Caesarstone Revenues Up in Bumpy 3Q 2015
By Emerson Schwartzkopf
When a company sets new sales highs, the response is usually “that’s great!”
With Caesarstone’s announcement this week of third-quarter 2015 performance, it sounded more like “and what else?”
While the Israeli manufacturer of quartz surfaces posted positive overall results for this July-September, questioned focuses on other developments, including:
- Slow sales with major U.S. partner IKEA;
- A settlement on silicosis claims in Israel;
- Production at its new U.S. manufacturing plant;
- Growing inventories of slabs; and
- A more-conservative outlook for final 2015 results.
Caesarstone’s 3Q 2015 worldwide revenue hit a record $136.8 million, up 11% from the same time last year (and a 23.8% climb with currency-value adjustments). The U.S. market drove most of the year-to-year upswing, contributing $61.7 million (+22.2%); Canada accounted for $19.8 million (+16.9%).
“We are pleased with our results in the third quarter, which demonstrate the continuing strength of our brand and business around the world,” said CEO Yos Shiran. “We are executing well, driving growth despite significant foreign currency headwinds. We are also continuing to innovate, launch new products, expand our infrastructure, and enhance our competitive edge.”
Caesarstone’s gross margin for 3Q 2015 came in at 39.5%, compared to 43.7% in the same period of the prior year. Some of that could be attributed to continuing currency changes worldwide; Caesarstone – despite being Israel-based – reports financial data in U.S. dollars, and the strong USD weakens results from other countries.
Plenty of other factors affected company stock performance, including a research report by short sellers Spruce Point Capital Management in August that brought down share prices significantly. A number of points came up in a longer-than-usual grilling of Caesarstone officials by Wall Street stock analysts in an early Wednesday morning conference call.
IKEA: Shiran noted in a conference call last year that its U.S. countertop deal with furnishing giant IKEA led to lower margins than expected. This week, the CEO said that the company was lowering U.S. revenue expectations in fourth-quarter 2015 to reflect a $5 million shortfall (in sales through IKEA.
Caesarstone sees the drag as temporary due to IKEA “operation factors related to sales-event timing” and not related to quartz surfaces, Shiran said. The postponed events should occur early next year with a positive effect on Caesarstone’s U.S. earnings in 2Q 2016.
Silicosis: To settle individual non-class-action claims concerning fabrication in Israel, Caesarstone marked up a $4.7 million non-cash expense in this year’s third quarter. The company is still contesting class-action claims, and Shiran said the company has a strong defense.
Caesarstone CFO Yair Averbuch explained that the company’s short- and long-term exposure to the claims totaled $14.5 million, with anticipated revenues making up the difference. Shiran added that Caesarstone has umbrella insurance coverage on claims worldwide, although no claims have surfaced outside Israel.
U.S manufacturing: Shiran said that the initial production line at Caesarstone’s new Richmond Hill, Ga., plant is “operating at a higher pace” and the second line has “reached the commissioning stage.” The company also noted a $10 million pull on revenues in plant start-up, and production next year will reverse the cash feed.
“Our plan is to produce much more in the United States than we produced this year, of course, because we’re just starting and we’re ramping up,” Shiran said. “So it will be a different picture totally different picture next year regarding the U.S. facility.”
Inventories: The value of manufactured slabs on hand grew from $80.2 million at the end of 2014 to $94.2 million in 3Q 2015. However, Shiran said that inventory levels will be going down because of U.S. manufacturing, which will allow the company to react faster to market needs.
2015 outlook: Caesarstone again tightened its range of expected worldwide revenue for 2015 to $497-502 million and its expected range of adjusted earnings (EBIDTA) for the full year to $125-128 million.
Governance: Shiran announced that company board chairman Maxim Ohana will step down at Caesarstone’s annual meeting next month, which will leave two independent director seats open. One will be filled by Ron Kaplan, who’s noted for turning around synthetic-decking manufacturer Trex.
Shiran says that members of Kibbutz Sdot Yam, the largest group of Caesarstone shareholders, will propose an alternate slate of directors with different nominees for the independent seats.
Spruce Point: “We were surprised by their unfounded allegations constituting the deliberate attempt to unfairly damage the company and to our shareholders,” Shiran said of the report. “We financed our U.S. investment by our own cash flow from operations. We are proud of what we have built here and taken the responsibility to create value to our shareholders very seriously.”
When asked by Barclays Capital analyst Stephen Kim if the company would take legal action against Spruce Point over the report, Shiran didn’t rule it out.
“I think that it’s a possibility,” Shiran said. “It’s on the table; in terms of the timing, we have to take also other considerations. And of course it has to be weighed on effort-to-reward, but it’s definitely something that I think we’ll consider with the time when the time is right.”
Caesarstone stock (NASDAQ:CSTE), which dipped to $33.33 in after-hours trading before Wednesday’s conference call, went as high as $42.37 on Wednesday afternoon, and finished the week today at $40.21.
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