Caesarstone: 2015 a “Fruitful Year,” but Bumpy

By Emerson Schwartzkopf

When Caesarstone CEO Yos Shiran noted “some turbulence” in describing the quartz-surfaces producer’s 2015 journey, he didn’t surprise anyone.

Naming a new head of U.S. operations during a conference call Wednesday with Wall Street stock analysts about last year’s financial performance, however, provided an early morning eye-opener.

In the middle of reviewing Caesarstone’s performance last year in the United States, Shiran announced that Dan Clifford, Caesarstone Canada’s chief, will move south of the border to be president of U.S. distribution. Clifford will replace Sagi Cohen, who’ll stay with the company and work on global business initiatives in Israel.

Clifford will head up Caesarstone’s largest market – which, as Shiran explained, gave the company profits and promise in 2015. And, in different ways, some concerns.

Full-year sales for U.S. Caesarstone operations totaled $233.3 million, an increase of 20.3% from the previous year. Shiran noted last year’s fourth-quarter U.S. sales of $56.5 million showed a 14% year-to-year increase.

U.S. sales dominate Caesarstone’s global sales charts, providing 44.7% of 2015 total company revenues. The United States is now twice as large as Caesarstone’s #2 market of Australia.

“The United States continues to be our largest market,” Shiran said, “and it continues to hold the largest potential for growth. The quartz-material conversion in the United States continues to be powerful.”

However, the United States market also magnifies four concerns that can affect Caesarstone’s performance this year.

• Shiran noted that overall quartz-surface growth is not only in the mid- to high-end sectors of the market – areas that Caesarstone actively competes – but also in lower-end value-conscious sales.

“What we see is a lot of Chinese imports coming to the lower end, and we see also other players, of course, responding and competing,” Shiran said. “So this affects all the competitive landscape. We managed in the past to live with this, and we still feel good on our strategy.”

• Shiran also cited the company’s new production plant in Richmond Hill, Ga., as a balancing benefit in dealing with the increased competition in the U.S. market. “Our new U.S. manufacturing facility will provide scale benefits and flexibility to help us capture this opportunity,” he explained.

In repeated questioning from stock analysts, though, Caesarstone CFO Yair Averbuch noted that continued ramp-up costs at the factory – in operation since last summer — affected U.S. profits through last year’s fourth quarter.

“The factory is becoming more efficient and the throughput is growing,” “Averbuch noted. “So, in 2016, we expect to have a significant throughput from the factory.

“It cost more than we thought, a little bit, but the progress in terms of quality and efficiency is improving.”

• Another drag on U.S. market potential came with the company’s countertop partnership with IKEA home-furnishing centers. While company officials didn’t provide details, Shiran noted that strong U.S. sale growth in Caesarstone’s core markets were “offset by significantly lower sales to IKEA.”

As he did three months ago in a similar stock-analyst call, Caesarstone is waiting on IKEA to resume promotional efforts that should spark increased countertop sales at the retailer’s 38 megastores. That program is set to resume in this quarter, but bottom-line impact on Caesarstone revenues won’t kick in until later this spring and 2Q 2016 financial reporting.

• Finally, there’s the U.S. dollar. Israel-based Caesarstone changed its accounting several years ago to report financial information in greenbacks instead of Israeli new shekels. While this aided Caesarstone in its listing of NASDAQ common stock, the conversion now tends to devalue profits worldwide due to the growing strength of the U.S. dollar.

The biggest example of the dollar concern is right at the top of the financial data sheet in company revenues. Caesarstone revenues for all of 2015 grew by 11.6% to $499.5 million compared to $447.4 million in 2014. Factor out currency-exchange changes, however, and revenues on a “constant-currency” basis would show a year-to-year sales growth of 22.1%.

Caesarstone remains bullish on 2016, issuing guidance (a forecast) of 2016 revenue to be in the range of $550 million to $565 million.

It all adds up to an interesting year to come for Caesarstone, as if 2015 didn’t provide enough excitement with a proxy fight with a shareholder group and the near-halving of the company’s stock-market value after a short-seller’s research report.

“Despite some turbulent events we’ve experienced,” Shiran said, “it was a very fruitful year for Caesarstone.”

To read a full transcript of the sales call, go to www.seekingalpha.com.

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