
We wish to caution you that such statements reflect 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 most recent Annual Report on Form 20-F and subsequent filings with the Securities and Exchange Commission.
In addition, the company will make reference to certain non-GAAP financial measures, including adjusted net income, adjusted net income per share, and adjusted EBITDA. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company’s first quarter earnings press release, which is posted on the company’s website.
With that, I would like to now turn the call over to Yos Shiran, Caesarstone’s Chief Executive Officer. Yos?
Yos Shiran
Thank you, Allison. Good day and thank you everyone for joining us to discuss our first quarter.
I would like to start with some highlights. This was a record first quarter for sales EBITDA and net income.
Sales in the first quarter increased 14% to $107.8 million, continuing our growth trend. First quarter adjusted EBITDA was $25.5 million, up 16% compared to last year.
Adjusted net income for the first quarter was $16.4 million, up 19% versus last year, and our adjusted earnings per share of $0.46 is up versus $0.39 in the same quarter last year. The United States continues to be the main driver in our revenue growth with Canada and Australia also showing significant growth on a constant currency basis.
Caesarstone continues to be a market leader, which is reflected in the hasty demand for our range of innovative products. Now, I would like to give an update on each of our major markets.
I will start with the United States, where our sales grew by 27.6% to $48 million. The US continues to be our fastest growing market.
Canada grew by 18.7% to $13.9 million on a constant currency basis. Growth was even stronger at 32.1%, partially driven by our new partnership with Ikea Canada.
Australia sales were $23.4 million, up 9.6% compared to last year. On a constant currency basis Australia was up 25.6%.
We are pleased to see continued stronger trend also in this region. Israel was down 12.5% in the quarter to $9.9 million primarily due to a strong US dollar.
On a constant currency basis we saw sales down 0.7%. Europe was down by 1% to $4.7 million, and was up 17.9% on a constant currency basis.
Revenue in the rest of the world was up 2.9% to $8 million in the first quarter, and was up 19.1% on a constant currency basis. We’re progressing on schedule at our Richmond Hill, Georgia manufacturing plants in the United States.
We are pleased to have began commissioning for the first US line, and continue to expect it to become operational in this quarter. The second line at Richmond and our seventh globally is also on schedule and is expected to become operational in the fourth quarter of 2015.
We are excited about executing our capacity execution in the US to better service the continued demand we are experiencing. We have strong confidence in our ability to further develop the business going forward.
Thank you and I will now turn the call over to Yair.
Yair Averbuch
Thank you, Yos and good morning to everyone. I will start with our income statement for the first quarter.
Sales in the first quarter increased by 14.2% to a first quarter record of $107.8 million compared to $94.4 million in the first quarter of last year. On a constant currency basis, sales increased by 22.9% versus last year.
Gross margin in the quarter was 42%, compared to 41.5% last year. This increase was primarily due to favorable product mix, benefit of scale, and improved utilization of our production lines in Israel.
These factors were offset by negative exchange rate fluctuation, start-up costs related to our new US manufacturing facility, as well as continued growth from lower margin publication and installation revenue in North America. Operating expenses in the first quarter were $24.6 million or 22.8% of sales versus $21.9 million last year, which was 23.2% of sales.
Operating income grew by 20.1% to $20.7 million as compared to $17.3 million in the first quarter of last year. Our operating margin increased by 90 basis points to 19.2% from 18.3% last year.
Adjusted EBITDA in the first quarter, which eliminates share-based compensation expenses, increased by 15.3% over the prior year to a new first quarter record of $25.5 million. This was a margin of 23.7% versus 23.4% last year.
Finance expenses in the first quarter were $1.9 million compared to finance expenses of $1.6 million in the prior year. This increase was partially due to lower interest income as we utilized cash to fund our new US production facility.
Our taxes in the first quarter were $2.5 million or 13.1% of income before taxes compared to a 14.2% rate last year. Adjusted net income attributable to controlling interest in the first quarter increased by 19.1% to $16.4 million from 13.8% last year.
Adjusted diluted earnings per share in the quarter were $0.46 on 35.5 million shares. Adjusted diluted earnings per share last year were $0.39 on 35.4 million shares.
Turning to our March 31 balance sheet. We had cash, cash equivalents and short-term bank deposits of $41.1 million, down $13.2 million from the end of 2014.
This was driven primarily by $10.6 million of seasonal inventory buildup occurring in the first quarter and $19.8 million of cash consumed by capital expenditures, mostly for the US manufacturing facility. We expect our total capital expenditure related to the US manufacturing facility to amount to $130 million compared to our previous estimate of $115 million.
With respect to 2015 guidance, we are maintaining our revenue guidance for the year of $515 million to $525 million and our expected range of adjusted EBITDA for the year of $123 million to $129 million. Thank you.
And we are now ready to open the call for questions.
Operator
Operator Instructions] We will take our first question from Stephen Kim from Barclays.
Stephen Kim
Thanks very much. I wanted to first of all congratulate you on the strong quarter once again.
My first question relates to the gross margin, I was curious if you could provide a little bit of color as to maybe some of the things that could have been helping to derive that, for instance, are you maybe purchasing some raw materials in dollar denominations and things like that, if you can maybe provide a little bit of color behind the gross margin?
Yos Shiran
Yes. So on gross margin our product mix – our product offering was contributing around 300 basis points positively.
Volume was around 100 points and improved manufacturing efficiency in Israel was over 100 points, around 150 points. On the other hand FX was over 300 points negative, and the impact of the start-up cost in the US was close to 150 basis points.
In terms of raw material, we continue to buy both in US dollars [Indiscernible] mainly in Europe.
Stephen Kim
Okay, great. That’s actually very helpful.
Thank you very much for that. My second question relates to SG&A, I know that you have direct distribution in a number of markets, I was wondering if perhaps there was maybe some benefit from the strong dollar that flowed through on the SG&A line, is there any way for you to quantify what that impact was?
Yos Shiran
Yes, so FX – the FX saved us some money in SG&A because of the expenses in Australia and Canada for the most part, also part of Italy as well, around $0.5 million.
Stephen Kim
Half a million, okay, great. Thank you for that.
And then I guess my last question, sort of a general one, which is that, in the US at least mostly what we’re seeing with quartz is its success due to its performance benefits over stone and granite and things like that, and so a lot of the design that we are seeing from quartz has been stimulating stone products. I was curious as to whether you thought longer term there might be the opportunity for quartz to establish a trend or benefit from a trend in design, where you no longer just simply try to imitate or mimic stone, but actually venture forth into services that are – or designs that cannot be replicated by the natural product kind of like your Motivo where you have the [Indiscernible].
I mean, but that obviously wouldn’t apply well in kitchens, but I guess I was curious as to whether you think there is any opportunity there, if it is way too early or if you are seeing any early signs that you might be able to move into that direction, because that would seem to me to be a significant step up in the longer term opportunity for quartz?
Yos Shiran
So Stephen, I think that what drives the quartz revolution as I mentioned many, many times is mainly three things low maintenance, long-term beauty, and low [Indiscernible], and this does not has to do specifically for a specific design, the design which is inspired by marble or by granite is of course, doing very well. However, looking backwards, Caesarstone strength was much more in the uniform designs, which goes hand in hand in a way with minimal design closer to the [powerhouse] style for example.
So we have the ability to do all kinds of designs and actually we do today, and most of the sales are not coming from designs that are inspired specifically by stone, but more by color. And the – but the fundamental is the functionality.
So it is not just design. It is design and functionality, the combination of the two.
Stephen Kim
That is very helpful. Thank you very much for that, and best of luck.
Yos Shiran
Thanks.
Operator
And we will take our next question now from [Indiscernible].
Ben Miller
This is actually Ben Miller on for [Stu]. You talked in the last call that you are in the process of trying to find a source of quartz in the US to meet demands of the new lines in Georgia.
Could you just give us an update on that, and maybe if you could quantify how much you expect to save by sourcing from the US versus Turkey?
Yos Shiran
Yes. So, we are working on firming up our supply chain and we are definitely looking for quartz in the States.
But in the meantime, until we find a solid source we will continue to buy quartz from Turkey also – also to the States. So there is quartz in the States and some of it may be adequate for our production, but it needs additional work on it, either a small investments or heavy investments on the side of the producers.
So eventually I believe it is – it will happen, but it will take time.
Ben Miller
Okay, thank you, and then next, could you talk about the agreement with Ikea in the US, and as I understand this is – it is expected to expire in the end of 2015, do you plan to renew this agreement and maybe more broadly if you could just talk about that relationship, as you noted that it had a positive impact on Canada growth?
Yos Shiran
Yes. So the agreement at the moment in both Canada and in the States is until the end of ’16.
And there is no news to report on that end. I think it is going well.
We are trying to improve and to make it flawless and make it better for everybody. And we can experience – so, this is what we have at the moment to say about it.
I think, of course, Ikea recognizes the importance of countertops, and we will continue also on their side to try to give for the consumer the best they can. So, for the time being there is nothing new there.
Ben Miller
Okay, thank you.
Yos Shiran
Thanks.
Operator
[Operator Instructions] And we will take a question now from Michael Rehaut from JP Morgan.
Unidentified Analyst
Hi, it is actually [Indiscernible] on for Mike. I was just wondering if you could talk about the US for a minute, it looks like the growth is very impressive, 28%, but it looks like a little bit of a deceleration from the last couple of quarters even though the comp looks pretty similar, just wondering if there are any things that are [Indiscernible] that impacted the US maybe if you guys talk about the port strike on the west coast impact your result at all, if you could give us any color on the slowdown?
Yos Shiran
Yes. So, I will.
Growth in the US is close to 28%, obviously remains very strong. And growth last year was impacted by the Ikea ramp up.
We entered too many Ikea stores, so of course it has a strong impact. There has been no changes to fundamentals in the markets.
As to the port delays, there was an impact, but it was relatively marginal. Apart from that the market – the market looks good there.
Unidentified Analyst
Okay, can you tell us what the impact Ikea had in terms of how much it contributed to sales in the prior year and also this year?
Yos Shiran
We don’t provide these numbers for – and also for Ikea reasons and for our reasons. But it has some significance, of course, but as I said to the fundamentals in the markets stay the same.
In Ikea, of course, when you are entering to new stores and generate also a revenue from the installation and publication, it has a strong impact. Today we are – cooperate in all the 42 stores and the growth that happened there should be more or less in line with the market – with the rest of the market.
And in a way, it is a same-store sale today. Not like starting from zero.
Unidentified Analyst
Okay, great. Got it.
In terms of the gross margins, very impressive this quarter, and definitely above what you are looking for, what do you think is the sustainable levels for the year, do you think the 42% is something that you guys can do for the full year?
Yos Shiran
We gave a guidance on revenue and EBITDA and I would like to stick with that. I would just say that the opening of the new manufacturing facility in the US will have a bigger impact in the next quarter.
In Q1 it was minimal.
Unidentified Analyst
Okay. I got it, and then just lastly, the marketing and selling, and the G&A, those are relatively fixed expenses I would imagine, how much leverage do you think is possible just via growth, do you think you will have to increase G&A, marketing and selling as they go forward or you think these levels are pretty reasonable for the next couple of quarters into 2016?
Yos Shiran
No, we think that we grow in the US and in Canada and Australia, we continue to grow. We will have to grow our sales force and our cost structure, but it won’t be at the rate of the revenue growth, and we would expect to see leverage.
Unidentified Analyst
Okay, very good. Thank you.
Yos Shiran
Thank you.
Operator
And we will now take a question from John Baugh from Stifel.
John Baugh
Thank you, and good afternoon Yos, you had another great quarter. I was curious on what the – you gave the gross margin breakdown, the puts and takes, but you cited fabrication mix hurting, is there a rough gross margin basis point impact from that here?
Yos Shiran
They are around 100 points, slightly below 100 points, 100 basis points.
John Baugh
Okay, and just to be clear, is Canada with Ikea doing the same formula?
Yos Shiran
Yes, more or less the same.
John Baugh
I know you build inventory in the first quarter seasonally always, and like a lot of manufacturing companies, that is a good thing because your demand has been so strong. It is the sizeable increase year-over-year, and I was just curious whether there were any issues on the West Coast, the port strike relating to that inventory build or how comfortable you see moving a lot of that inventory as you typically do in the second quarter?
Yos Shiran
So, regarding the port, as I said there was some impact, but it was relatively small. And we definitely – usually we are building inventory in the first quarter to service the second quarter and the third quarter, and we are still little bit below our target inventories for Australia, Canada and the States, but we’re getting there.
So we have benefited from improved manufacturing in Israel, and hopefully in Q3 we will have also our new line that will help us. And again remember that we have today, with line number six, we estimate that we have excess capacity in terms of production as to service the immediate demand.
Of course we expect the future demand to grow, but we are okay with the immediate demand.
John Baugh
Great. Thank you for that color, and then the increase in the CapEx, is that for equipment, process, building, and then you will help us understand the spread maybe or the annual CapEx budget for ’15 versus say ’16?
Yos Shiran
Yes. With regards to the increase, it is actually a combination of a few things.
There are some improvement-related investments that got into the project. We also invested additional money to improve our environmental footprint that is extremely important for us.
So that played another segment role, but there was also some partial deviation from original budget that [wasn’t budget]. So the mix of those things.
John Baugh
Great, and then is there any change to your outlook for the total startup expense of the US facility on 2015 earnings?
Yos Shiran
No, I think that overall for the year I would say that it is more or less the same though in Q1 that was less tax, of course, than we originally estimated.
John Baugh
Okay, and my last question is on Australia, it seems like the economy there is slow, yet the housing market is quite strong, I’m just curious on any color in that market in terms of outlook? Thank you.
Yos Shiran
In Australia we benefited from positive market, increased quartz penetration and an improved product offering. These were the main factors for the growth in Australia, and we feel quite good with the three markets, the United States, Australia and Canada in terms of demand.
John Baugh
Thank you. Good luck.
Yos Shiran
Thanks.
Yair Averbuch
Thanks.
Operator
And we currently have no additional questions at this time. I would like to turn the conference back over to Yos Shiran for any additional comments or remarks.
Yos Shiran
Thank you. So thank you for your continued interest in our company.
We are excited about our business and are working hard to deliver continued growth. Have a great day.
Bye.
Operator
And ladies and gentlemen, this does conclude today’s conference and we do thank you for your participation.