Good day, and welcome to Caesarstone's 4th Quarter and Full Year 2016 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Alison Kane of ICR. You may begin.
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 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 Q4 and full year 2016 earnings release, which is posted on the company's Investor Relations website. With that, I'd like to now turn over the call to Yonathan Melamed, Interim Chief Executive Officer of Caesarstone. Yonathan, please go ahead.
Thank you, Alison. Good day and thank you everyone for joining us. I will start by providing some highlights of the Q4. We grew sales year over year by 6% to $135,000,000 Our adjusted EBITDA was $30,000,000 a margin of over 22%. Adjusted net income was $18,000,000 and our adjusted diluted earnings per share was $0.53 And also some highlights for the full year.
We grew sales by 8% to a record level of $539,000,000 2016 adjusted EBITDA was $130,000,000 a margin of over 24%. Adjusted net income was $81,000,000 and our adjusted diluted earnings per share was $2.33 We closed our year with a stronger performance in the U. S, especially towards the end of the quarter and with a solid growth in Australia and Canada. We are pleased to begin 2017 with a better momentum in the U. S.
Where we remain highly focused on reacceleration growth. We are working hard to constantly improve our operations and refine our approach to market. We are very pleased to add Lowe's Home Improvement as a new partner with our new Transform by Caesarstone. And innovative product solution. We expect this business to gradually ramp over the course of the year and to contribute more significantly thereafter.
We have also started direct distribution in the U. K. To a better serve of this market and capture by significant growth opportunity we see there. We remain intently focused on ramping up our Richmond Hill manufacturing facility, which is an important part of our growth plan for 2017 and beyond. As you know, I will remain in TRIM's CEO for a few more weeks until I will hand over the steering wheel to Anand Silbermann at the end of February.
It has been my pleasure to serve the company in this role and as a member Board member for more than 8 years. I believe that Caesarstone is commercially and financially an outstanding company, which I am confident that Ranaan will take to the next level.
Thank you. And I would like to now turn the call over to Yair. Thank you, Yonatan, and good morning to everyone. I will start with our original revenue performance for the Q4 and full year. 4th quarter sales in the United States were $55,000,000 down 2.8% compared to last year.
With an improvement in our performance as the quarter progressed, This was better than we expected when we reported our Q3 results. Overall, our core business was down year over year. IKEA showed strong growth on a relatively easy comparison from the Q4 last year when our IKEA business was weak due to temporary changes in IKEA promotional events. For the full year, our U. S.
Revenue were $222,600,000
down 0.3%
year over year, with a single digit core growth offset by lower sales in IKEA. As we discussed last quarter, we have worked hard to improve our capabilities in the United States in several areas. We have started to see the benefit of these investments. We intend to make further investment in the U. S.
Market in 2017. We also made strategic progress with the addition of Loews Home Improvement as a new customer in the United States commencing in the Q1 of 2017. We are introducing at Lowe's a new innovative solution called Transform by Caesarstone. Transform is an overlay quartz surface that can be installed in one day over an existing countertop. This is targeted at consumers interested in refinishing versus a complete renovation and represents an incremental business opportunity for both Lowe's and us.
We expect that revenue growth associated with this business at Lowe's will be modest this year and stronger thereafter. Turning to Australia region, we grew 4th quarter sales to $36,100,000 up 17.5% compared to last year. On a constant currency basis, Australia was up 12.5% in the Q4. Our execution in Australia remains excellent. For the full year, despite the tough housing market, we grew our revenue by 18.7 percent to 133 $230,900,000 19 percent constant currency growth.
We grew 4th quarter sales in Canada by 20% to $21,500,000 in the 4th quarter. Growth was 20.3 percent on a constant currency basis. Like Australia, we've executed very well in a soft market. For the full year, we grew Canada sales by 21.2% to $85,700,000 partially driven by the IKEA ramp up in the first half of twenty sixteen. Constant currency growth in Canada was 25.4% for the full year.
Sales in Israel for the quarter were $9,800,000 up 2.3% compared to the Q4 last year. On a constant currency basis, 4th quarter sales were up 1.8%. For the year, Israel was up 7.3 percent to $42,500,000 On a constant currency basis, Israel growth in 2016 was healthy at 6.3%. Europe sales in the 4th quarter were down by 5.1% to $5,200,000 and were down 3.8% on a constant currency basis. For the full year, Europe sales were up 6.9% to $25,600,000 up 7.1% on a constant currency basis.
We are very pleased to have begun direct distribution in the United Kingdom as of January 1, 2017. This is the first time we have shifted to direct distribution without acquiring the previous distributor. We believe that there is an opportunity for a meaningful increase in the market revenue growth over time. We expect that this move will have a drag on our operating income margin in 2017 as we ramp up our infrastructure and capabilities. Revenue in the rest of the world was up 4.2% to $7,500,000 in the 4th quarter, growth of 5.2% on a constant currency basis.
For the full year, rest of world was down 1.3% to $31,100,000 and down 1% on a constant currency basis. Altogether, global sales for the 4th quarter increased by 6% to $135,000,000 compared to $127,400,000 last year. On a constant currency basis, total sales increased by 4.8%. For the full year, GOLF was 7.8 percent to a record of $538,500,000 This was above the high end of our most recent guidance. Without currency impact, growth was stronger 8.4% over prior year.
Gross margin in the 4th quarter was 38.1% compared to 37.9% last year. Lower raw material costs and increased content of higher margin product were partially offset with higher cost in Richmond Hill plant and the increased portion of IKEA revenue, which has a significant lower margin fabrication and installation component. Full year gross margin was 39.5 percent in 20 16 versus 40.1% in 2015. Operating expenses in the 4th quarter were $32,300,000 versus $25,600,000 last year. Such expenses in the quarter included $3,100,000 for legal settlement and loss contingencies compared of among other things a provision related to the potential settlement of certain legal proceedings.
Although we are not able to discuss details at this point, if such a settlement materializes, we would see it as a positive outcome. Excluding the total provision under legal settlement and loss contingencies, operating expenses in the 4th quarter were $29,200,000 21.6 percent of sales compared with $25,600,000 or 20.1 percent of sales last year. This increase was primarily due to increased strategic investment, specifically marketing and sales in the United States. Operating expenses for the full year were $119,700,000 or 22.2 percent of sales compared to $103,800,000 last year or 20.8 percent of sales. Operating income was $19,100,000 compared to $22,600,000 in the Q4 of last year.
Our operating margin, excluding legal settlement and loss contingencies, was 16.5% this quarter compared to 17.7% last year. For the full year, operating income was $92,800,000 compared to 96 $400,000 in the prior year. Adjusted EBITDA in the 4th quarter, which eliminate share based compensation, legal settlements and loss contingencies expenses, as well as other non recurring items, was $30,000,000 a margin of 22.2%. This compares with last year adjusted EBITDA of $30,400,000 a margin of 23.9 percent. For the full year, adjusted EBITDA was $130,300,000 a margin of 24.2%.
This is an increase from $125,700,000 last year, a margin of 25.2%. The slightly lower margin, both in the Q4 and for the year, mainly reflects our increased marketing and sales spending to support stronger growth in the United States. Finance expenses in the 4th quarter was $1,000,000 compared to finance expenses of $700,000 in the prior year, mainly reflecting increased revolving credit usage and banking activities. For the full year, finance expenses were $3,300,000 compared to $3,100,000 in 20.15. Taxes in the 4th quarter were $2,800,000 or 15.4 percent of income before taxes, compared to a tax rate of only 11.7% last year.
The increase in effective tax rate is mainly due to 2 factors. One relates to production allocation between our plants in Israel that are subject to different tax rates. The second relates to higher taxable income outside of Israel, where tax rates are higher. For the full year, our tax rate was 14.5% compared to 14.8% last year. Adjusted net income attributable to controlling interest, which eliminate the same items as mentioned above, was $18,100,000 in the 4th quarter compared to $19,700,000 same period last year.
For the full year, adjusted net income was $81,200,000 compared to $83,700,000 last year. Adjusted diluted earnings per share in the 4th quarter were $0.53 on 34,400,000 shares. Adjusted diluted earnings per share last year were $0.55 on 35,500,000 shares. For the full year, adjusted diluted EPS were $2.33 versus $2.36 in 20.15. Turning to our December 31 balance sheet.
We had cash, cash equivalents and short term bank deposits of $106,300,000 Our cash flow from operations peaked at $35,900,000 in the 4th quarter. During 2016, we generated $78,100,000 of free cash flow and used $39,400,000 to repurchase 1,100,000 shares, 3.2% of our total shares outstanding. With respect to our 2017 guidance, we are expecting revenue in the range of $580,000,000 to 5 $95,000,000 With respect to adjusted EBITDA, we are guiding to a range of 119 $1,000,000 to $126,000,000 We see 2017 as a transformative year, and this guidance reflects mainly our intention to further expand our investment in key markets, particularly in the U. S. And the U.
K. We believe that our strategy, coupled with such investments, will reaccelerate our growth rate and improve our overall performance starting 2018. The guidance also reflect higher involvement with builders and big boxes and related increase in the fabrication and installation services, which contains lower margin as well as an increase in polyester prices. Thank you. We are now ready to open the call for questions.
The first question today comes from Michael Rehaut of JPMorgan. Please go ahead.
Thanks. Good morning, everyone. First question, I was hoping to get a little bit more detail or specificity around the EBITDA guidance for 2017. Obviously, you're looking at margins to be down and the EBITDA dollars to be down despite a stronger top line sales growth even potentially than 2016. And you referred to a bunch of items, Yair, that I guess is driving that outlook, expanded investment in the U.
S, U. K, more builders and related fabrication and higher raw material prices, polyester. I was hoping to get a sense of what each of these factors is responsible for the lower EBITDA or the decline in EBITDA margins, however you want to put it. And more specifically, even what you feel is perhaps one time investments or leverageable investments versus kind of more of a permanent mix shift in your business?
Hi, Mike. Thank you for the question. Yes, so basically, the EBITDA margin down our results of 2 main factors. 1 is substantial investments in our M and S and the other one is a channel mix change in the U. S.
With regards to marketing and sales, we are investing substantially in sales and marketing, mainly in the U. S, which is consistent with our marketing expansion strategy as well as in the U. K. With regards to the U. S, we believe that the investment has already contributed to our momentum, and I hope that it will continue like that.
With regards to the U. K, we need to really build a full organization, direct distribution organization. On both angles, I believe that those are transitional in nature, and we will see a leverage on both aspects after 2017. With regard to the channel mix, we are growing in big boxes. We are going to grow in the commercial builder segment as well.
The growth in big boxes segment require the fabrication installation component service that we believe is a major competitive advantage that we have, but it carries lower gross margin. So on the marketing and sales side, I believe that this is transitional on the channel mix, yet to be seen. But I believe that after 2017, we will see a faster growth rate in our top line with related profitability. And maybe as a final note, just to remind us all myself included that we do have also a polyester price increase. This is reflected in this guidance along with the oil prices that are going up.
So just to get a better sense of this, Yair. When you you've talked in the past about IKEA and the lower gross margins with those revenues, Correct me if I'm wrong, but I think you've also kind of described it as operating margin neutral in that you've had also lower SG and A and it's kind of an offset. Is that something that we should think similarly with the Lowe's business model?
I think in Lowe's, we do invest a little bit more this year. We need to build the infrastructure for this execution. We need to do a lot of prepared marketing material across the whole chain and be ready for a nice launch and execution. So I'm not sure that this year it's the story. I hope that it will be the story in years thereafter.
Okay. And what type of impact just on the polyester, higher polyester costs either on a dollar or margin basis, do you expect that to impact 2017?
Yes. Polyester is around fifty-sixty basis points of the margin erosion. And the marketing and sales infrastructure and the channel mix are more or less similar numbers to each other, not similar to the 50, but similar impact. Okay.
And then one last one, and I appreciate it, and I'll get back in the queue. Queue. In the past, you've given on the gross margin kind of the puts and takes in terms of how quarter has been impacted, that 38% kind of flattish year over year. But for 4Q, you mentioned some positives and negatives. I was hoping if you could give us, as you have in the past, kind of a degree of magnitude of what some of the positives were and some of the negatives that you listed?
Yes. So basically, product mix or better product mix for higher content of differentiated products with higher margins. This and the reduced raw material cost was each around 100 basis points. FX was also slightly favorable at the neighborhood of 50 basis points this quarter. FST was pressured margin by around 120 basis points And increased fabrication installation component, given the IKEA growth, reduced the margin by around 80 basis points.
I'm sorry, what was the 120,000,000, yes, Yair?
120,000,000 was the Richmond deal performance. You're welcome.
The next question comes from John Baugh of Stifel. Please go ahead.
Thank you. Good morning, Jonathan. Good morning, Yahir. Good morning. Just get some sense of what the plant in Georgia produced, I don't know, maybe for the year, but more importantly, what was the rate of production in Q4, say, versus Q1 or entering here in 20 17?
Yes. So in Q4, Richmond deal was the biggest of this disappointment for us, but also we did a lot of fundamental change there, which intentionally slowed us down. For next year, our revenue growth for next year is dependent upon a significant throughput improvement in Richmond Hill as well as improved quality rate and improved cost efficiency. So we are looking at a significant ramp up in 2017 enrichment deal relative to 2016. It still is not going to be similar to the Israeli plants in performance.
This will take more than 2017. But I believe that as the time go by, Richmond will likely increase the performance because Israel is kind of 100% utilization. And with that, we will see leverage in the performance.
And so Yair, is I mean, can you look at yield or scrap or however you measure quality currently and see a meaningful improvement and now it's just a matter of ramping speed? Or are there still big fundamental changes you're going through right now to try to improve those things?
Yes. So we are making a lot of changes now. We are expanding shifts to scale up production. We are increasing the manpower for those shifts. We have quite heavy dedicated on-site support for me as well now to do further equipment engineering optimization and continued training over there.
We are heavily investing in processes improvement over there. And I if I can judge by our performance in the last 2 weeks, I would say this I'm encouraged. But it's still we need to see it continue like that. And it is a key factor for top line growth next year in 'seventeen.
Thank you. I'm curious on the EBITDA margin guidance, which I calculated at the midpoint down over 300 basis points and you touched on polyester. I'm curious though, is there embedded in that assumption a like for like price reduction or more competitive promotional efforts or are all those pressures the U. K. And channel mix and starting up with lows, etcetera?
Look, John, we normally don't comment on pricing, and we intend to remain synonymous with premium brand product and quality and innovation here. At the same time, we are certainly implementing a competitive multichannel strategy with distinct offering for each channel. And I think that this is what we are discussing here for the most part.
And could you comment on the U. K? How much revenue did you do there this past year, roughly the size of that countertop market and what the penetration rate is currently? And then how we might think about how your revenues should ramp over the next several years?
Yes. So U. K. Currently is a market where cost penetration is still below all of our main regions. So to our estimate, it's below 10% in volume, 10% of the market.
It's relatively dominant by European competitors. We had quite a reasonable presence there. But now going direct, we believe that we will make a much faster growth, and we can increase the top line in a significant manner. So again, the baseline from where we start is not very significant. I would say also that in the second half of twenty sixteen, our revenue performance in Europe was negatively impacted by this mode.
Okay. Okay. And my last question, as it relates to Lowe's, is there a plan in the future to sell slabs more than just the retrofit products you're talking about? Or is that not in discussion?
I guess, we will have to wait and see. Currently, it's the term for my season
Okay. Thank you so much for answering my questions. Good luck.
You're welcome.
The next question comes from Lena Rogovin of Chardan Capital Markets. Please go ahead.
Hello. Congratulations on strong revenue growth. I have a couple of questions. The first one is again on the U. K.
What's roughly the expected CapEx for 2017 to launch the distribution? My second question is about Canada and Australia. So this year was incredibly strong given both in constant currency and in reported terms. So it looks like double digit growth is unlikely to be sustainable. So what should we expect going forward?
And my last question is about legal expenses, which were relatively high in the Q4. So what was the reason for that? Thank you.
Okay. You give me too much credit to remember all the questions, but I wish. So with regards to UK, there isn't a significant CapEx there. It's we need to do some stuff in creating the offices and the warehouse and everything. The main investment is in marketing and sales and putting together all the sales force organization as well as having a strong presence within the kitchen and bath studios, the architecture and all of those things.
So a lot of investment in expenses, not so much in CapEx. With regards to Canada and Australia, We are delighted from our results in both regions. This year, that was actually executed despite a weakening housing market. In Canada, our first half of the year was also helped by the ramp up of the IKEA business. The close off was very, very strong, but there was also a push from the IKEA ramp up.
And then in the second half, IKEA basically reached its anniversary, so our growth is our growth. And with regards to next year, the signals about the housing market in both regions are not extremely optimal for us. And yet, we plan to continue and grow. I would without getting into any regional guidance for 2017, I would say that we expect U. S.
And Canada to be our fastest growing regions next year. And regarding the legal expenses, it is too early for us at this point to disclose details regarding the potential settlement, which we provided for or approved for. I can just say repeat and say that if this settlement materialize, we would view it as a positive outcome. And until this reached, we prefer not to comment.
We have a follow-up question from Michael Rehaut of JPMorgan. Please go ahead.
Thanks. I just wanted to follow-up about the U. K. And the investment there. Just wanted to get a sense, number 1, if you could give us an idea roughly in terms of the dollar investment in 2017.
And I assume you're saying it's no CapEx. So I assume it's kind of an incremental dollar expense in 2017 with initially minimal revenues. So just trying to get a sense of that dollar investment for the year. And I guess secondly, why the departure from typically acquiring a distributor, which is what you've always done in the past, if there is a team that or a group of a person or a group of people that you've been in discussions with that you feel there's an ability to grow it from the ground up, particularly given it's obviously from a distance and a core market for you, it's not necessarily an obvious country to kind of go in, particularly in an organic way?
Yes. So with regards to the second question first, Mike, we've contemplated all options about how to go direct in the U. K. And we decided that the highest value option for us would be to just establish our own organization. There are many reasons for that.
I prefer not to not be specific on those. But let's just say that we did a lot of preparation ahead of time in the second half of twenty sixteen, and I believe we are rock and rolling as we speak and start to do business there. So I see it as a very positive move for the company. And I believe, again, that while it is not helping EBITDA, both certainly not margin, but not even an absolute number, it will be a good move for the company over time.
And can you give us a sense of the dollar investment in 2017?
It drags our EBITDA in dollars for a few $1,000,000
Great. Great. Thank you.
This does conclude the question and answer session. At this time, I'd like to turn it back to management for any additional or closing remarks.
Thank you, everyone. As we close the call, on behalf of our entire company, I would like to thank Yonatan for his service, particularly these past few months as our Interim CEO. We are deeply grateful for his efforts and contribution over the years. We are pleased to see the strength of our business reflected in our results globally and in the recent improvement in the United States. We have good new opportunities, particularly in the United States, both in the core market and in the bigger box channels with IKEA and now Loews.
We look forward to continuing to demonstrate our ability to drive growth and shareholder value. Thank you all for participating today.