Business Wire | Aug 5, 2020 07:00AM EDT

Caesarstone Reports Second Quarter 2020 Financial Results

Aug. 05, 2020

MP MENASHE, Israel--(BUSINESS WIRE)--Aug. 05, 2020--Caesarstone Ltd. (NASDAQ:CSTE), a leading developer and manufacturer of high-quality engineered surfaces, today reported financial results for its second quarter ended June 30, 2020.

Yuval Dagim, Chief Executive Officer, commented, "Our proactive actions taken in March allowed us to effectively right size our resources and mitigate the impact of the unprecedented environment brought on by the COVID-19 pandemic. At the same time, we continue to focus on factors that are in our control, such as executing our Global Growth Acceleration Plan and making strategic investments to strengthen our position as a leading premium countertop Company. With our strong cash position, we will continue to execute this strategy to improve our business over the long-term, most particularly in areas of product innovation, production processes, technology, and go-to-market capabilities. Looking ahead, we are fortunate to have a talented workforce, leading products and solid financial resources to deliver on our focused approach to value creation in the quarters and years ahead."

Ophir Yakovian, Chief Financial Officer, added, "Second quarter sales in all of our four global regions were better than initially expected at the onset of the pandemic. We experienced the majority of adverse impacts in our Americas region during April and May. Since that time, we have been encouraged to see sequential improvement in June as more customers opened for business and demand began to return. As we look to the balance of 2020, we recognize that there is potential for additional limitations through national and local government orders aimed to safeguard the public from the pandemic. That said, we will continue to focus on managing cash, controlling costs and adjusting our production as needed to appropriately manage our inventory in this volatile environment. We remain committed to our strategy and continue allocating resources to enhance our position as a global, premium countertop expert with a leading and valued customer-focused brand."

Second Quarter 2020 Results

Revenue in the second quarter of 2020 was $99.0 million compared to $141.1 million in the prior year quarter. On a constant currency basis, second quarter revenue was lower by 28.3% year-over-year, driven by extended shelter-in-place guidelines, particularly during the first two months of the quarter with the biggest impact in the Americas region.

Gross margin in the second quarter was 20.4% compared to 28.2% in the prior year quarter. Adjusted gross margin in the second quarter was 20.5% compared to 27.3% in the prior year quarter. The lower adjusted gross margin primarily reflects lower sales volume and less favorable regional and product mix as well as currency exchange headwinds, partially offset by lower raw material prices.

Operating loss in the second quarter was $2.9 million compared to operating income of $10.6 million in the prior year quarter. The year-over-year difference mainly reflects lower gross margin.

Adjusted EBITDA, which excludes expenses for share-based compensation, legal settlements and loss contingencies and for non-recurring items, was $6.5 million in the second quarter, representing a margin of 6.6%. This compares to adjusted EBITDA of $19.2 million, representing a margin of 13.6%, in the prior year quarter.

Finance expense in the second quarter was $2.5 million compared to $1.8 million in the prior year quarter. The difference was primarily a result of the unfavorable impact of foreign currency exchange rates.

Net loss for the second quarter was $5.9 million compared to net income of $6.4 million in the prior year quarter. Loss per share for the second quarter was ($0.17) compared to diluted net income per share of $0.19 in the prior year quarter. Adjusted diluted net loss per share for the second quarter was ($0.10) on 34.5 million shares, compared to adjusted diluted net income per share of $0.23 on a similar share count in the prior year quarter.

Balance Sheet & Liquidity

The Company believes it has a strong financial position and the flexibility required to support its global operations during this volatile period. The Company's balance sheet as of June 30, 2020 remained strong, including cash, cash equivalents and short-term bank deposits and short and long term marketable securities of $130.1 million.

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. Pursuant to the Company's dividend policy, the Company does not intend to pay a dividend for the second quarter of 2020, based on its reported net loss for the period.

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. Due to potential extended wait times to access the conference call via dial-in, the Company encourages use of the webcast. 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 Second 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 13706779. The replay will be available beginning at 11:00 a.m. ET on Wednesday, August 5, 2020 and will last through 11:59 p.m. ET on Wednesday, August 12, 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 subsidiariesCondensed consolidated balance sheets As ofU.S. dollars in thousands June 30, December 31, 2020 2019 (Unaudited) (Audited)ASSETS CURRENT ASSETS: Cash and cash equivalents and short-term bank $ 117,064 $ 139,372 depositsShort-term available for sale marketable securities 2,025 -

Trade receivables, net 67,007 78,282

Other accounts receivable and prepaid expenses 27,987 34,066

Inventories 133,611 122,686

Total current assets 347,694 374,406

LONG-TERM ASSETS: Severance pay fund 3,510 3,475

Other long-term receivables 3,577 3,176

Deferred tax assets, net 8,513 7,881

Long-term deposits and prepaid expenses 4,260 2,887

Operating lease right-of-use assets 73,544 72,047

Long-term available for sale marketable securities 10,978 -

Property, plant and equipment, net 201,980 204,776

Goodwill 34,804 35,218

Total long-term assets 341,166 329,460

Total assets $ 688,860 $ 703,866

LIABILITIES AND EQUITY CURRENT LIABILITIES: Trade payables 37,274 53,072

Related party and other loan 2,076 2,212

Short term legal settlements and loss contingencies 23,377 28,300

Accrued expenses and other liabilities 44,414 42,782

Total current liabilities 107,141 126,366

LONG-TERM LIABILITIES: Long-term loan and financing liability of land from 7,044 7,915 a related partyLegal settlements and loss contingencies long-term 27,891 21,505

Long-term lease liabilities 65,264 64,638

Accrued severance pay 4,373 4,333

Long-term warranty provision 1,372 1,385

Total long-term liabilities 105,944 99,776

EQUITY: Ordinary shares 371 371

Treasury shares - at cost (39,430 ) (39,430 )

Additional paid-in capital 158,932 157,225

Capital fund related to non-controlling interest (5,587 ) (5,587 )

Accumulated other comprehensive loss (3,740 ) (3,288 )

Retained earnings 365,229 368,433

Total equity 475,775 477,724

Total liabilities and equity $ 688,860 $ 703,866

Caesarstone Ltd. and its subsidiariesCondensed consolidated statements of income (loss) Three months ended Six months ended June 30, June 30,

U.S. dollars inthousands 2020 2019 2020 2019(except pershare data) (Unaudited) (Unaudited)

Revenues $ 99,037 $ 141,071 $ 225,594 $ 269,268

Cost of revenues 78,865 101,308 169,021 198,236

Gross profit 20,172 39,763 56,573 71,032

Operatingexpenses:Research and 763 1,280 1,543 2,222developmentMarketing and 11,435 15,579 30,064 32,653sellingGeneral and 9,241 10,572 21,108 21,605administrativeLegalsettlements and 1,637 1,729 4,475 3,305losscontingencies,net Total operating 23,076 29,160 57,190 59,785expenses Operating income (2,904 ) 10,603 (617 ) 11,247(loss)Finance 2,507 1,825 1,638 2,147expenses, net Income (loss) (5,411 ) 8,778 (2,255 ) 9,100before taxesTaxes on income 471 2,364 949 3,091(loss) Net income $ (5,882 ) $ 6,414 $ (3,204 ) $ 6,009(loss) Basic net income $ (0.17 ) $ 0.19 $ (0.09 ) $ 0.17(loss) perordinary shareDiluted netincome (loss) $ (0.17 ) $ 0.19 $ (0.09 ) $ 0.17per ordinaryshareWeighted averagenumber ofordinary sharesused in 34,412,369 34,380,799 34,406,107 34,373,848computing basicincome (loss)per ordinaryshareWeighted averagenumber ofordinary sharesused in 34,412,369 34,425,797 34,406,107 34,427,899computingdiluted income(loss) perordinary share

Caesarstone Ltd. and its subsidiaries

Selected Condensed consolidated statements of cash flows

Six months ended June 30,

U.S. dollars in thousands 2020 2019

(Unaudited)

Cash flows from operating activities: Net income (loss) $ (3,204 ) $ 6,009

Adjustments required to reconcile net income (loss)to net cash provided by operating activities:Depreciation and amortization 14,102 14,862

Share-based compensation expense 1,707 1,884

Accrued severance pay, net 7 (8 )

Changes in deferred tax, net (640 ) (1,242 )

Capital loss 22 338

Legal settlements and loss contingencies, net 4,475 3,305

Decrease (increase) in trade receivables 9,942 (10,479 )

Decrease (increase) in other accounts receivable and 3,172 (4,726 )prepaid expensesDecrease (increase) in inventories (12,621 ) 21,571

Decrease in trade payables (16,117 ) (9,800 )

Decrease in warranty provision (98 ) (82 )

Changes in right of use assets (1,347 ) (74,159 )

Changes in lease liabilities 1,554 76,385

Amortization of premium and accretion of discount on 6 - marketable securities, netChanges in Accrued interest related to Marketable (8 ) - SecuritiesIncrease in accrued expenses and other liabilities 4,173 2,088 including related party Net cash provided by operating activities 5,125 25,946

Cash flows from investing activities: Purchase of property, plant and equipment (12,459 ) (11,955 )

Proceeds from sale of property, plant and equipment 6 54

Investment in marketable securities (13,002 ) -

Increase in long term deposits (711 ) (192 )

Net cash used in investing activities (26,166 ) (12,093 )

Cash flows from financing activities: Changes in short-term bank credit and loans, net (459 ) (7,771 )

Repayment of a financing leaseback related to (610 ) (588 )Bar-Lev transaction Net cash used in financing activities (1,069 ) (8,359 )

Effect of exchange rate differences on cash and cash (198 ) 304 equivalents Decrease in cash and cash equivalents and short-term (22,308 ) 5,798 bank depositsCash and cash equivalents and short-term bank 139,372 93,562 deposits at beginning of the period Cash and cash equivalents and short-term bank $ 117,064 $ 99,360 deposits at end of the period Non - cash investing:Changes in trade payables balances related to (954 ) (2,500 )purchase of fixed assets

Caesarstone Ltd. and its subsidiaries Three months ended Six months ended June 30, June 30,

U.S. dollars in thousands 2020 2019 2020 2019

(Unaudited) (Unaudited)

Reconciliation of Grossprofit to Adjusted Gross profit:Gross profit $ 20,172 $ 39,763 $ 56,573 $ 71,032

Share-based compensation 122 63 253 139 expense (a)Non-recurring import - (2,611 ) - (1,501 )related incomeOther non-recurring items - 1,367 $ - 1,367 (b)Adjusted Gross profit $ 20,294 $ 38,582 $ 56,826 $ 71,037 (Non-GAAP)

(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 Six months ended June 30, June 30,

U.S. dollars in thousands 2020 2019 2020 2019

(Unaudited) (Unaudited)

Reconciliation of Net Income(loss) to Adjusted EBITDA:Net income (loss) $ (5,882 ) $ 6,414 $ (3,204 ) $ 6,009

Finance expenses, net 2,507 1,825 1,638 2,147

Taxes on income 471 2,364 949 3,091

Depreciation and 6,987 8,099 14,102 14,862 amortizationLegal settlements and loss 1,637 1,729 4,475 3,305 contingencies, net (a)Share-based compensation 801 832 1,707 1,884 expense (b)Non-recurring import related - (2,611 ) - (1,501 )expense (income)Other non-recurring items - 504 - 993 (c) Adjusted EBITDA (Non-GAAP) $ 6,521 $ 19,156 $ 19,667 $ 30,790

Consists of legal settlements expenses and loss contingencies, net,(a) 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.

Three and six months ended June 30, 2019 relates to non-recurring(c) expenses related to North American region establishment and one time charge related to reduction in headcount.

Caesarstone Ltd. and its subsidiaries Three months ended Six months ended June 30, June 30,

U.S. dollars in thousands 2020 2019 2020 2019(except per share data) (Unaudited) (Unaudited)

Reconciliation of net income(loss) to adjusted netincome:Net income (loss) $ (5,882 ) $ 6,414 $ (3,204 ) $ 6,009

Legal settlements and loss 1,637 1,729 4,475 3,305 contingencies, net (a)Share-based compensation 801 832 1,707 1,884 expense (b)Non cash revaluation of 1,256 799 (215 ) 2,226 lease liabilities (c)Non-recurring import related - (2,611 ) - (1,501 )income (d)Other non-recurring items - 1,704 - 2,193 (e)Total adjustments 3,694 2,453 5,967 8,107

Less tax on non-tax 1,310 871 2,116 2,875 adjustments (f)Total adjustments after tax 2,384 1,582 3,851 5,232

Adjusted net income (loss) $ (3,498 ) $ 7,996 $ 647 $ 11,241 (Non-GAAP)Adjusted diluted EPS (g) $ (0.10 ) $ 0.23 $ 0.02 $ 0.33

Consists of legal settlements expenses and loss contingencies, net,(a) 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.

Three and six months ended June 30, 2019 relates mainly to non-recurring(d) import related expenses and relocation expenses of Caesarstone USA headquarters, the Company's subsidiary.

Three and six months ended June 30, 2019 relates to non-recurring(e) expenses related to North American region establishment and one time charge related to reduction in headcount.

(f) Tax adjustments for the three and six months ended June 30, 2020, based on the effective tax rates of the comparative periods.

In calculating adjusted diluted (Non-GAAP) EPS for the six month ended(g) June 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 subsidiariesGeographic breakdown of revenues by region Three months ended Six months ended June 30, June 30,

U.S. dollars in thousands 2020 2019 2020 2019

(Unaudited) (Unaudited)

USA $ 41,726 $ 64,590 $ 101,781 $ 121,007

Canada 14,435 23,342 32,993 43,520

Latin America 132 1,351 638 1,947

America's 56,293 89,283 135,412 166,474

Australia 23,534 28,292 45,888 53,506

Asia 1,732 3,311 4,563 7,907

APAC 25,266 31,603 50,451 61,413

EMEA 8,031 11,419 19,371 21,874

Israel 9,447 8,766 20,360 19,507

Total Revenues $ 99,037 $ 141,071 $ 225,594 $ 269,268

Caesarstone Ltd. and its subsidiariesGeographic breakdown of revenues by region - Supplemental data

Three months endedU.S.dollars 6/30/ 3/31/ 12/31/ 9/30/ 6/30/ 3/30/ 12/31/ 9/30/ 6/30/in 2020 2020 2019 2019 2019 2019 2018 2018 2018thousands (Unaudited) $ $ $ $ $ $ $ $ $USA 41,726 60,055 64,659 64,805 64,590 56,417 60,200 61,933 60,358

Canada 14,435 18,558 20,575 21,881 23,341 20,178 23,834 25,140 27,349

Latin 132 506 735 1,434 1,351 596 1,212 1,635 1,738AmericaAmerica's 56,293 79,119 85,969 88,120 89,282 77,191 85,246 88,708 89,445

Australia 23,534 22,354 26,000 28,642 28,294 25,214 33,484 33,968 34,731

Asia 1,732 2,831 3,932 3,675 3,311 4,596 4,929 4,189 4,221

APAC 25,266 25,185 29,932 32,317 31,605 29,810 38,413 38,157 38,952

EMEA 8,031 11,340 9,464 11,719 11,418 10,455 9,954 11,115 11,721

Israel 9,447 10,913 8,502 10,683 8,766 10,741 9,268 9,709 9,125

Total $ $ $ $ $ $ $ $ $Revenues 99,037 126,557 133,867 142,839 141,071 128,197 142,881 147,689 149,243

Year-over-year % change 6/30/ 3/31/ 12/31/ 9/30/ 6/30/ 2020 2020 2019 2019 2019 (Unaudited) USA -35.4% 6.4% 7.4% 4.6% 7.0%

Canada -38.2% -8.0% -13.7% -13.0% -14.7%

Latin -90.2% -15.1% -39.4% -12.3% -22.3% AmericaAmericas -36.9% 2.5% 0.8% -0.7% -0.2%

Australia -16.8% -11.3% -22.3% -15.7% -18.5%

Asia -47.7% -38.4% -20.2% -12.3% -21.5%

APAC -20.1% -15.5% -22.1% -15.3% -18.9%

EMEA -29.7% 8.5% -4.9% 5.4% -2.6%

Israel 7.8% 1.6% -8.3% 10.0% -3.9%

Total -29.8% -1.3% -6.3% -3.3% -5.5% Revenues Year-over-year % change in constant currency (*) 6/30/ 3/31/ 12/31/ 9/30/ 6/30/ 2020 2020 2019 2019 2019 (Unaudited) USA -35.4% 6.4% 7.4% 4.6% 7.0%

Canada -36.0% -7.1% -13.6% -12.1% -11.6%

Latin -90.2% -15.2% -39.4% -12.3% -22.3% AmericaAmericas -36.4% 2.7% 0.9% -0.4% 0.7%

Australia -11.5% -3.3% -18.2% -10.0% -12.0%

Asia -45.9% -37.1% -14.7% -8.8% -18.6%

APAC -15.1% -8.5% -17.8% -9.9% -12.7%

EMEA -26.9% 11.4% -4.4% 10.9% 2.8%

Israel 4.5% -1.5% -14.0% 7.8% -3.5%

Total -28.3% 0.5% -5.5% -1.5% -2.9% Revenues

(*) 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.

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CONTACT: Investor Relations: ICR, Inc. - Rodny Nacier CSTE@icrinc.com +1 646 277-1237