Caesarstone Reports Q1 2023 Financial Results, Initiates Global Restructuring Plan
Caesarstone, a leading developer and manufacturer of high-quality engineered surfaces, today reported financial results for its first quarter ended March 31, 2023.
Yos Shiran, Caesarstone’s chief executive officer commented, “It is clear that Caesarstone has been lagging behind in its ability to generate profit and increase value for its shareholders. We aim to improve on these fronts and have begun a thorough review of all aspects of the business. We believe that swift actions, taken as part of a comprehensive restructuring plan, will allow us to leverage our strong brand and best-in-class products to address these issues. A major part of our effort has focused on improving our cash flow and we have already started to reap some benefits with positive cash flow from operations and an improved net cash position in the first quarter of 2023. We will continue to take actions to make broad improvements throughout the entire business.”
Shiran continued, “As a first major step in our restructuring plan, we have stopped production at our Sdot-Yam facility in Israel and are taking actions to permanently close the site. This difficult yet necessary step is expected to improve efficiencies, reduce costs and allow us to create a more agile company as we streamline our production. The Sdot-Yam facility is our oldest plant. Our remaining facilities combined with our network of third-party manufacturers provide us with adequate capacity and the flexibility to efficiently serve our customers. We are confident that our company can rise to its potential and we expect to deliver improved results in the years to come. We will continue to innovate, optimize our infrastructure, and enhance our competitive edge to improve our long-term growth and profitability.”
Manufacturing Facility Network and Cost Optimization Update
On May 9, 2023, the company approved initial steps of restructuring actions across operations, commencing with the closure of the manufacturing facility in Sdot-Yam, Israel, and a reduction in headcount of approximately 150 employees mostly associated with the facility. This part of the restructuring plan is intended to better align the company’s organizational structure, streamline global production and drive additional cost efficiencies through an optimized manufacturing footprint.
The Sdot-Yam plant is the company’s oldest facility. In February 2022, Israel adopted a long-term goal for the reduction of environmental emissions. Although that goal had not yet impacted operations at the Sdot-Yam facility, the company determined that the required upgrades and modernization of the facility to meet the new regulations in the future would require an impractical level of investment into the facility, further contributing to the decision to close the facility.
In connection with the facility closure, the company expects to incur estimated cash costs in the amount of $4.0 million to $8.0 million, related to operations, beginning in the second quarter of 2023 and continuing through the next 12 months. These estimated cash closure costs do not include a potential noncash write-down on the long-term noncancellable lease agreement related to the facility, valid through 2032, which the company aims to sublease in whole or in part through the remaining term of the lease.
The facility closure is intended to help improve the company’s profitability and cash flow. Once fully implemented, Caesarstone leadership expects to realize annualized cash savings of approximately $10 to $15 million, with the potential for additional cash savings if subleases are executed on the noncancellable long-term facility lease agreement.
Upon closure of the Sdot-Yam Facility, the company will continue to maintain its high level of service to customers through its remaining manufacturing facilities and its third-party manufacturers.
Beyond the facility closure, the restructuring plan will focus on additional actions that can be taken to improve future profitability and cash flow.
First Quarter 2023 Results
Revenue in the first quarter of 2023 was $150.6 million, compared to $170.4 million in the prior year quarter. On a constant currency basis, first quarter revenue was down 8.9% year-over-year largely attributable to lower volume partially offset by the benefit of previously enacted pricing actions. Volumes were mainly impacted by global economic headwinds, particularly in renovation and remodeling channels, across our main regions.
Gross margin in the first quarter of 2023 was 19.7% compared to 25.3% in the prior year quarter. Adjusted gross margin in the first quarter was 19.7% compared to 25.4% in the prior year quarter. Most of the decrease in gross margin resulted from increased manufacturing unit costs due to lower fixed cost absorption resulting from lower capacity utilization, higher raw material costs and unfavorable foreign currency exchange rate fluctuations as a result of appreciation of the U.S dollar against all other currencies. This was partially offset by previously enacted pricing actions.
Operating expenses in the first quarter of 2023 were $35.5 million, or 23.6% of revenue, compared to $36.2 million, or 21.2% of revenue in the prior year quarter. The higher percentage is mainly due to lower revenues. Excluding legal settlements and loss contingencies, adjusted operating expenses were 24.5% of revenue, compared to 21.7% in the prior year quarter.
Operating loss in the first quarter of 2023 was a loss of $5.9 million compared to operating income of $7.0 million in the prior year quarter. The decrease mainly reflects lower gross margin as well as higher operating expenses.
Adjusted EBITDA in the first quarter of 2023, which excludes expenses for non-cash share-based compensation, legal settlements and loss contingencies and for non-recurring items, was $0.7 million, representing a margin of 0.5%. This compared to adjusted EBITDA of $15.7 million, representing a margin of 9.2% in the prior year quarter. The year-over-year decrease primarily reflects the lower operating income.
Finance income in the first quarter of 2023 was $2.3 million compared to finance income of $1.3 million in the prior year quarter. The difference primarily reflects foreign currency exchange rate fluctuations on assets and liabilities denominated in currencies other than the US Dollar.
Net loss attributable to controlling interest for the first quarter of 2023 was $3.8 million compared to net income of $6.2 million in the prior year quarter. Net loss per share for the first quarter was $0.11 compared to diluted net income per share of $0.18 in the prior year quarter. Adjusted diluted net loss per share for the first quarter was $0.17 on 34.6 million shares, compared to adjusted diluted net income per share of $0.14 in the prior year quarter on a similar share count.
Balance Sheet & Liquidity
During the first quarter, the company generated positive cash flow from operations of $7.9 million compared to cash used in the amount of $23.3 million in the first quarter of 2022. As of March 31, 2023, the company’s balance sheet included cash, cash equivalents and short-term bank deposits and short-term marketable securities of $51.7 million and total debt to financial institutions of $18.4 million. Caesarstone’s net cash position as of March 31, 2023, was $33.3 million compared to $28.2 million as of December 31, 2022.
Based on the actions and initiatives underway, the company has amended its full-year outlook to align with its focus on cash flow. With headwinds such as slow macroeconomic conditions and volatile business trends, which may be offset by tailwinds that include lower raw material and shipping costs and restructuring efforts, the company is no longer providing an outlook for full-year revenues or Adjusted EBITDA margin. The company will prioritize cash flow and expects to generate positive cash flow from operations and end the year with an improved net cash position based on inventory reductions and other working capital improvements, along with cost optimization efforts.