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Caesarstone Reports 2019 Second Quarter Financial Results

August, 07, 2019
  • Quarterly Revenue of $141.1 million
  • Net Income of $6.4 million, or $0.19 per share
  • Adjusted net income of $7.9 million, or $0.23 per share
  • Adjusted EBITDA of $19.2 million
  • Began effectively executing Global Growth Acceleration Plan
  • Reiterates Adjusted EBITDA and updates revenue outlook for full year 2019

MP MENASHE, Israel--(BUSINESS WIRE)-- Caesarstone Ltd. (NASDAQ: CSTE), a leading developer and manufacturer of high-quality engineered quartz surfaces, today reported financial results for its second quarter ended June 30, 2019.

Yuval Dagim, Chief Executive Officer, commented, “In the first half of 2019, we have put in place our new core leadership team, initiated our Global Growth Acceleration Plan, and deployed execution teams across our footprint. In combination with the realignment of our North American region earlier this year, our progress is demonstrated by encouraging results in our core U.S. business. We see great opportunity in the underpenetrated U.S. quartz market and will continue to focus on leveraging our U.S. distribution platform to capture higher share over time. Outside of the U.S., the global dynamics following the U.S. duties on Chinese countertop imports resulted in softer than expected performance in many of our markets, which are adjusting to the new conditions. We are confident that we have the right plan, strategy and team to achieve our long term goals.”

Ophir Yakovian, Chief Financial Officer, added, “Our second quarter results reflect our efforts to improve efficiencies and control costs under challenging market conditions. Our core business in the U.S. grew 12%, largely attributed to the changes in our U.S. operations under the new leadership team. This partially offset an overall decline in most other regions. In addition, the actions that we implemented last quarter have favorably impacted gross margin and produced efficiencies in operating expenses as a percentage of revenue. Initial success with our Global Growth Acceleration Plan gives us confidence that we can achieve many of our full year and long-term goals.”

Second Quarter 2019 Results

Revenue in the second quarter of 2019 was $141.1 million compared to $149.2 million in the prior year quarter. On a constant currency basis, second quarter revenue was lower by 2.9% year-over-year. Sales improvement in the Company’s core business in the U.S. and the continued strong momentum in the U.K. was more than offset by softer than expected performance in Australia and Canada as well as weaker results in Ikea U.S. and in other regions.

Gross margin in the second quarter was 28.2% compared to 32.4% in the prior year quarter. Adjusted gross margin in the second quarter was 27.3% compared to 32.4% in the prior year quarter. The lower adjusted gross margin mainly reflects increased manufacturing unit costs due to lower fixed cost absorption resulting from lower capacity utilization and foreign exchange headwinds, partly offset by lower raw material costs.

Operating expenses in the second quarter were $29.2 million, or 20.7% of revenue, compared to $35.1 million, or 23.5% of revenue, in the same quarter last year. Excluding legal settlements and loss contingencies, operating expenses decreased to 19.4% of revenue, compared to 21.7% in the prior year second quarter mainly due to lower marketing and sales expenses.

Operating income in the second quarter was $10.6 million compared to $13.3 million in the prior year quarter.

Adjusted EBITDA, which excludes expenses for share-based compensation, legal settlements and loss contingencies and for non-recurring items, was $19.2 million in the second quarter, representing a margin of 13.6%. This compares to adjusted EBITDA of $24.6 million, representing a margin of 16.5%, in the prior year quarter. This year-over-year margin comparison primarily reflects the lower gross margin partly offset by lower operating expenses, as described above.

Finance expenses in the second quarter were $1.8 million compared to finance expenses of $0.5 million in the prior year quarter. The difference was primarily attributable to the negative impact of the U.S. dollar appreciation against the Company’s other main currencies.

Net income attributable to controlling interest for the second quarter was $6.4 million, compared to net income of $11.0 million in the prior year quarter. Diluted net income per share for the second quarter was $0.19, compared to diluted net income per share of $0.32 in the prior year quarter. Adjusted diluted net income per share for the second quarter was $0.23 on 34.5 million shares, compared to $0.43 on 34.4 million shares in the prior year quarter.

Balance Sheet

The Company's balance sheet as of June 30, 2019 remained strong, including cash, cash equivalents and short-term bank deposits of $99.4 million with no financial debts to banks.

The Company’s dividend policy provides for a quarterly cash dividend in the range of $0.10 to $0.15 per share up to the lesser of 50% of reported net income attributable to controlling interest (i) on a quarterly basis or (ii) on a year-to-date basis, subject in each case to approval by its board of directors. Pursuant to the Company’s dividend policy, the Company does not intend to pay a dividend for the second quarter, based on its second quarter reported net income attributable to controlling interest.

Global Growth Acceleration Plan

In May 2019, the Company began executing its Global Growth Acceleration Plan. The plan is designed to improve operational inefficiencies and reignite growth through a variety of projects across our business and a better alignment of resources.

As previously announced, during the second quarter, the Company reduced its global headcount by approximately 7% across all business units and regions to gain efficiencies in a range of areas including production, supply chain and general & administrative functions. As part of the headcount reductions, the Company temporarily reduced effective capacity at its U.S. manufacturing facility by 50%.

The Company also commenced a range of projects to expand its selling efforts in key markets, improve production and supply chain efficiency, enhance its innovative portfolio of premier product offerings, implement a digital transformation within the Company, and streamline core processes.

Beyond currently identified opportunities, the Company will continue to pursue additional avenues to drive efficiencies and to accelerate growth through its multi-year Global Growth Acceleration Plan.

Outlook

The Company updates its 2019 revenue outlook, expecting revenue to be in the range of $550 million to $565 million, and reiterates its adjusted EBITDA outlook to be in the range of $72 million to $80 million. The revised revenue outlook primarily anticipates a continuation of soft market conditions outside the U.S. with its unchanged adjusted EBITDA outlook achieved through cost saving initiatives.

Conference Call Details

The Company will host a conference call today at 8:30 a.m. ET to discuss the results, followed by a question and answer session for the investment community. A live webcast of the call can be accessed at ir.caesarstone.com. To access the call, dial toll-free 1-877-407-4018 or +1-201-689-8471 (international). The toll-free Israeli number is 1 80 940 6247. Upon dialing in, please request to join the Caesarstone Second Quarter Earnings Call.

To listen to a telephonic replay of the conference call, dial toll-free 1-844-512-2921 or +1-412-317-6671 (international) and enter pass code 13693003. The replay will be available beginning at 11:30 a.m. ET on Wednesday, August 7, 2019 and will last through 11:59 p.m. ET on Wednesday, August 14, 2019.

About Caesarstone

Caesarstone is a concept and lifestyle-driven company with a customer-centered approach to designing, developing, and producing high-end engineered quartz surfaces used in residential and commercial buildings. Caesarstone® products offer superior aesthetic appeal and perfected functionality through a distinct variety of colors, styles, textures, and finishes used in countertops, vanities, wall cladding, floors, and other interior surfaces. Marked by their inherent longevity characteristics such as non-porousness, scratch and stain resistance, and durability, the company’s product umbrella offers a highly desirable alternative to other surfaces. Strong commitment to service has fostered growing customer loyalty in over 40 countries where the four distinct Caesarstone product collections are available: Classico, Supernatural, Metropolitan and Concetto. For more information please visit our website: www.caesarstone.com.

Non-GAAP Financial Measures

The non-GAAP measures presented by the Company should be considered in addition to, and not as a substitute for, comparable GAAP measures. Reconciliations of GAAP gross profit to adjusted gross profit, GAAP net income attributable to controlling interest to adjusted net income attributable to controlling interest and net income to Adjusted EBITDA are provided in the schedules to this release. The Company provides these non-GAAP financial measures because it believes that they present a better measure of the Company's core business and management uses the non-GAAP measures internally to evaluate the Company's ongoing performance. Accordingly, the Company believes that they are useful to investors in enhancing an understanding of the Company's operating performance.

Forward-Looking Statements

Information provided in this press release may contain statements relating to current expectations, estimates, forecasts and projections about future events that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to the Company's plans, objectives and expectations for future operations, including expectations of the results of its business optimization initiative and its projected results of operations. These forward-looking statements are based upon management's current estimates and projections of future results or trends. Actual results may differ materially from those projected as a result of certain risks and uncertainties. These factors include, but are not limited to: the ability of the company to realign aspects of its business based on the business optimization initiative, the strength of the home renovation and construction sectors; intense competitive pressures; the outcome of silicosis and other bodily injury claims; regulatory requirements relating to hazards associated with exposure to silica dust; manufacturing of existing products and managing required changes in production; economic conditions within any of our key existing markets changes in raw material prices; fluctuations in currency exchange rates; the success of our expansion efforts in the United States; unpredictability of seasonal fluctuations in revenues; delays in manufacturing and other factors discussed under the heading "Risk Factors" in our most recent annual report on Form 20-F and other documents filed with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

Caesarstone Ltd. and its subsidiaries
 Condensed consolidated balance sheets
 
    As of
U.S. dollars in thousands     June 30, 2019   December 31,
2018
    (Unaudited)   (Audited)
ASSETS      
       
CURRENT ASSETS:      
       
Cash and cash equivalents and short-term bank deposits    

$               99,360

 

$             93,562

Trade receivables, net    

83,533

 

72,555

Other accounts receivable and prepaid expenses    

32,418

 

25,495

Inventories    

136,801

 

158,492

       
Total current assets    

               352,112

 

             350,104

       
LONG-TERM ASSETS:      
       
Severance pay fund    

3,421

 

3,591

Other long-term receivables    

5,603

 

5,435

Deferred tax assets, net    

7,638

 

6,372

Long-term deposits and prepaid expenses    

2,979

 

2,799

Right of use assets    

74,159

 

                     -  

Property, plant and equipment, net    

207,573

 

213,338

Goodwill    

35,214

 

35,283

       
Total long-term assets    

336,587

 

266,818

       
Total assets    

$             688,699

 

$            616,922

       
LIABILITIES AND EQUITY      
       
CURRENT LIABILITIES:      
       
Short-term bank credit     

 $                    -  

 

 $              7,567

Trade payables    

45,134

 

55,787

Related party and other loan    

2,092

 

2,908

Short term legal settlements and loss contingencies    

18,513

 

13,146

Accrued expenses and other liabilities    

43,001

 

31,873

       
Total current liabilities    

108,740

 

111,281

       
LONG-TERM LIABILITIES:      
       
Long-term loan and financing leaseback from a related party    

8,036

 

7,089

Legal settlements and loss contingencies long-term    

                 25,405

 

               26,089

Long-term lease liabilities    

                 65,219

 

                     -  

Accrued severance pay    

4,518

 

4,695

Long-term warranty provision    

1,296

 

1,267

       
Total long-term liabilities    

104,474

 

39,140

       
       
EQUITY:      
       
Ordinary shares    

                     371

 

                   371

Treasury shares - at cost    

(39,430)

 

(39,430)

Additional paid-in capital    

               155,478

 

             153,593

Capital fund related to non-controlling interest    

(5,587)

 

(5,587)

Accumulated other comprehensive loss    

(2,087)

 

(3,177)

Retained earnings    

366,740

 

360,731

       
Total equity    

475,485

 

466,501

       
Total liabilities and equity    

$             688,699

 

$            616,922

     

Caesarstone Ltd. and its subsidiaries

Condensed consolidated statements of income  

      Three months ended
June 30,
    Six months ended June
30,
U.S. dollars in thousands (except per share data)  

2019

 

2018

 

2019

 

2018

  (Unaudited)   (Unaudited)
   
Revenues  

$

     141,071

$

     149,243

$

     269,268

$

       285,301

Cost of revenues  

 

101,308

 

100,914

 

198,236

 

202,728

   
Gross profit  

 

39,763

 

48,329

 

71,032

 

82,573

   
Operating expenses:  
Research and development  

 

1,280

 

885

 

2,222

 

1,641

Marketing and selling  

 

15,579

 

20,249

 

32,653

 

38,609

General and administrative  

 

10,572

 

11,244

 

21,605

 

22,448

Legal settlements and loss contingencies, net  

 

1,729

 

2,676

 

3,305

 

5,173

   
Total operating expenses  

 

29,160

 

35,054

 

59,785

 

67,871

   
Operating income  

 

10,603

 

13,275

 

11,247

 

14,702

Finance expenses (income), net  

 

1,825

 

531

 

2,147

 

(9)

   
Income before taxes on income  

 

8,778

 

12,744

 

9,100

 

14,711

Taxes on income  

 

2,364

 

1,703

 

3,091

 

2,214

   
Net income  

 $

        6,414

 

 $

      11,041

 

$

        6,009

 

$

         12,497

 

 

 

 

 

 

 

 

Net income (loss) attributable to non-controlling interest  

 

               -  

 

 

(31)

 

 

               -  

 

 

6

Net income attributable to controlling interest  

 $

        6,414

 

 $

      11,010

 

$

        6,009

 

$

         12,503

Basic net income per ordinary share (*)  

$

         0.19

 

 $

         0.32

 

$

          0.17

 

$

            0.37

Diluted net income per ordinary share (*)  

$

         0.19

 

 $

         0.32

 

$

          0.17

 

$

            0.37

Weighted average number of ordinary shares used in
computing basic income per ordinary share
 

 

   34,380,799

 

   34,360,872

 

  34,373,848

 

     34,352,449

Weighted average number of ordinary shares used in
computing diluted income per ordinary share
 

 

   34,425,797

 

   34,379,948

 

  34,427,899

 

     34,387,420

   
   
(*) The numerator for the calculation of net income per share for the three and six months ended June 30, 2018 has been increased
by approximately $0.1 million and $0.1 million, respectively, to reflect the adjustment to redemption value
associated with the redeemable non-controlling interest.
Caesarstone Ltd. and its subsidiaries
Selected Condensed consolidated statements of cash flows 
 
        Six months ended June
30,
U.S. dollars in thousands    

2019

 

 

2018

    (Unaudited)
Cash flows from operating activities:      
       
Net income     

 $

     6,009

 

$

       12,497

Adjustments required to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization    

 

14,862

 

 

14,382

Share-based compensation expense    

 

1,884

 

 

392

Accrued severance pay, net    

 

(8)

 

 

(583)

Changes in deferred tax, net    

 

(1,242)

 

 

(3,868)

Capital loss    

 

338

 

 

               75

Legal settlements and loss contingencies, net    

 

3,305

 

 

          5,173

Increase in trade receivables     

 

(10,479)

 

 

(7,382)

Increase in other accounts receivable and prepaid expenses    

 

(4,726)

 

 

(5,970)

Decrease (increase) in inventories    

 

21,571

 

 

(23,280)

Decrease in trade payables    

 

(9,800)

 

 

(3,744)

Increase (decrease) in warranty provision    

 

(82)

 

 

154

Changes in right of use assets    

 

(74,159)

 

 

               -  

Changes in lease liabilities    

 

76,385

 

 

               -  

Increase (decrease) in accrued expenses and other liabilities including related party    

 

2,088

 

 

(8,155)

       
Net cash provided by (used in) operating activities    

 

25,946

 

 

(20,309)

       
       
Cash flows from investing activities:      
       
Purchase of property, plant and equipment    

 

(11,955)

 

 

(7,831)

Proceeds from sale of property, plant and equipment    

 

54

 

 

                2

Increase in long term deposits     

 

(192)

 

 

(53)

       
Net cash used in investing activities     

 

(12,093)

 

 

(7,882)

       
       
Cash flows from financing activities:      
       
Dividend paid    

 

             -  

 

 

(9,960)

Dividend paid by subsidiary to non-controlling interest    

 

             -  

 

 

(559)

Changes in short-term bank credit and loans, net    

 

(7,771)

 

 

5,369

Repayment of a financing leaseback related to Bar-Lev transaction    

 

(588)

 

 

(587)

       
Net cash used in financing activities    

 

(8,359)

 

 

(5,737)

       
       
Effect of exchange rate differences on cash and cash equivalents    

 

304

 

 

(139)

       
Increase (decrease) in cash and cash equivalents and short-term bank deposits     

 

5,798

 

 

(34,066)

Cash and cash equivalents and short-term bank deposits at beginning of the period    

 

93,562

 

 

138,707

         
Cash and cash equivalents and short-term bank deposits at end of the period    

$

     99,360

 

$

     104,641

       
Non - cash investing:      
Changes in trade payables balances related to purchase of fixed assets    

 

(2,500)

 

 

186

Caesarstone Ltd. and its subsidiaries          
       
        Three months ended
June 30,
      Six months ended June
30,
U.S. dollars in thousands    

2019

 

2018

 

 

2019

 

2018

    (Unaudited)   (Unaudited)
Reconciliation of Gross profit to Adjusted Gross profit:      
Gross profit    

 $

     39,763

 $

      48,329

 

 $

      71,032

 $

      82,573

Non-recurring import related income    

 

(2,611)

 

               -  

 

 

(1,501)

 

               -  

Other non-recurring items (*)    

 

          1,367

 

               -  

 

 

           1,367

 

               -  

Adjusted Gross profit (Non-GAAP)    

$

      38,519

$

       48,329

 

$

       70,898

$

       82,573

       
(*) Including one time amortization of machinery equipment with no future alternative use, 
and one time charge related to reduction in headcount.
 
  Caesarstone Ltd. and its subsidiaries        
       
          Three months ended
June 30,
    Six months ended June
30,
U.S. dollars in thousands    

2019

 

2018

 

2019

 

2018

      (Unaudited) (Unaudited)
  Reconciliation of Net Income to Adjusted EBITDA:    
  Net income     

 $

       6,414

 $

     11,041

 $

        6,009

 $

      12,497

  Finance expenses (income), net    

 

1,825

 

531

 

2,147

 

(9)

  Taxes on income     

 

2,364

 

1,703

 

3,091

 

2,214

  Depreciation and amortization (*)    

 

8,099

 

7,132

 

14,862

 

14,382

  Legal settlements and loss contingencies, net (a)    

 

1,729

 

2,676

 

3,305

 

5,173

  Share-based compensation expense (b)    

 

            832

 

362

 

           1,884

 

392

  Non-recurring import related income    

 

(2,611)

 

              -  

 

(1,501)

 

               -  

  Other non-recurring items (c)    

 

504

 

1,157

 

993

 

1,157

       
  Adjusted EBITDA (Non-GAAP)    

$

      19,156

$

      24,602

$

       30,790

$

       35,806

       
       
(a)   Consists of legal settlements expenses and loss contingencies, net, related to product liability claims and other
adjustments to on-going legal claims, including related legal fees. 
(b)   Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors of the Company. 
(c)   Relates to non-recurring expenses related to North American region establishment, one time charge related to reduction in headcount,
and in 2018 also relocation expenses of Caesarstone USA headquarters (Company's subsidiary).
(*)   Including one time amortization of machinery equipment with no future alternative use.

 

Caesarstone Ltd. and its subsidiaries          
       
      Three months ended
June 30,
      Six months ended
June 30,
U.S. dollars in thousands (except per share data)  

2019

 

2018

 

2019

 

2018

  (Unaudited)   (Unaudited)
Reconciliation of net income attributable to controlling
interest to adjusted net income attributable to controlling
interest:
       
Net income attributable to controlling interest  

 $

       6,414

 

 $

     11,010

 

 $

         6,009

 

 $

     12,503

Legal settlements and loss contingencies, net (a)  

 

1,729

 

 

2,676

 

 

3,305

 

 

5,173

Share-based compensation expense (b)  

 

832

 

 

362

 

 

1,884

 

 

392

Non-recurring import related income  

 

(2,611)

 

 

              -  

 

 

(1,501)

 

 

              -  

Other non-recurring items (c)  

 

1,704

 

 

         1,157

 

 

           2,193

 

 

          1,157

Total adjustments  

 

1,654

 

 

4,195

 

 

5,881

 

 

6,722

Less tax on non-tax adjustments (d)  

 

140

 

 

355

 

 

885

 

 

1,012

Total adjustments after tax  

 

1,514

 

 

3,840

 

 

4,996

 

 

5,710

       
Adjusted net income attributable to controlling interest (Non-GAAP)  

$

        7,928

 

$

      14,850

 

$

        11,005

 

$

      18,213

Adjusted diluted EPS (e)  

$

         0.23

 

$

         0.43

 

$

           0.32

 

$

         0.53

(a)

 

Consists of legal settlements expenses and loss contingencies, net, related to product liability claims and other 
adjustments to on-going legal claims, including related legal fees.

(b)

 

Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors of the Company. 

(c)

 

Relates to non-recurring expenses related to North American region establishment, one time charge related to reduction in headcount,
one time amortization of machinery equipment with no future alternative use, and in 2018 also relocation expenses of Caesarstone USA headquarters
(Company's subsidiary).

(d)

 

Tax adjustments for the three and six months ended June 30, 2018 was based on the effective tax rates for these periods. 
For the three and six months ended June 30, 2019 the Company applied the effective tax rates used in the comparable figures as current  
effective tax rate is not indicative for the on-going business.

(e)

 

In calculating adjusted diluted (Non-GAAP) EPS, the diluted weighted average number of shares outstanding excludes the effects of
share-based compensation expense in accordance with FASB ASC 718.

Caesarstone Ltd. and its subsidiaries
Geographic breakdown of revenues by region       
   
      Three months ended
June 30,
    Six months ended
June 30,
U.S. dollars in thousands  

2019

2018

2019

2018

  (Unaudited) (Unaudited)
   
USA (*)  

$

          64,590

$

       60,358

$

     121,007

$

      117,108

Australia (incl. New Zealand)  

 

28,294

 

34,731

 

53,508

 

63,635

Canada (*)  

 

23,341

 

27,349

 

43,519

 

50,704

Israel  

 

8,766

 

9,125

 

19,507

 

20,916

Europe  

 

9,981

 

9,133

 

18,787

 

16,565

Rest of World  

 

6,099

 

8,547

 

12,940

 

16,373

 

$

        141,071

$

      149,243

$

     269,268

$

      285,301

   
(*) Total revenues for the three and six months ended June 30, 2019 and 2018 in the North American
region were $87,931 and $164,526, and $87,707 and $167,812, respectively.

 

Public Relations:
Caesarstone - Maya Lustig
Maya.Lustig@caesarstone.com
+ 972 54 677 8100

Investor Relations:
ICR, Inc. - Rodny Nacier
CSTE@icrinc.com
+1 646 277-1237

Source: Caesarstone Ltd.

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