Caesarstone Reports Third Quarter 2020 Financial Results

Rhea-AI Summary

Caesarstone Ltd. (NASDAQ: CSTE) reported its Q3 2020 financial results, highlighting revenue of $123.9 million, down 14.4% year-over-year, primarily due to COVID-19 disruptions in the Americas. The company achieved a gross margin of 31.4% and adjusted EBITDA of $23.7 million, with a margin of 19.1%, marking the highest in over two years. Net income increased to $12.8 million, or $0.37 per diluted share. The company declared a cash dividend of $0.14 per share, to be paid on December 9, 2020. CSTE maintains a strong cash position of $155.7 million with no debt.

Positive

• Adjusted EBITDA increased to $23.7 million, highest in over two years.
• Net income rose to $12.8 million, up from $7.1 million year-over-year.
• Gross margin improved to 31.4%, up from 29.8% year-over-year.
• Declared cash dividend of $0.14 per share, reflecting positive financial health.

Negative

• Revenue decreased to $123.9 million, down 14.4% year-over-year, largely due to COVID-19.
• Operating income increased but reflects a decline in sales volume and prices.

MP MENASHE, Israel--(BUSINESS WIRE)--Caesarstone Ltd. (NASDAQ: CSTE), a leading developer and manufacturer of high-quality engineered surfaces, today reported financial results for its third quarter ended September 30, 2020.

“I am encouraged by the ongoing disciplined execution of our Global Growth Acceleration Plan to improve our business over the long-term,” commented Yuval Dagim, Chief Executive Officer. “The benefits of our team’s collective efforts are emerging, with visible progress in our third quarter results, as we realized our highest adjusted EBITDA and margin in over two years. In addition, we are encouraged with the improvement in year-over-year sales trends compared to the second quarter 2020. Most importantly, we delivered this performance while maintaining the health and safety of our employees, customers and partners across the globe.”

Mr. Dagim continued, “We have also kept a sharp focus on executing strategic investments to further solidify our position as a leading premium, multi-material countertop Company. Our recent majority stake acquisition of Lioli Ceramica is directly aligned with this strategy that leverages our brand, distribution, sales and global scale to efficiently enlarge our addressable market. As we integrate Lioli and make additional progress on other initiatives, we remain confident in the prospects for our business as the recovery continues.”

Ophir Yakovian, Chief Financial Officer, added, “Our diligent efforts to improve our operations allowed us to generate further cost savings and create additional efficiencies to mitigate the COVID-19 pandemic related business disruptions, primarily in our Americas region. We are extremely pleased with our ability to improve our results while carefully managing our working capital to produce strong cash flow from operations of $28.2 million during the third quarter. Looking at the remainder of the year, our significant cash position (*) in excess of $155 million provides us with the capacity to continue to accelerate initiatives to transform our business.”

(*) Cash position is defined as cash and cash equivalents and short-term bank deposits and long and short-term investment in marketable securities less debt from financial institutions.

Third Quarter 2020 Results

Revenue in the third quarter of 2020 was $123.9 million compared to $142.8 million in the prior year quarter. On a constant currency basis, third quarter revenue was lower by 14.4% year-over-year, driven primarily by COVID-19 pandemic related business disruptions, particularly in the Americas region.

Gross margin in the third quarter was 31.4% compared to 29.8% in the prior year quarter. Adjusted gross margin in the second quarter was 31.4% compared to 29.9% in the prior year quarter. The year-over-year improvement in gross margin mainly reflects improved product mix, lower raw material costs and improved efficiency partly offset by the impact of lower sales volume, lower sale prices and less favorable regional mix.

Operating expenses in the third quarter were $23.8 million, or 19.2% of revenue, compared to $29.7 million, or 20.8% of revenue in the prior year quarter. Excluding legal settlements and loss contingencies, operating expenses improved to 18.8% of revenue, compared to 19.5% in the prior year quarter mainly due to lower marketing and sales expenses combined with lower general and administrative expenses.

Operating income in the third quarter was $15.0 million compared to operating income of $12.9 million in the prior year quarter. The year-over-year difference mainly reflects higher gross margin and lower operating expenses.

Adjusted EBITDA, which excludes expenses for share-based compensation, legal settlements and loss contingencies and for non-recurring items, was $23.7 million in the third quarter, representing a margin of 19.1%. This compares to adjusted EBITDA of $22.5 million, representing a margin of 15.8%, in the prior year quarter. The year-over-year margin improvement primarily reflects higher gross margin and lower operating expenses as a percentage of revenue.

Finance (income) expenses in the third quarter was $0.1 million income compared to finance expenses of $4.1 million in the prior year quarter. The difference was mainly a result of the favorable impact of foreign currency exchange rates.

Net income for the third quarter was $12.8 million compared to net income of $7.1 million in the prior year quarter. Diluted net income per share for the third quarter was $0.37 compared to diluted net income per share of $0.21 in the prior year quarter. Adjusted diluted net income per share for the third quarter was $0.41 on 34.5 million shares, compared to adjusted diluted net income per share of $0.29 on 34.6 million shares in the prior year quarter.

Balance Sheet & Liquidity

The Company's balance sheet as of September 30, 2020 remained strong, including cash, cash equivalents and short-term bank deposits and short and long-term marketable securities of $155.7 million with no debt from financial institutions. The Company believes it has a strong financial position and the flexibility required to support its global operations and strategic plan.

Dividend

The Company’s dividend policy provides for a quarterly cash dividend of up to 50% of reported net income on a year-to-date basis, less any amount already paid as dividend for the respective period (the “calculated dividend”), subject in each case to approval by the Company’s board of directors. No dividend is paid if it would be less than $0.10 per share.

In accordance with the Company’s dividend policy, the board of directors declared a cash dividend of $0.14 per share for the third quarter and the nine months ended September 30, 2020. The dividend will be paid on December 9, 2020 to shareholders of record as of November 18, 2020. The dividend payment is subject to withholding tax of 20%.

Webcast and Conference Call Details

The Company will host a live webcast and conference call today at 8:30 a.m. ET to discuss the results, followed by a question and answer session for the investment community. The live webcast of the call can be accessed at ir.caesarstone.com. For those unable to access the webcast, the conference call will be accessible by dialing 1-877-407-4018 (domestic) or +1-201-689-8471 (international). The toll-free Israeli number is 1 80 940 6247. Upon dialing in, please request to join the Caesarstone Third Quarter Earnings Call.

To listen to a telephonic replay of the conference call, dial toll-free 1-844-512-2921 (domestic) or +1-412-317-6671 (international) and enter pass code 13711696. The replay will be available beginning at 11:30 a.m. ET on Wednesday, November 4, 2020 and will last through 11:59 p.m. ET on Wednesday, November 11, 2020.

About Caesarstone

Caesarstone is a concept and lifestyle-driven company with a customer-centered approach to designing, developing, and producing high-end engineered surfaces used in residential and commercial buildings. Our products offer superior aesthetic appeal and perfected functionality through a distinct variety of colors, styles, textures, and finishes used in countertops, vanities, wall cladding, floors, and other interior surfaces. Marked by their inherent longevity characteristics such as non-porousness, scratch and stain resistance, and durability, the company’s product umbrella offers a highly desirable alternative to other surfaces. Strong commitment to service has fostered growing customer loyalty in over 50 countries where the five distinct Caesarstone product collections are available: Classico, Supernatural, Metropolitan, Concetto and Outdoor. For more information please visit our website: www.caesarstone.com.

Non-GAAP Financial Measures

The non-GAAP measures presented by the Company should be considered in addition to, and not as a substitute for, comparable GAAP measures. Reconciliations of GAAP gross profit to adjusted gross profit, GAAP net income (loss) to adjusted net income (loss) and net income (loss) to Adjusted EBITDA are provided in the schedules to this release. To calculate revenues growth rates that exclude the impact of changes in foreign currency exchange rates, the Company converts actual reported results from local currency to U.S. dollars using constant foreign currency exchange rates in the current and comparable period. The Company provides these non-GAAP financial measures because it believes that they present a better measure of the Company's core business and management uses the non-GAAP measures internally to evaluate the Company's ongoing performance. Accordingly, the Company believes that they are useful to investors in enhancing an understanding of the Company's operating performance.

Forward-Looking Statements

Information provided in this press release may contain statements relating to current expectations, estimates, forecasts and projections about future events that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to the Company's plans, objectives and expectations for future operations, including estimations relating to the impact of the COVID-19 pandemic and mitigation measures in connection thereto, expectations of the results of the Company’s business optimization initiative and its projected results of operations. These forward-looking statements are based upon management's current estimates and projections of future results or trends. Actual results may differ materially from those projected as a result of certain risks and uncertainties, both known or unknown. These factors include, but are not limited to: the impact of the COVID-19 pandemic on end-consumers, the global economy and the Company’s business and results of operations; the ability of the company to realign aspects of its business based on the business optimization initiative, the strength of the home renovation and construction sectors; intense competitive pressures; the outcome of silicosis and other bodily injury claims; regulatory requirements relating to hazards associated with exposure to silica dust; manufacturing of existing products and managing required changes in production and supply chain; economic conditions within any of our key existing markets changes in raw material prices; fluctuations in currency exchange rates; the success of our expansion efforts in the United States; unpredictability of seasonal fluctuations in revenues; disturbances to the Company’s operations or the operations of its suppliers, distributors, customers or other third parties and other factors discussed under the heading "Risk Factors" in our most recent annual report on Form 20-F and other documents filed with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

Caesarstone Ltd. and its subsidiaries Condensed consolidated balance sheets
		As of
U.S. dollars in thousands		September 30, 2020				December 31, 2019
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents and short-term bank deposits		$	135,975			$	139,372
Short-term available for sale marketable securities			10,325				-
Trade receivables, net			68,671				78,282
Other accounts receivable and prepaid expenses			27,374				34,066
Inventories			127,487				122,686
Total current assets			369,832				374,406
LONG-TERM ASSETS:
Severance pay fund			3,639				3,475
Other long-term receivables			3,398				3,176
Deferred tax assets, net			7,929				7,881
Long-term deposits and prepaid expenses			4,115				2,887
Operating lease right-of-use assets			78,287				72,047
Long-term available for sale marketable securities			9,432				-
Property, plant and equipment, net			198,610				204,776
Goodwill			35,425				35,218
Total long-term assets			340,835				329,460
Total assets		$	710,667			$	703,866
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Trade payables			39,951				53,072
Related party and other loan			2,210				2,212
Short term legal settlements and loss contingencies			23,276				28,300
Accrued expenses and other liabilities			44,848				42,782
Total current liabilities			110,285				126,366
LONG-TERM LIABILITIES:
Long-term loan and financing liability of land from a related party			6,914				7,915
Legal settlements and loss contingencies long-term			27,661				21,505
Long-term lease liabilities			69,385				64,638
Accrued severance pay			4,513				4,333
Long-term warranty provision			1,267				1,385
Total long-term liabilities			109,740				99,776
EQUITY:
Ordinary shares			371				371
Treasury shares - at cost			(39,430	)			(39,430	)
Additional paid-in capital			159,561				157,225
Capital fund related to non-controlling interest			(5,587	)			(5,587	)
Accumulated other comprehensive loss			(2,309	)			(3,288	)
Retained earnings			378,036				368,433
Total equity			490,642				477,724
Total liabilities and equity		$	710,667			$	703,866

Caesarstone Ltd. and its subsidiaries
Condensed consolidated statements of income
			Three months ended September 30,							Nine months ended September 30,
U.S. dollars in thousands (except per share data)				2020				2019			2020			2019
			(Unaudited)							(Unaudited)
Revenues			$	123,922			$	142,839		$	349,516		$	412,107
Cost of revenues				85,068				100,215			254,089			298,451
Gross profit				38,854				42,624			95,427			113,656
Operating expenses:
Research and development				930				962			2,473			3,184
Marketing and selling				14,231				17,419			44,295			50,072
General and administrative				8,194				9,451			29,302			31,056
Legal settlements and loss contingencies, net				452				1,853			4,927			5,158
Total operating expenses				23,807				29,685			80,997			89,470
Operating income				15,047				12,939			14,430			24,186
Finance (income) expenses, net				(52	)			4,053			1,586			6,200
Income before taxes				15,099				8,886			12,844			17,986
Taxes on income				2,292				1,758			3,241			4,849
Net income			$	12,807			$	7,128		$	9,603		$	13,137
Basic net income per ordinary share			$	0.37			$	0.21		$	0.28		$	0.38
Diluted net income per ordinary share			$	0.37			$	0.21		$	0.28		$	0.38
Weighted average number of ordinary shares used in computing basic income per ordinary share				34,422,128				34,390,244			34,411,480			34,379,402
Weighted average number of ordinary shares used in computing diluted income per ordinary share				34,453,647				34,442,592			34,455,129			34,438,797

Caesarstone Ltd. and its subsidiaries Selected Condensed consolidated statements of cash flows
		Nine months ended September 30,
U.S. dollars in thousands			2020				2019
		(Unaudited)
Cash flows from operating activities:
Net income		$	9,603			$	13,137
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			21,160				21,617
Share-based compensation expense			2,335				2,852
Accrued severance pay, net			16				(78	)
Changes in deferred tax, net			(46	)			(1,359	)
Capital loss			342				342
Legal settlements and loss contingencies, net			4,927				5,158
Compensation paid by a shareholder							-
Foreign currency translation gains							-
Decrease (increase) in trade receivables			9,155				(14,930	)
Decrease (increase) in other accounts receivable and prepaid expenses			3,740				(7,787	)
Decrease (increase) in inventories			(4,375	)			33,466
Decrease in trade payables			(15,263	)			(9,292	)
Increase (decrease) in warranty provision			(342	)			97
Changes in right of use assets			(5,245	)			(73,969	)
Changes in lease liabilities			5,761				77,318
Amortization of premium and accretion of discount on marketable securities, net			69				-
Changes in Accrued interest related to Marketable Securities			(87	)			-
Increase in accrued expenses and other liabilities including related party			1,535				1,202
Net cash provided by operating activities			33,285				47,774
Cash flows from investing activities:
Purchase of property, plant and equipment			(15,544	)			(15,770	)
Proceeds from sale of property, plant and equipment			7				52
Investment in marketable securities			(19,728	)			-
Increase in long term deposits			(407	)			(200	)
Net cash used in investing activities			(35,672	)			(15,918	)
Cash flows from financing activities:
Changes in short-term bank credit and loans, net			(459	)			(7,771	)
Repayment of a financing leaseback related to Bar-Lev transaction			(924	)			(891	)
Net cash used in financing activities			(1,383	)			(8,662	)
Effect of exchange rate differences on cash and cash equivalents			373				80
Increase (decrease) in cash and cash equivalents and short-term bank deposits			(3,397	)			23,274
Cash and cash equivalents and short-term bank deposits at beginning of the period			139,372				93,562
Cash and cash equivalents and short-term bank deposits at end of the period		$	135,975			$	116,836
Non - cash investing:
Changes in trade payables balances related to purchase of fixed assets			(438	)			(2,463	)

	Caesarstone Ltd. and its subsidiaries
			Three months ended September 30,						Nine months ended September 30,
	U.S. dollars in thousands			2020			2019			2020			2019
			(Unaudited)						(Unaudited)
	Reconciliation of Gross profit to Adjusted Gross profit:
	Gross profit		$	38,854		$	42,624		$	95,427		$	113,656
	Share-based compensation expense (a)			100			136			353			274
	Non-recurring import related income			-			-			-			(1,501	)
	Other non-recurring items (b)			-			-			-			1,367
	Adjusted Gross profit (Non-GAAP)		$	38,954		$	42,760		$	95,780		$	113,796

(a)	Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors of the Company.
(b)	Relates mainly to one time amortization of machinery equipment with no future alternative use.

	Caesarstone Ltd. and its subsidiaries
			Three months ended September 30,							Nine months ended September 30,
	U.S. dollars in thousands			2020				2019			2020			2019
			(Unaudited)							(Unaudited)
	Reconciliation of Net Income to Adjusted EBITDA:
	Net income		$	12,807			$	7,128		$	9,603		$	13,137
	Finance (income) expenses, net			(52	)			4,053			1,586			6,200
	Taxes on income			2,292				1,758			3,241			4,849
	Depreciation and amortization			7,058				6,755			21,160			21,617
	Legal settlements and loss contingencies, net (a)			452				1,853			4,927			5,158
	Share-based compensation expense (b)			628				968			2,335			2,852
	Non-recurring import related income			-				-			-			(1,501	)
	Acquisition and integration related expenses			477				-			477			-
	Other non-recurring items (c)			-				-			-			993
	Adjusted EBITDA (Non-GAAP)		$	23,662			$	22,515		$	43,329		$	53,305

(a)	Consists of legal settlements expenses and loss contingencies, net, related to product liability claims and other adjustments to on-going legal claims, including related legal fees.
(b)	Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors of the Company.
(c)	Nine months ended September 30, 2019 relates to non-recurring expenses related to North American region establishment and one time charge related to reduction in headcount.

Caesarstone Ltd. and its subsidiaries
		Three months ended September 30,						Nine months ended September 30,
U.S. dollars in thousands (except per share data)			2020			2019			2020			2019
		(Unaudited)						(Unaudited)
Reconciliation of net income to adjusted net income:
Net income		$	12,807		$	7,128		$	9,603		$	13,137
Legal settlements and loss contingencies, net (a)			452			1,853			4,927			5,158
Share-based compensation expense (b)			628			968			2,335			2,852
Non cash revaluation of lease liabilities (c)			227			1,123			12			3,349
Non-recurring import related income (d)			-			-			-			(1,501	)
M&A related expenses			477			-			477			-
Other non-recurring items (e)			-			-			-			2,193
Total adjustments			1,784			3,944			7,751			12,051
Less tax on non-tax adjustments (f)			481			1,063			2,090			3,249
Total adjustments after tax			1,303			2,881			5,661			8,802
Adjusted net income (Non-GAAP)		$	14,110		$	10,009		$	15,264		$	21,939
Adjusted diluted EPS (g)		$	0.41		$	0.29		$	0.44		$	0.64

(a)	Consists of legal settlements expenses and loss contingencies, net, related to product liability claims and other adjustments to on-going legal claims, including related legal fees.
(b)	Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors of the Company.
(c)	Exchange rate differences deriving from revaluation of lease contracts in accordance with FASB ASC 842.
(d)	Nine months ended September 30, 2019 relates mainly to non-recurring import related expenses and relocation expenses of Caesarstone USA headquarters, the Company's subsidiary.
(e)	Nine months ended September 30, 2019 relates to non-recurring expenses related to North American region establishment and one time charge related to reduction in headcount.
(f)	Tax adjustments for the three and nine months ended September 30, 2020, based on the effective tax rates of the comparative periods.
(g)	In calculating adjusted diluted (Non-GAAP) EPS for the three and nine month ended September 30, 2020, the diluted weighted average number of shares outstanding excludes the effects of share-based compensation expense in accordance with FASB ASC 718.

Caesarstone Ltd. and its subsidiaries
Geographic breakdown of revenues by region
		Three months ended September 30,						Nine months ended September 30,
U.S. dollars in thousands			2020			2019			2020			2019
		(Unaudited)						(Unaudited)
USA		$	52,097		$	64,805		$	153,878		$	185,812
Canada			19,174			21,884			52,167			65,404
Latin America			124			1,433			762			3,380
America's			71,395			88,122			206,807			254,596
Australia			27,746			28,641			73,634			82,147
Asia			2,881			3,676			7,444			11,583
APAC			30,627			32,317			81,078			93,730
EMEA			11,422			11,717			30,793			33,591
Israel			10,478			10,683			30,838			30,190
Total Revenues		$	123,922		$	142,839		$	349,516		$	412,107

Caesarstone Ltd. and its subsidiaries
Geographic breakdown of revenues by region - Supplemental data
		Three months ended
U.S. dollars in thousands		9/30/2020				6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019			3/30/2019			12/31/2018			9/30/2018			6/30/2018
		(Unaudited)
USA		$	52,097			$	41,726			$	60,055			$	64,659			$	64,805			$	64,590		$	56,417		$	60,200		$	61,933		$	60,358
Canada			19,174				14,435				18,558				20,575				21,881				23,341			20,178			23,834			25,140			27,349
Latin America			124				132				506				735				1,434				1,351			596			1,212			1,635			1,738
America's			71,395				56,293				79,119				85,969				88,120				89,282			77,191			85,246			88,708			89,445
Australia			27,746				23,534				22,354				26,000				28,642				28,294			25,214			33,484			33,968			34,731
Asia			2,881				1,732				2,831				3,932				3,675				3,311			4,596			4,929			4,189			4,221
APAC			30,627				25,266				25,185				29,932				32,317				31,605			29,810			38,413			38,157			38,952
EMEA			11,422				8,031				11,340				9,464				11,719				11,418			10,455			9,954			11,115			11,721
Israel			10,478				9,447				10,913				8,502				10,683				8,766			10,741			9,268			9,709			9,125
Total Revenues		$	123,922			$	99,037			$	126,557			$	133,867			$	142,839			$	141,071		$	128,197		$	142,881		$	147,689		$	149,243
		Year-over-year % change
		9/30/2020				6/30/2020				3/31/2020				12/31/2019				9/30/2019
		(Unaudited)
USA			-19.6	%			-35.4	%			6.4	%			7.4	%			4.6	%
Canada			-12.4	%			-38.2	%			-8.0	%			-13.7	%			-13.0	%
Latin America			-91.4	%			-90.2	%			-15.1	%			-39.4	%			-12.3	%
America's			-19.0	%			-36.9	%			2.5	%			0.8	%			-0.7	%
Australia			-3.1	%			-16.8	%			-11.3	%			-22.3	%			-15.7	%
Asia			-21.6	%			-47.7	%			-38.4	%			-20.2	%			-12.3	%
APAC			-5.2	%			-20.1	%			-15.5	%			-22.1	%			-15.3	%
EMEA			-2.5	%			-29.7	%			8.5	%			-4.9	%			5.4	%
Israel			-1.9	%			7.8	%			1.6	%			-8.3	%			10.0	%
Total Revenues			-13.2	%			-29.8	%			-1.3	%			-6.3	%			-3.3	%
		Year-over-year % change in constant currency (*)
		9/30/2020				6/30/2020				3/31/2020				12/31/2019				9/30/2019
		(Unaudited)
USA			-19.6	%			-35.4	%			6.4	%			7.4	%			4.6	%
Canada			-11.7	%			-36.0	%			-7.1	%			-13.6	%			-12.1	%
Latin America			-91.3	%			-90.2	%			-15.2	%			-39.4	%			-12.3	%
America's			-18.8	%			-36.4	%			2.7	%			0.9	%			-0.4	%
Australia			-7.1	%			-11.5	%			-3.3	%			-18.2	%			-10.0	%
Asia			-21.2	%			-45.9	%			-37.1	%			-14.7	%			-8.8	%
APAC			-8.7	%			-15.1	%			-8.5	%			-17.8	%			-9.9	%
EMEA			-5.9	%			-26.9	%			11.4	%			-4.4	%			10.9	%
Israel			-4.5	%			4.5	%			-1.5	%			-14.0	%			7.8	%
Total Revenues			-14.4	%			-28.3	%			0.5	%			-5.5	%			-1.5	%

(*) Change in revenues at constant currency is calculated so that revenues can be viewed without the impact of fluctuations s in foreign currency exchange rates, thereby facilitating period-to-period comparisons of business performance. Change in revenues adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year period’s currency conversion rate. Exchange rates used, are the representative exchange rate published by the Bank of Israel for the relevant periods.