Nov 4, 2015
Executives
Allison Cain – Vice President, Investor Relations-ICR Yos Shiran – Chief Executive Officer Yair Averbuch – Chief Financial Officer
Analysts
Michael Rehaut – JPMorgan Mike Dahl – Credit Suisse John Baugh – Stifel Stephen Kim – Barclays Capital Susan McCrory – UBS George Staphos – Bank of America Merrill Lynch Michael Weisberg – Crestwood Capital
Operator
Good day and welcome to the Caesarstone Third Quarter 2015 Earnings Conference Call. Today’s call is being recorded.
And at this time, I would like to turn it over to Allison Cain of ICR. Please go ahead ma’am.
Allison Cain
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 third quarter earnings release, which is posted on the company’s investor relations website.
With that, I’d like to 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 third quarter.
I would like to start with some highlights. Sales in the third quarter increased 11% to a record of $136.8 million.
Third quarter adjusted EBITDA was $36.2 million, slightly above last year’s record level. Adjusted net income for the third quarter was $24.4 million, and our adjusted diluted earnings per share was $0.69.
This was a good quarter. We sell double-digit revenue growth.
On a constant currency basis we grew our third quarter revenues by 23.8%, the fastest growth of any quarter of this year-to-date. Every region grew by 20% or more on a constant currency basis with the exception of Israel our most mature markets.
In the United States our largest market we grew our business by 22.2% over the same quarter last year to $61.7 million. Our core business growth in the U.S.
remains solid and we expected to show healthy growth next quarter. However lowering our overall U.S.
expectation for the fourth quarter to reflect approximately $5 million of floor focused sales through IKEA. This is related to IKEA’s operational factors connected to sales event timing which we see as temporary.
Sales in Canada grew by 16.9% to $19.8 million or 40.7% on a constant currency basis. This rapid increase reflects continued strong performance in general and the positive impacts of IKEA Canada, which we began selling through in the first quarter of this year.
Australia sales were down 5% to $29.3 million, a growth rate of 21.3% on a constant currency basis, this growth rate is a result of our new product success and strong growth in new housing completions. Israel sales was down 5.3% in the quarter to $10.6 million, but was up 5.2% on a constant currency basis, this is a good performance for this developed market.
We’re pleased to see a significant increase in Europe, which was up 14.9% to $7.1 million and up 36.9% on a constant currency basis. I will point out the third-party business tends to fluctuate.
Revenue in the rest of the world was up 8.5% to $8.4 million in the third quarter, up 26% on a constant currency basis. We are ramping up our U.S.
manufacturing facility in Richmond Hill, Georgia, the first line in the U.S. is now operating at the higher pace and the second line is now in commission stage.
This facility supports our growth, removes capacity constraints and enables us to better serve the U.S. market.
We are endeavoring to allocate production efficiently across our global manufacturing footprints, while bouncing cost and time to market considerations. As you know there are some recent tech changes to our board of directors, we believe that we have a stronger board as a result of these changes.
Our annual general meeting including the election of directors is set for December. Maxim Ohana has been our Chairman since 2010, a period during which we achieved many remarkable milestones.
Maxim has decided to step down from the board to facilitate the election of new Independent Chairman. On behalf of our board, I would like to extend our thanks and appreciation to Maxim.
Maxim faithfully served the company as a chairman, was committed to the best interest of the company throughout his service and was an important contributor to our leadership and success. The new proposed board includes majority of independent directors, one of [indiscernible] will be the Chairman and another will be an experienced American executive Ron Kaplan the former CEO and the current Chairman of TREX.
Recently we’re informed by the Kibbutz that they would like to propose an alternate slate of directors including similar slates with two different independent directors, our board will consider this Kibbutz initiative. Finally, I would like to address the recent [indiscernible] against our company, we were surprised by their unfounded allegations constituting the deliberate attempt to unfairly damage the company and to our, our shareholders while at the same time [Indiscernible].
Caesarstone is a strong global company, we are leading the quartz evolution worldwide with our powerful brand, [Indiscernible] high quality, innovation and inspiring design and excellent services. We have a strategy to capture a significant opportunity for growth and profitability.
We have wheeled and maintained a very solid balance sheet to support this strategy. We financed our U.S.
investment by our own cash flow from operations. We are proud of what we have built here and taken the responsibility to create value to our shareholders very seriously.
We believe that our continued efforts to grow our business with transparency and consistency will enable our shareholders to benefit from their investments in our company. Thank you again and I will now turn the call over Yair.
Yair Averbuch
Thank you, Yos and good morning to everyone. I will start with our income statement for the third quarter.
Sales in the third quarter increased to a new record of $136.8 million, up 11% compared to $123.3 million in the third quarter of last year. On a constant currency basis, sales increased by 23.8% versus last year.
Gross margin in the quarter was 39.5% compared to 43.7% last year. As we anticipated the decrease was primarily driven by approximately 300 basis points of unabsorbed cost related to the early stage of production in the U.S.
manufacturing facility. We also saw approximately 300 basis points of pressure [ph] from exchange rate.
These two factors will partially offset by favorable product mix in lower polyester and quartz cost relative to last year. Operating expenses in the third quarter were $29.4 million including a $4.7 million non-cash expense related to silicosis claims we have in Israel.
Excluding this non-cash expense operating expenses would have been $24.7 million, 18% of revenue versus $22.7 million last year, which lesser than 18.4% of revenue. This slight improvement in percent of sales was due primarily to scale benefits.
Operating income was $24.7 million or 18.1% of revenue. Excluding the above mentioned non-cash expense, operating income would have been $29.4 million or 21.5% of revenue as compared to $31.2 million or 25.3% of revenue in the third quarter of last year.
This was primarily a result of the lower growth margin. Adjusted EBITDA in the third quarter which eliminate the impact of share-based compensation, the excess cost of acquired inventory, legal settlements and loss contingencies expenses and other non-recurring items, was $36.2 million $300,000 above last year, this was a margin of 26.5% versus 29.1% last year.
Finance expenses in the third quarter were $100,000 compared to finance income of $1.0 million in the prior year. The change versus last year was primarily due to a lower net gain related to our currency derivative instruments, which offset some of the unfavorable exchange rate fluctuations.
Our taxes in the third quarter were $4.2 million 70% of income before taxes compared to 15% rate last year, the increase in tax rate is mainly due to higher tax rates associated with our New York manufacturing operations. Adjusted net income attributable to controlling the interest in the third quarter was $24.4 million compared to $27 million of last year.
Adjusted diluted earnings per share in the quarter were $0.69 on 35.5 million shares compared to $0.76 on 35.4 million shares last year. Turning to our recent balance sheet, we had cash, cash equivalents and short-term bank deposits of $52.6 million, up $14.9 million from June 30th cash balance.
Our cash flow from operations grew to $28.5 million in the third quarter of 2015 compared to $20.2 million in the previous quarter. I would note the beginning with this first quarter capital expenditure related to the U.S manufacturing facilities are flowing down and we are beginning to generate significantly more free cash flow.
Into [Ph] the $4.7 million of non-cash expense, this expense was recorded for all the silicosis claims that’s we have been subject to in Israel [indiscernible] for number of years other than [indiscernible] status. In the third quarter and thereafter there are current certain development this legal recording of this expense.
These developments include our consent to settlements. In addition we entered this to an agreement with the state of Israel related to the silicosis claims not including the claim seeking [Indiscernible] struggles, under the agreement we’ve also meeting [ph] any liability, we anticipate that agreed to cooperate in dealing with claim, it’s easier way of the state Israel, is form liable for damages we have agreed appointment of those damages.
Overall we believe the agreement was the same would enable us to manage more effectively to silicosis claims and to reduce our exposure. The $4.7 million is the estimate of our total earnings shares exposure.
With respect to 2015 guidance we believe we will offset a lower IKEA U.S. contribution in the fourth quarter and the continued negative interest of exchange rate with strong performance [indiscernible].
Therefore we’re going to expect 2015 we have been in the range of $497 million to $502 million. In full year 2015 adjusted EBITDA we have been in the range of $125 million to $128 million, both are the nearest ranges within our previous guidance.
Thank you and we are now ready to open the call for questions.
Operator
[Operator Instructions] We’ll take our first from Michael Rehaut with JP Morgan.
Michael Rehaut
Hi, thanks, good morning everyone, a nice quarter. The first question I had was on the guidance regarding the U.S.
and the mentioning of the $5 million of sales related to IKEA, it’s certainly a positive that you expect to offset this in the FX by strong performance elsewhere. Just wanted to better understand, I didn’t hear fully what the issue was around the $5 million hit and from a – if you were to exclude that hit or we’d think that the U.S.
would grow in 4Q similar to 3Q or would have even grown at a stronger rate?
Yos Shiran
Hi Mike. So what we can say about the IKEA and of course, we cannot elaborate too much about it, but they have their own considerations which and this get not related to us.
And it’s mostly has to do about events that it do from time-to-time. So these events were postponed and we’ll be renewed next year in the beginning of next year it takes sometimes from the event until we can get the benefit of it.
And it’s very important to the amount of our sales there. Now the reason for that is nothing to do with us, but anyway we are connected to it.
So this is the IKEA story. And again just to mention that we see this relationship very beautiful and benefiting for both parties.
And as we said we expect to be temporary and we’ll benefit from this more next year. Now as you mentioned of course, we also happy that we can cover this from other places and also from our strength in the U.S.
And to your question about Q4, if we are looking at our core business without IKEA industries, so Q4 is expected to be the strongest this year. So…
Michael Rehaut
That’s from a growth rate. Yes, when you say strongest you mean from a growth rate perspective?
Yos Shiran
You’re right. It’s good.
Sorry.
Michael Rehaut
Yeah.
Yos Shiran
From a gross rate perspective this will be the strongest not from absolute dollars.
Michael Rehaut
That’s helpful. Thank you.
And when you say events, I assume you mean promotional events done by IKEA?
Yos Shiran
Promotional events. Yeah.
Michael Rehaut
All right. Okay.
Second question was just on the silicosis non-cash charge and I appreciate the detail here. What I wanted to understand was, if you want to look at the – from what I understand this is all related as you described in your statement here related to claims not associated with the class action.
I just wanted to understand number one, is this only related in the claims in general are really only concentrated in Israel number one from both the class action and those outside of the class action? And number two, in terms of the totality of the claims that you have at this point.
Has that number changed at all this year versus last year, if you could give us a sense of whether or not, because this is obviously been something that’s been fully disclosed and really hasn’t changed that much from a risk standpoint for the last three years. And I just wanted to make sure I understand that whether the total amount of claims, have they changed at all, and is this just more of a maneuvering to deal with certain claims that are outside of the Class Action?
Yair Averbuch
Yes, all the claims that’s we have in Israel including the Class Section there is nothing outside of Israel. And [Indiscernible] covers all the claims outstanding today except for the Class Section.
In our 20-F we have been providing that about claims that’s we have submitted every year. Do you feel there are additional claims we would probably give details about within the next 20-F, but the Israel to [Ph] certify those expenses, we certified with closure for everything that is outstanding today.
Yos Shiran
Just to mention that the – it’s not the Class Section, it’s the emotion to be recognized in the Class Section and we believe we have the strong defense against it.
Operator
And we will take our next question from Mike Dahl with Credit Suisse.
Mike Dahl
Hi, thanks. Just for my first question a follow-up on that last comment, sorry, did you say that this charge fully covers all outstanding claims as you’d estimate them today, or was that all of the individual claims, sorry if I miss that clarification?
Yos Shiran
It covers all the individual claims, it covers filed in the Israeli court, because it is earning short, so that’s what it covers. The claims that, we have notion to be recognize as Class Section is not part of it, as I said before.
Mike Dahl
Got it, and I guess to be clear on the agreement with the state of Israel this now represents your maximum liability under those claims, would that be accurate individual clams?
Yos Shiran
According to the estimation that we did in a duly manner, this is what – the lawyer that has to assess every claim one-by-one, so this is after a work that was done on each claim.
Mike Dahl
Okay. And then shifting to the U.S.
side, so one clarification there as well, yes, when you said U.S. would be the strongest growth rate in the fourth quarter IKEA, can you give us any sense of magnitude since, obviously the first three quarters were impacted by some of the ups and flows in the IKEA business.
So what type of growth rate should we really be thinking about, because that would really be helpful as we think forward to next year and if we get these events back, but just quantification of what that IKEA business is growing?
Yos Shiran
So first of all the IKEA might not [Indiscernible] allows us, which we are suffering in there, in the fourth quarter will impact the overall U.S. growth for us, so this is just a beginning there.
We speak about the core business here just a signal that we feel very good that this the core business is very healthy and more than that, I really can’t get into much details, because then I will get into the IKEA number exactly and as you know we cannot do and we don’t breakdown, but in general, I give you the direction, but the growth is healthy.
Operator
And we’ll take our next question from John Baugh with Stifel.
John Baugh
Thank you. Good morning.
My first question is on the plan start up– yes, I think you have guided us to and around $10 million drag for the year. Where do we sort of sit through Q3 it’s the first question and with 9 months in the book, so we are still looking at $10 million for the year.
How do we think about where start up drag peaks, did it peak in the third quarter or is it seeking fourth quarter and going into next year, any color on that particular issue?
Yair Averbuch
Yes, so overall the annual impact on our EBITDA taking aside depreciation is still around $10 million slightly above $10 million. In Q3, as I mentioned it was around 300 basis points of gross margin which include the depreciation part.
I assume that closing to what we see there isn’t much difference on the impact between Q3 and Q4.
John Baugh
Okay.
Yair Averbuch
There isn’t [ph] much difference.
John Baugh
And then any…
Yair Averbuch
Going forward for next year we have also quantifying on this thing, we expect that the ramp up of the U.S. facility will of course reduce this impact slight a bit.
John Baugh
Okay, and that’s helpful, I appreciate it, is there any color around, I think with the $13.4 million item on the balance sheet that related to the legal settlement and I believe that’s a new line item, could you discuss that in the context of the four points that mainly are charged?
Yair Averbuch
Yes, sure, and so according to the U. S.
debt, the full liability amount that recorded on the balance sheet and then to the extended insurance payments are highly certain then there is an offsetting effect that is also recorded, which is the way we created this, so what you’ve seen in the balance sheet, you see $13.4 million in long-term liability related to this exposure and it’s around $1.1 million in short-term liability, so all together there is lot of exposure as we estimated today, related to all declines except the one that [indiscernible] to be CapEx and is in total $14.5 million, on the other end we reported long-term and short-term receivables of $8.7 million long-term and $1 million short-term respectively for a total of $9.7 million, which representing insurance payment, so the difference between the $40.5 million and the $9.7 million is $4.7 million which is what we recorded as an expense.
Operator
[Operator Instructions] We’ll take our next from Stephen Kim with Barclays Capital.
Stephen Kim
Thanks very much guys. So I just – yeah, here if I could follow up a little bit on John’s question just about the drag in the U.S.
from the Richmond Hill facility ramping, I think you’ve indicated it wouldn’t be that much different from the 300 basis point drag that you saw in 3Q in 4Q it would be similar but in terms of the timing of when we might able to expect to see that drag moderate, is it your expectation that we would see that drag moderate as quickly as the first half of next year or is it something which is going to take longer, if you think?
Yos Shiran
No, I think it’s imposing quarter – quarter next year.
Stephen Kim
Okay.
Yos Shiran
And I see this plant that are all contributing the next year to our review, as a percent of loan operation.
Stephen Kim
Got it.
Yos Shiran
Yeah, I think in next year our plan is to produce much more in the U.S. and we produce this year of course, because we’re just starting this year and we’re ramping up as we said in the line 6 and line 7 is non-commissioning and we’ll also have next year.
So it will be a different picture totally different picture next year regarding the U.S. facility.
Stephen Kim
Got it. Okay.
And then in the U.S. well overall we saw your inventory levels moderate a little bit sequentially.
And I was curious sensitive whether you could share with us just generally in the U.S. not by specific product line, but may be supernatural or versus high end versus lower end, if you could talk a little bit about what you are experiencing in terms of demand trends or delivery times have they extended for some products more than others and overall impact on the inventory levels you recorded.
Yos Shiran
Inventory is one thing, so I will divide it to two. The inventory levels are going down also because of course the help that we get from our factory in the U.S.
which allows our sales land to reduce inventories and react faster. So this is one thing and we are working on reducing the inventory, which of course has also the cash flow.
In terms of new products, we are continued to launch new exiting products. We are now going to launch new product afford to define the upper end of the Supernatural sometimes we call it the usual natural [ph] mainly none as the Calacatta and Statuario, now there is a new one we call it Statuario Maximos [ph] which will be launched next year all over the world and it looks very good.
May be more importantly we are not in stage to intent to launch more targeted collections next year for the American market, which we also expect to have positive impacts on our performance in this place and in general of course. In terms of competition, the gross market is growing and this is very positive with the growth also the competition is growing, which is also in some way positive, but also we should adapt we should make sure that we maintain the margins and then the profits and in general we are welcoming competition.
So we see competition of course in the low end, which we less care about because we are more focused in the mid and high range, but also there is competition and there have always been competition, but it’s getting tougher and we are getting better.
Operator
We’ll take our next question from Susan McCrory with UBS.
Susan McCrory
Good morning.
Yos Shiran
Hi, good morning.
Susan McCrory
First of all I will talk a little bit about the change in the board. You noted that your Chairman is going to be stepping down to midway for new independent [Indiscernible].
Can you talk a little bit about his decision to do that why now? And then you also mentioned that the Kibbutz has been purposively a new initiative for the board.
Can you talk a little bit about that as well?
Yos Shiran
So Maxim, our Chairman as we said he decided to step down and he will be replaced with an independent board member from our current independent board of directors. And in addition what I think is also he was important for us is to bring to the board to be elected of course an American Director and we brought Ron Kaplan from TREX and this again we see as a very positive step in improving our board.
The Board will be consisted according to the current offer of nine directors. So this is to what our board has decided and we filed of course 6-K for that and we’ll be in general assembly in December.
The Kibbutz very recently send a letter to us and notified to offer a different slate of board members including the same members proposed by our board except for two different independent directors. So our board will need to consider this Kibbutz initiative and of course, we’ll need some time to assess and see what does it means and how to react to that.
Susan McCrory
Okay. And then you mentioned that your cash flow is improving.
And as we look to next year in the U.S. plant it’s fully sort of operational and up in running.
Can you talk about how you think about your uses of free cash going forward?
Yos Shiran
I believe that we really continue to generate strong cash flow from operation and given that our CapEx will go down dramatically compared to this year that will increase our free cash flow, it should.
Operator
And we will take our next question from George Staphos with Bank of America Merrill Lynch.
George Staphos
Hi everyone, good day, just wanted to come back to two things, one on silicosis and then the other on the board to start, so I just want to understand the $50 million or so of liability that’s on the book represents your best estimate of claims to-date, however and excluding the claims associated with the potentials class actions, but to the extent that there might be future claims, have you incorporated those in your estimate or would those be incremental, should any arise?
Yos Shiran
No, any future plans that may come or may not or nothing included in this exposure.
George Staphos
Okay, fair enough. And the related point that I had here on that is as I recall your maximum insurance coverage was around $10 million and at some point it was going to trend to $5 million on annual basis, did I recall that correctly and if not could you give us an update in terms of what your coverage is year-by-year?
Yair Averbuch
It seems exactly this year.
George Staphos
I’m sorry, I didn’t hear that what was that?
Yair Averbuch
Yeah, it seems exactly in 2015.
George Staphos
Yes.
Yair Averbuch
The $10 million of potential damages related to silicosis on the company, we’re slightly insured for this disrespect, after the $5 million we have an additional global insurance of $35 million covering our exposure globally with certain limitation on timing and damage occurrence, in addition to that and discounts we will be deductible around and it’s not around exactly 125,000 [indiscernible] above that in this region Israel, Canada and U.S. we have additional coverage for those regions so there is something for [indiscernible] if there is a claim in the U.S.
then I will cover if it’s throughout the regional coverage that we have in the New York and then we have the 35 layouts from the global umbrella.
George Staphos
Okay, that’s helpful, I appreciate that, and then other question I had to extent that you can comment and you might not be able to. The Kibbutz’s slate of director you said the only difference is their choice of the two independent directors.
Can you comment as to who those two independent directors are or why they were not in agreement with your choice? Thank you.
Yair Averbuch
No we don’t know.
George Staphos
Okay. Thank you.
I fell turn it over.
Yair Averbuch
Thank you very much.
Operator
[Operator Instructions] We’ll take our next from Michael Rehaut with JPMorgan.
Michael Rehaut
Hi, thanks. Just a couple of clarifications.
Number one on the startup cost that you mentioned slightly above $10 million for this year. I just wanted to be clear given the fact that you will have next year the second line I guess starting to come up.
Did you say that you expect 2016 in aggregate to have a less startup costs than 2015, and if there is any way you could quantify the magnitude of that?
Unidentified Company Representative
What I said is that the unabsorbed cost from the U.S. manufacturing area will should be a loss less in the effect on our EBITDA margin should be a lot less than this year.
We also believe that the plant itself will contribute EBITDA to our total performance unlike this year. And as far as specific quantification we assume to rolling out our annual plan and it’s a bit too early to talk about it exactly in the next earning call which we will probably, but I will be in better position to discuss it.
Michael Rehaut
Okay, thank you. And then just also again on the two independent directors that the Kibbutz is proposing in contrary to you just to be fully clear.
The difference is on these two different directors, the Kibbutz is still proposing obviously, these two different directors are still independent they are just two other independent directors than the two that you proposes. Is that correct?
Unidentified Company Representative
Yeah, it’s a same slate apart of two independent directors, but they are proposing two different people than what was proposed by our Board.
Michael Rehaut
Right and those two other people are also independent?
Unidentified Company Representative
These two people are also of course, they’re also independent and they’re from Israel and the yeah….
Michael Rehaut
Okay, thank you.
Unidentified Company Representative
They are proposing, two independent from Israel, instead of other two independent from Israel, is what they’re proposing.
Michael Rehaut
So they’re in agreement with the proposal of Ron from TREX?
Unidentified Company Representative
Yeah, yes, yes.
Michael Rehaut
Okay, great, thank you.
Operator
We’ll take our next question from Stephen Kim with Barclays Capital.
Stephen Kim
Great, thanks. Yeah, just to sort of follow-up, I just want to make sure that with the IKEA temporary impact is that I understand it clearly, it sounds like this is going to have a drag effect on your 4Q which you’ve indicated but am I correct in interpreting your remarks to suggest that in the first part of next year, let’s say maybe in the first quarter you would actually see that, you expect that promotion to be restarted at that point that would – you would basically take what’s the $5 million drag was in 4Q and it would actually be a benefit to 1Q, am I interpreting your remarks correctly there?
Yos Shiran
I think most of the benefit will start on second quarter.
Stephen Kim
Okay.
Unidentified Company Representative
Because the event starts in Q1 by [indiscernible] until we benefit from that it takes a bit and we expect a strong business with them next year.
Stephen Kim
Okay, and then again just simply make sure that I heard everything correctly, you’ve indicated that the year-over-year growth rate excluding this IKEA fact which is roughly 10,00,000 [ph] basis points let’s say the growth rate, excluding that would have been the strongest year-over-year growth rate this year, you did in 27% or so in the first quarter or they’re 27.5% in the U.S. year-over-year growth so essentially what you’re implying is that had a non-win for this 1000 basis point impact in 4Q your growth rate in the U.S.
would have exceeded 27.5% year-over-year growth, is that essentially is what you’re trying to say right?
Unidentified Company Representative
Well, not exactly because the 27.5% was including IKEA so, what we’re saying is that excluding IKEA this will be the fastest growing quarter for us on a year-over-year comparison.
Stephen Kim
Got it, would there be any reason to think that $5 million quarterly run rate benefit was different than 1Q of this year I mean was it fairly, would that be a fair guess?
Yos Shiran
Yes, that’s in progress.
Stephen Kim
Okay, thank you, that’s very helpful.
Yos Shiran
For the good sales events.
Stephen Kim
Okay. And since we’re in the sort of the additional question period.
Can I ask a couple of more questions or do you want me to get back in queue.
Yos Shiran
No you go ahead and ask.
Stephen Kim
Okay. So we just had a question regarding the claims are made that Yos made in your opening remarks the comment that that you felt like the claims that were made against you by or the charges allegations made by an investor were [indiscernible].
I was curious as to whether the company has considered taking legal action. You sort of alluded to it in one of your documents earlier, but I was wondering if you had consider that where that stands have you decided against that or where does that stand now.
Yos Shiran
I think that it’s a possibility it’s on the table in terms of the timing we have to take also other considerations. And of course also waited on effort to reward, but it’s definitely something that’s I think we’ll consider with the time when the time is right.
Operator
And we’ll take our next question from Michael Weisberg with Crestwood Capital.
Michael Weisberg
Hi, everyone. Just a clarification if I could.
You mentioned that [indiscernible] will be EBITDA positive in 2016. Does that including the startup costs or is that before the startup cost next year.
Yos Shiran
Including everything or inclosing?
Michael Weisberg
Including everything.
Yos Shiran
Yeah.
Michael Weisberg
That’s great. The board that you are proposing has a majority of independent directors.
Is that right?
Yos Shiran
Sure, you said to be an exact and it’s a six independent.
Michael Weisberg
So its six independents and three members of the management of Kibbutz.
Yos Shiran
Yeah.
Michael Weisberg
That’s great. Thanks very much.
I appreciate it.
Yos Shiran
Thank you.
Operator
And we’ll take our next question from Mike Dahl with Credit Suisse.
Mike Dahl
Hi, thanks for the follow-ups. Just wanted another clarification on the IKEA relationship and I know they’ve been you haven’t necessarily had advance notice in terms of these sales events being cancelled or postponed this year.
So just to confirm it sounds like from your comments they have notified you that they will definitively resume these activities in the first quarter. Is that correct?
Yos Shiran
First of all I would like to emphasize, they don’t – it’s not that – it wasn’t planned and it wasn’t sure that this will be the case. Okay, so and again I cannot elaborate on – and it’s not a big deal by way, but I cannot elaborate on the reasons for that.
But according to what we know now it will be resumed in the first quarter.
Mike Dahl
Thanks and separately from IKEA, because it does seem like you have had success ramping up the growth rate. Can you talk about in the U.S., I know you’ve mentioned some of the product rollouts, but anything in terms of channel penetration or expansion, what’s been more successful for your over the past several months than it had been in 2Q?
Yos Shiran
So, I think overall as I said we are working diligently in the United States to increase the sales and this includes among other things taking care of different segments, fine tuning the distribution launching new product and more importantly new targeted products for the American markets and of course other things. So, and as I said also big bunch of things that we are doing and I believe that would bear fruit next year, but even before that the business is solid and as I said the growth rate in Q4 compared to last year is the best – it’s expected to be the best so far this year.
Mike Dahl
Okay, thanks.
Yos Shiran
Thank you.
Operator
We will take our next question from George Staphos with Bank of America Merrill Lynch.
George Staphos
Hi guys. I just wanted to perhaps pass gross margin a little bit, to an extent again possible.
So I think you said, I just wanted to confirm the start-up expenses with the Richmond Hill – 300 basis points that was in line with your expectation, better than your expectations, worse than your expectation. If you could provide some color there.
And then you said, if I remember correctly that inputs and mix were partial offset increases to gross margin. Can you comment us to whether you got more benefit from mix or more benefit from raw in the quarter?
Thanks and good luck in 4Q.
Unidentified Company Representative
The impact of the unabsorbed cost of the U.S. manufacturing operation was pretty much in line with what we had expected entering to this quarter.
What was not in line with our expectation is the effects that continue to drag on us and make it, although with regards to the benefits on the other side, product mix was slightly – had a slightly big positive impact than the raw material cost.
George Staphos
Thank you.
Operator
We will take our next question from Michael Rehaut with JPMorgan.
Michael Rehaut
Thanks for taking my follow-up or second follow-up, just I guess a clarification on previous question that was asked around the 4Q growth rate in the U.S. versus comparing it versus the first quarter.
Just want to make sure that we are on the same page here, again, if you were to exclude the $5 million, the U.S. would grow faster than 28%, is that what you are saying or not and if not, what are you saying in terms of how you think about the first quarter growth rate?
Yos Shiran
Okay, I would say this [indiscernible] we need – when we fix closing IKEA we mean excluding IKEA in total, so first quarter this year, you have to remember that last year in Q1 2014, the business was just starting to ramp up so, it was very weak, so therefore Q1 this year for IKEA was quite a strong year. So, that’s what we mean.
When we say $5 million it’s what is the impact of this lack of sales events on our original – on our with this assumption about what will be the U.S. revenue in Q4.
Yos Shiran
So, let me maybe just say to that Mike, if I understand your question. So, what we are saying, we are referring to Q4 this year and we are saying that in Q4 because of the temporary issue with IKEA, we are having less $5 million in this specific quarter than what we thought we had before, so this is the change.
On the other end, if you exclude IKEA in the fourth quarter in just a matter co-business compared to co-business year over year, then we grow more, but the overall growth in the United States will be lower, so it will be lower because we are selling $5 million this in the next stage. So this is the demand if it’s clear enough, if not please, ask me again.
George Staphos
Okay, so can you give us a sense then of for this year excluding IKEA roughly speaking what has your core U.S. been growing, if you could give that in a rough range or would this be too specific to the IKEA relationship?
Yos Shiran
I think it would be too specific.
George Staphos
Okay. Alright, we can talk offline.
Yos Shiran
Yeah, thank you so much, thanks
George Staphos
Thanks.
Operator
And we’ll take our next question from John Baugh with Stifel.
John Baugh
Thanks for taking my follow-ups, the FX drag for the year, where does that number sum out, I guess on an EBITDA basis projecting currencies to the rest of the year similar levels?
Yair Averbuch
So year-to-date FX drag is around 2% - 200 basis points.
John Baugh
Okay, would that be similar you think in Q4?
Yos Shiran
No, I think in Q4 it may be higher.
John Baugh
Okay and then as it relates to line [indiscernible] I think you’ve talked about may be doing some prep CapEx – preparation CapEx for that in calendar 2016. Any update on that or is that really more in 2017 amount?
Yos Shiran
We are taking very – very, very initial steps towards it, so it’s we’re seeing in two ways and see what happens with the [Indiscernible] and then it gets to the 8 and 9, but we are of course we are prepared, but it’s not – it’s very initial steps.
John Baugh
Okay and then my last question is on 100 – I think it was $130 million of the total Richmond Hill capital spending number, I know that part of that was a showroom, I guess part of that land, I’m just curious what is being depreciated and how much is the depreciation expense for per year for the next I don’t know 5 or 10 years?
Yos Shiran
I would say [Indiscernible] based on, I don’t say we have plans now what will be depreciation specifically, but as a rule of thumb if you take 7% to 8% that is a good rule of thumb, because the land is not being depreciated. So generally what I’ve seen previously investment this is a good assumption.
John Baugh
All right. Thank you and good luck.
Operator
We’ll go next to Mike Dahl with Credit Suisse.
Mike Dahl
Hi, thanks. One more attempt, trying to get some color around the whole ex IKEA business, and so may be to frame it.
What was the strongest quarter so far to-date ex IKEA in the U.S., because our sense is once you wrap that first quarter comp the IKEA business would have been run rated and that your core growth in 2Q and 3Q would have actually exceeded the total growth that you reported in terms of the 19% and the 22% in 3Q. Can you give any color or confirmation around that?
Yos Shiran
I would just say that the core business have improved quarter-over-quarter steadily.
Mike Dahl
So 3Q would have actually been your strongest?
Yos Shiran
Yes, yes.
Mike Dahl
Okay. Thank you.
Operator
With no further questions in queue. I’d like to turn it back to you Shiran for closing remarks.
Yos Shiran
Okay, thank you for your continued interest in our company and we are pleased with the quarter’s results and look forward to sharing more with you next quarter and have a great day. Bye.
Operator
That concludes today's conference. We thank you for your participation.