Caesarstone: Cash-Strong, Revenue-Soft

MP MENASHE, Israel — Caesarstone continued its recent financial track in this year’s first quarter by bolstering finances in the face of weaker revenues.

The surfaces company reported $118.3 million in worldwide revenues during January-March, down 21% (on constant-currency basis) from the same time last year. In the United States, Caesarstone’s biggest market, $60.9 million in revenue marked a 19.8% year-to-year downturn.

“Our team has demonstrated resilience and adaptability to start off 2024 while facing persistent global economic headwinds, regulatory changes in Australia and the ongoing conflict in Israel,” said Yos Shiran, Caesarstone CEO, in a statement announcing first-quarter results.

”Despite our quarterly revenues falling short of our expectations, we are beginning to see the benefits of our strategic restructuring actions after aligning our production footprint and network of production business partners, especially in improving our gross margin in this quarter,” he added.

Caesarstone continuing refinement of its business led to an increase from 1Q 2023 in gross margin to 24.5% and a slight reduction in operating loss ($5.9 million to $5.6 million). It also had positive cash flow of $8.7 million, driven mainly by inventory reduction.

In a conference call on May 8 with Wall Street analysts, Caesarstone CFO Nahum Trost said the company “expedited sales” of excess inventory “in connection with the closure of the Richmond Hill plant and in connection with the future regulations in Australia.”

Trost noted that the effort sold off most of the higher-production-cost material from the now-closed factory in Georgia. The company shuttered the facility early this year as part of its outsourcing of quartz-surface production, with third-party manufacturers now supplying more than half of Caesarstone surfaces.

“Let’s say that, after Q2, we will not see the negative impact of the old inventory of Richmond Hill,” Trost said.

Closing the U.S. factory, plus a production facility in Israel last year, will result in savings of $20 million this year, Trost said. Caesarstone is subletting parts of the Israeli plant, he added, and “we are also looking for the best alternative to monetize our Richmond Hill site.”

In another restructuring action, Shiran announced that “we have separated our U.S. and Canadian leadership teams to allow each team to better focus on the opportunities in their respective markets.” The move reverses the early 2019 combination of efforts in both countries under Caesarstone North America.

Shiran also noted that the company continues to accelerate work to meet the July 1 ban of quartz-surface fabrication in Australia – a market where Caesarstone was the clear market leader.

“By the end of second quarter of 2024, a majority of our collection will consist of alternative products,” he said, “with a full collection of compliant products available by end of the year, which, we believe, will allow us to retain our leading position in the Australian market.”

Shiran also noted that, with the company’s porcelain-slab products, “activity is very small for Caesarstone, but very promising,” in the United States.

“We are investing a lot in expanding the collection, improving it, offering additional products,” he said. “So, it’s not significant yet in terms of numbers, but it is very important in terms of the potential for the future of Caesarstone.”

Caesarstone also addressed a new problem arising from the Israel-Hamas conflict, as the company will need to deal with Turkey’s decision on May 2 to immediately stop all trade with Israel until there’s an uninterrupted and sufficient flow of humanitarian aid to Gaza. Turkey is one of the main suppliers worldwide for processed quartz parts used for surface production.

“We have been sourcing raw materials for several years from Turkey, and the recently announced trade restrictions could have a negative impact on our Bar-Lev plant production in the short term,” Trost said. “We are actively seeking alternative sources for raw materials to minimize any potential disruptions.

“While we anticipate an increase in production cost at our Bar-Lev manufacturing facility, due to these restrictions, we do not foresee currently a significant negative impact on our overall financial results.”

Turkey announced May 9 that existing import-export contracts between companies in Israel will be allowed to continue for three more months, although direct shipments are prohibited. Goods will need to be sent through a third country.