Day, and welcome to the Caesarstone First Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alison Kane of ICR. Please go ahead.
Thank you, operator, and good morning to everyone. Certain statements in today's conference call and responses to 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. Additionally, 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 Q1 earnings release, which is posted on the company's website. With that, I'd like to now turn the call over to Yoss Sharon, Caesarstone's Chief Executive Officer. Yoss?
Thank you, Alison. Good day and thank you everyone for joining us to discuss our Q1. Our Q1 was generally as expected and our business is performing well. I would like to start with some highlights. Sales increased 8.4 percent to $116,900,000 Without currency impact, growth would have been 12.3%.
Adjusted EBITDA for the Q1 was $23,000,000 a margin of 19.7%. Adjusted net income was $13,300,000 and adjusted EPS was $0.38 Our gross rate was strongest in Europe, Canada, the United States, excluding our IKEA business and Australia. This performance was partially offset by continued foreign exchange pressure and in the United States by an expected drop in sales to IKEA versus prior year related to previous quarter sales event interruptions. As our sales growth accelerates, we expect margins to improve. Now I would like to give an update on each of our major markets for the Q1.
1st quarter sales in the United States grew by 2.7 percent to $49,300,000 Similar to the past few quarters, growth was adversely impacted by significantly lower sales to IKEA. As we mentioned before, IKEA resumed its promotional events in March and we expect this to have positive impact starting in the Q2. We have continued to refine our growth strategy in the United States along three key lines brand execution and innovation. The Sisorson brands and products have tremendous value, which we leverage mainly through creating a more compelling consumer purchasing experience in different channels at the points of sale and other platforms. With respect to execution, we've also identified specific opportunities to enhance accessibility of our product samples and marketing tools throughout our value chain.
And as to innovation, we believe we are on the cutting edge in terms of the breadth of new products we will introduce this year. Longer term, we believe that our innovation capability is a strong and solid competitive differentiator. Alongside our excellent quality and service, this position us as an industry leader. Australia sales in the Q1 were $25,700,000 up 10.1%. On a constant currency basis, Australia was up 19.6 percent in the Q1.
Housing conditions in Australia are slightly better than originally forecasted for 2016 and our business in Australia is proceeding very well. Canada sales in the Q1 grew 26.7 percent to $17,600,000 Canada's Q1 growth was 41.2 percent on a constant currency basis. Our business is strong and also our sales to IKEA IKEA continue to ramp up. Sales in Israel for the quarter were $10,300,000 up 4.4% compared to last year. On a constant currency basis, sales were up 3.6%.
Europe sales in the first quarter increased 41 percent to $600,000 and were up 43.3 percent on a constant currency basis. We believe that in the Q1, we benefited from timing of orders and are not expecting this level of growth to continue in Europe. Revenue in the rest of the world during the quarter was down 7.7 percent to $7,300,000 On a constant currency basis, revenue was down 6%. In general, during the Q1, we achieved our plan and we believe we are on track to achieve our early target. Thank you.
And I will now turn the call over to Eyir.
Thank you, Yoss, and good morning to everyone. I will start with our income statement for the Q1. Sales in the Q1 increased by 8.4 percent to $116,900,000 compared to $107,800,000 in the Q1 of last year. On a constant currency basis, sales increased by 12.3% versus last year. Gross margin in the quarter was 36.5% compared to 42% last year.
This margin decrease is attributed to inefficiencies related to our Richmond Hill manufacturing facility. Favorable product mix and lower raw material cost, specifically polyester, were offset by negative exchange rate fluctuations. Our manufacturing costs in Richmond deal were higher than expected. As a result, we have taken action to improve our performance, including operational process improvements. We have also made managerial changes in the plant.
Operating expenses in the Q1 were $28,400,000 or 24.3 percent of sales versus $24,600,000 last year, which was 22.8 percent of sales. Excluding an increase of $1,000,000 in share based compensation expenses derived from recent grants and legal settlement and loss contingencies expenses of $700,000 that were not incurred in the same period last year, operating expenses as a percentage of sales would have been the same as last year. Operating income was $14,200,000 compared to $20,700,000 in the Q1 of last year. Our operating margin decreased to 12.2 percent from 19.2% last year. Adjusted EBITDA in the Q1, which eliminates share based compensation and legal settlements and loss contingencies expenses was $23,000,000 This was a margin of 19.7% versus 23.7% last year.
This lower EBITDA margin is a result of lower gross margin associated with the U. S. Plant operation. Finance income in the Q1 was $200,000 compared to finance expenses of $1,900,000 in the prior year. The change was primarily due to a $1,000,000 net gains related to currency exchange rate fluctuation in the Q1 of 2016, compared with net losses of $1,100,000 in the Q1 of
2015. Our taxes
in the Q1 were $2,400,000 16.4 percent of income before taxes, compared to 13.1% tax rate last year, reflecting higher production portion from our U. S. Plant and certain non deductible expenses occurred in this quarter. Adjusted net income attributable to controlling interest in the Q1 decreased to $13,300,000 from $16,400,000 last year. Adjusted diluted earnings per share in the quarter were $0.38 on 35,400,000 shares.
Adjusted diluted earnings per share last year were $0.46 on 35,500,000 shares. Turning to our March 31 balance sheet. We had cash, cash equivalents and short term bank deposits of $59,900,000 Our net cash position went down by $7,100,000 due to share repurchase of approximately 334,000 shares for a total of $11,800,000 Our cash flow from operations improved to $9,100,000 in Q1 twenty 16 compared to $2,700,000 in the same period last year. With respect to 20 16 guidance, our business is proceeding well and we are pleased to see some positive exchange rate changes. At the same time, we are monitoring exchange rate trends and the development of our U.
S. Sales including IKEA and therefore we believe that at this early point of the year it is prudent to maintain guidance. Accordingly, our revenue guidance for the year remains $550,000,000 to $565,000,000 and our adjusted EBITDA guidance for the year remains to $145,000,000 Thank you. And we are now ready to open the call for questions.
Thank We'll take your first question from Michael Rehaut from JPMorgan.
Thanks. Good morning, everyone. Good morning, Mike. First question I had was on the gross margins and more specifically the costs with the plant inefficiencies. And I guess you mentioned that the costs were higher than expected.
And as a result, you made some changes both operationally and from a management standpoint. At the same time, you reiterated your full year EBITDA guidance. So there's 2 parts of the question here. Number 1, with the if you could go into more detail in terms of the changes that you made both operationally and managerially, And do those changes when do you expect those changes to have an impact on the P and L? And are there other offsetting positives that from your perspective allow you to retain the EBITDA guidance despite at least at this point in the year a greater than expected headwinds in this area?
I think Mike and I will start with the plans and then Yaron will answer about the guidance question. But in the plant, it's not a secret, it was also demonstrated in the Q4 that we had some deviations from our expectation. This quarter was better, but we think it should have been much better and we took some more aggressive steps in order to correct it. It has to do with the way we operate with expenses and with processes. We're already seeing positive results there and this quarter for sure will suffer less than in the Q1.
And in general, the plant is progressing. It's not that it's progressing, but it's not progressing as fast as we would like it to be. So, I think now with the measurements that we took, it is going to be better. Now, we will see improvement gradually during the year and it should be better of course through the course of 2017. Eyal?
Yes, I think you Regarding
the EBITDA for the year.
Yes. So again, as Vyoss said, we took immediate action now. We believe that we will start seeing all this impact in Q2 and more noticeably in the quarters thereafter. We expect volume to grow of revenue and EBITDA margins to improve significantly from Q1.
So just to be a little more specific as possible. Number 1, when during the quarter were these changes made, either operationally or in terms of management? And number 2, again, going back to the gross margin question, if 1Q was a little worse than expected, how are you able to maintain full year EBITDA guidance? Were there other positives that came through like less than expected FX headwind now? Or is it just that you expect this to really turn around and fix itself?
So with regards to FX, as we said, there is some positive FX trend. However, we prefer to remain cautious in those and to see this trend stabilize and not going backwards. We have some Australia again and Canada are doing very well. U. S, we believe will improve.
So our visibility as of now is that we remain confident with our guidance.
And at this time, we'll move to the next caller in the queue and will come from Mike Dahl from Credit Suisse.
Hi, this is actually Matthew Belay on for Mike. Thank you for taking my questions. So first, on the annual sales guidance, I just wanted to tie all that together. So you mentioned you're continuing to monitor the U. S.
And IKEA sales and the same time foreign exchange has improved since the last guide and you're seeing Australia come in a little bit better than initially expected. So really just the question is, has anything really changed in your kind of organic assumptions given some of those trends?
No, I think the organic assumption in general are the same. And all in all, we feel that we stay with the same expected sales.
Okay. Okay. Thank you. And then just more broadly, now that we're a few months into the leadership change that you made in the U. S.
And you mentioned redefining the growth strategy in the U. S, I just wanted to get your updated thoughts on new channels and specifically what if any opportunities you might pursue in terms of the home centers?
So again, just to reiterate partially what I said, we've continued to refine the growth strategy there and along the three lines that I mentioned, the brand execution and innovation. And so first of all, we intend to leverage the brands mainly through the points of sales and other platforms Execution, execution of sales and marketing within the channel is very important and we intend to apply more consistent processes to distribute samples of our newer products as well as marketing tools throughout the value chain. So, to the designers, architects and of course the points of sales and we believe this was part of the weakness. And we believe that we have a successful new products offering to introduce down the road this year. So, all of that, I think, provides us the confidence that the sales in the States will improve during the year.
And we see the strength in the other market in Australia and Canada, which are very strong. So this is it.
Okay. Thank you very much. Thanks.
We'll hear next from Stephen Kim from Barclays.
Yes. Thanks very much guys for taking my questions. I guess the first thing I wanted to understand is the IKEA effect. You had indicated that the promotion restarted in March and just help me if you guys want to make sure first of all they're going to benefit the entire quarter or if there's going to be a lag that would make it peak at most of the quarter, but not all of it? And then the second thing part of that would be the second part of the IKEA question is, can you just generally tell us what kind of seasonality the IKEA business typically sees overall excluding this promotion effect, 1Q I would guess probably be the smallest quarter, but I just want to make sure that is correct and the fee penalty is lower in
2? So we believe that the IKEA business also will improve gradually as because of the interruption that we suffered a year ago. So, we should definitely benefit in Q2, but it should be more beneficial in Q3 and Q4. In terms of seasonality, I don't think that we can identify any specific seasonality in the IKEA sales.
Okay. And then the second question relates to the small charge that we take in the quarter regarding that. With that what region of the world was that related to? And how much of that was how much was covered by insurance?
So basically it was all in Israel related to a few additional claims. And today, if you remember, the first $5,000,000 are not insured. So anyway, we are exposing the 1st layer of $5,000,000
I think maybe one comment to that. So to the claims in Israel, so we got one new claim in early proceedings in Australia by the end of the quarter. So we don't know how to evaluate yet, but just to worth notice.
Is that the first claim that you've had in Australia?
The first claim is against us and others and other manufacturers, yes, it's the first claim there. We had at the time one claim in the States, but we were deleted from the claim afterwards. This was I think about 2 years ago or 3 years ago and this is the first claim, a part of that of the States that we are aware of outside of Israel for us.
And I know you're probably going to be limited in what you say regarding these, but in general, would you say that the nature of the claim or the complaint is very similar to that we've seen thus far in Israel? Or is there anything about the claim that they are making?
No, the nature is the same, but it's too early for us assess and to understand exactly what is the situation, but the nature is the same nature.
Yes. Okay, great. Thank you very much.
Thanks.
George Staphos with Bank of America. Your line is open.
Hi, it's actually Alex Wong on for George. Thanks for taking the question. First question, appreciate you identifying the IKEA impact for us last quarter. But was the growth in the U. S.
This quarter in line with your expectations? And then on the outlook, can you maybe talk about what gives you confidence in the pickup? I know you talked a little bit about the change in the strategy and marketing tools, but are you seeing any change in the underlying demand, especially given a strong start to the new home construction this year?
So I think regarding the IKEA, I'm not sure if I fully understand your question, but IKEA restarted the events and this is why I said that we expect it to grow gradually from as of Q2. As to the business in the States in general, so many parts of the business are very good. I think we have opportunities to be more consistent in the channels in sales and marketing, and this is what we are doing. The business has grown and we saw that it needed a different treatment and this is why we did the change and we believe that it will bear fruits.
Understood. So would you characterize the confidence and the outlook more related to these internal initiatives that you're implementing? Or is the underlying market also giving you a pretty high sense of confidence in the acceleration?
In general, when we try to do our best to project and it's a process that we do bottom up and it's a thorough process and this is from the low level, the Bell's view, we see the markets, we see the trends, and we believe that we are confident with the projection that we provided.
Appreciate that. And then just as a follow-up, mix has been a tailwind for margins in recent quarters. Can you comment to what's driving the favorable mix shift and how sustainable do you think this trend is? And if you could talk about any new products by market or what the pipeline looks like?
So we continue to work on differentiating Sealson from the competition. We believe we have a very strong R and D and very strong operation organization to execute upon the R and D inventions. It's a game, it's a race. So we launch products and we launch series of products and then there are imitations and all the time you have to invent your collections and also to understand the trends to be ahead of the competition and better from the competition of the competition. And we have succeeded to do it so far and we believe that we will continue to succeed to do it in the future.
We'll move next to George, Susan Maklari from UBS.
Good morning.
Good morning.
First off, I wanted to get a little bit more details on the raw material costs. I know that you said that that was a little bit better during the quarter. How are you thinking about that as we move through the year?
It's basically all related to polyester prices. We this tends to be volatile. We don't know how it will develop, but we are basically locked for the first half.
Okay. So you'll maintain these prices through the Q2 then?
Yes.
Yes. Okay. And then in terms of the share repurchases, you spent about $12,000,000 or so with the $40,000,000 that you've been authorized. Can you just give us some sense of timing, how you're thinking about using the remaining $28,000,000 or so?
Yes. So the execution of this authorization continues under a predetermined plan and we will report our progress each quarter on the earnings.
Okay.
Susan, do you have anything further?
No, I'm all set. Thank you.
We'll hear
next from John Bauch from Stifel.
Thank you and good afternoon. I guess I wanted to ask a couple of things on the U. S. Gross margin again. Was there any unusual discounting or promoting going on?
Or was it really largely, if not solely, the U. S. Plant utilization weighing on the gross margin percentage?
So basically the oil swing in gross margin relative to last year was due to the U. S. Plant. Again, as Joss mentioned, part of it was expected because we are not in an efficient utilization yet, but part of it was more than we expected. And basically all the rest was of the impact of setting each other.
So there was a negative FX impact that was offset with the lower material cost and the volume impact.
Great. And I think I heard one of you comment about sort of sales growth ex IKEA with Canada maybe leading Australia. Anyway, I couldn't remember the order. Could you restate that?
Yes. So on a constant currency basis, again, Europe and Canada were the fastest growing region this quarter, each above 40%. Australia was 19.6 percent overall constant currency growth. Now with regards to U. S.
Revenue in the Q1, again, we are not breaking out revenue without IKEA, but just want to remind everybody that IKEA revenue dropped significantly from the Q1 of last year. So that's what I can say about this. Regarding Canada, I can say that Canada even ex IKEA is very healthy growth.
Great. That's helpful. And then the there are stories around the kibbutz and what they may or may not do. I realize you may not be able to comment on their intent, but ask the question anyway.
Yes, I think you realize right.
Okay. And then is there anything on the plant, you talk about process, you mentioned progress. What I don't know, maybe you could talk about 2 or 3 metrics you're looking at. Is it scrap rates? Is it utilization rates?
Is it labor per foot? What kind of metrics are you looking at? And any kind of feel for what you've seen sequentially January through April in any or all of those metrics you're willing to share? Thank you.
So in the high level, it's the regular industrial KPIs. So processes should be controlled, deviation should be lower and then you have usage of material, hours of work and general expenses that needs to be better controlled. In general, as I said, we see a progress, but the progress is not fast enough. And we are improving all the time and but we definitely took some more strong steps toward the end of Q1 and we already seeing it getting better.
We'll move next to Lena Rogovin from Chardan Capital Markets.
Hello? I've got a couple of questions on your U. S. Business. First is, I realize that you don't disclose separately IKEA and the organic growth.
But just in terms of the trends, in terms of like for like revenue in this first quarter, how is it compared to growth rates in the previous quarters and this year any like for like growth slowdown FHL? And my second question is regarding the Richmond facilities. Is it possible to quantify utilization rate and the progress there further in the year? And the last question is also on IT business. Since it has structured lower gross margin for you and you're saying that the effect on IT is going to be stronger in the coming quarters.
What's the effect on your overall gross margin in basis points? Thank you.
Okay. So regarding IKEA business, again, we do not break it out. But as I mentioned before, Q1 revenue in IKEA in Q1 in the U. S. Was a major drop compared to last year.
So that's what I'm willing to say on that part. To your last question, when IKEA business grows, for us it dilutes a bit our gross margin, but there is a significant OpEx leverage. So basically, it's a very good business for us in terms of operating margin, which is what counts and therefore this shouldn't be a problem for us and it shouldn't reduce our EBITDA margins at all. With regards to Richmond Hill, can you remind me again the question?
Yes, sure. I asked if it is possible to quantify utilization rates in funds and what's the dynamics there you expect?
No, we are not specifying utilization rates, but currently they are not high. We expect the utilization rate to continue and improve during the year and this will also benefit our margins.
At this time, we'll take a follow-up from Michael Rehaut from JPMorgan.
Thanks. Just
wanted to circle back
to a couple quick items. Number 1, in the U. S. With the expected improvement now in the Q2 from IKEA, I was wondering if we should be expecting a return to double digit sales growth in the second quarter or would that more be a 2 second half event?
I think overall we don't provide guidance according to quarters, but I think this will be the direction.
Are you saying the direction for 2Q or for second half? I mean, when you say this is the direction, I'm just not sure I understand what you're saying?
Direction starting with Q2 and improving in Q3.
Okay. And then also just on the I just wanted to be clear on the managerial changes. I don't think I got an answer from my previous question. If you could just give us a sense of when during the quarter did you make the managerial changes at the Richmond Hill plant?
Richmond Hill managerial changes part of it is part of the regular process and part of it starting just now and it's natural development. We had relatively few people from Israel there for relocation and we are replacing them step by step by local people. And now we appointed a new General Manager that will start will start starting now basically.
Okay. Thank you. Okay.
Thank you.
We'll move next for a follow-up from George Staphos from Bank of America.
Thanks for taking the follow ups. Just two quick questions. One on IKEA, can you maybe provide a little color in terms of what you're monitoring when you talk about the IKEA sales for the rest of the quarter? Can you remind us what drives the promotional timing? How much visibility do you have on this?
And then just as a second part to that, when do we anniversary the Canada IKEA sales, if you can remind us?
So the IKEA promotions are usually about 3 or 4 a year, And this was the now by the end of started on March was the first event this year. And we will have probably 2 more events this year for promotions and the timing in Canada is quite similar I think to the time in the States.
Thanks. And maybe to continue on your question. We do have a little bit more visibility on IKEA because the orders are normally fulfilled in a lag of time. So there is some visibility about how many orders were generated.
Thanks for that, Yair. And just last one for me. Can you talk about the sales growth in Australia? I think in your formal remarks, you mentioned maybe better than expected housing statistics. But I believe you've also introduced some new products over the last few quarters, so maybe that's also driving the growth, but if you could provide some additional color.
Thank you.
Yes. So the dominant factors behind our growth in Australia are increased quotes penetration of course and then improved product offering combined with our strong execution there. And the housing environment is currently slightly better than we assumed in the beginning of the year. So Australia performance is very good overall. Alex?
And at this time, there are no further questions in the queue. I'd like to turn the conference back over to Mr. Sharon for any concluding remarks.
Thank you for your continued interest in Caesarstone and we look forward to sharing more with you next quarter. Have a great day. Bye.
And that does conclude today's teleconference.