nasdaq (cste) | megan s., ben e., brandon l., matt w ... · 2010-2014 quartz market share in us...
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NASDAQ (CSTE) | Megan S., Ben E., Brandon L., Matt W. | BIG Pitch
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q/A
Agenda1. Business Overview
a. Product Offeringb. Supply Chainc. Sales Strategyd. Geographye. Kibbutz
2. Industry Overviewa. Quartz vs. Graniteb. Industry Demand
3. Competitorsa. Global Competitionb. Chinese Competition
4. Variant Perceptiona. US Growthb. International Growthc. Managementd. Spruce Point Report
5. Valuationa. Valuationb. Risks
6. Thesis7. Appendix
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Business Overview
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Who is Caesarstone?
Business Description● Leading manufacturer of high quality engineered quartz surfaces● Sells in over 50 countries through direct sales via subsidiaries and indirectly through a network of independent distributors● Accounted for 12% of total engineered quartz by volume in 2014● Products primarily used as kitchen countertops but also have applications in interior surfaces for both residential and
non-residential applications● Offers a wide variety of colors, styles, designs, and textures
Performance Other Info● Stock plummeted in mid 2015 after multiple events pushed
the stock down○ On August 5th the stock beat EPS estimates, but
missed on revenue by 4% (25% drop)○ On August 19th a report was put out by Spruce
Point Capital Advisors attacking the company’s practices (7% drop)
○ Total 52% price depreciation
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Product Offering
Product Mix
● The company markets themselves as a higher end luxury quartz countertop producer that’s “accessible to the masses”
● Brands like Supernatural and Concetto are meant to impersonate natural stone, while brands like Classico and Motivo are intended to be customizable and mass-market
● 60% of revenue comes from renovation and remodeling. 25-35% comes from new residential construction
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Supply Chain
Distribution
● CSTE has 3 factories, two in Israel and one in the United States
● Each factory manufactures countertops from raw quartz powder and a polymer resin glue which are then distributed across the world
Quartz Sourcing
● CSTE sources its quartz from a variety of mines, but 71% of their quartz comes from 4 mines in Turkey
● The rest comes primarily from Europe, India, Israel, and the United States
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Sales Strategy
● Sell directly to local distributors in Israel● US, Aus, Can, Singapore, UK: direct distribution
channels at major urban centers and third party sub-distributors
● US/Canada: IKEA agreement, exclusively supply all non-laminate slabs to IKEA customers in the US, marketed without brand name
Direct Markets Indirect Markets● In other countries, distribute products to fabricators● Fabricators sell products to contractors, developers,
builders● 50 countries in total, account for 10.5% of revenue.
Accelerate penetration into new markets.
Sales Breakdown
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Geography
International Breakdown
Q&A
Kibbutz
● A Kibbutz is a self-governing, privatized, collective community in Israel traditionally based around agriculture
● Kibbutz Sdot Yam holds a 32.5% stake in CSTE● Sdot Yam has roughly 420 members, 67 of them work
for CSTE● Sdot Yam is the wealthiest Kibbutz in Israel (in 2013
their stake in CSTE was wroth $2.2M per member
Description Relationship to CSTE
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Land Use Agreement● CSTE leases land for two different factories, both are long-term agreements (10 years) & were renewed in the last few years● Each lease automatically renews unless CSTE gives a 2 year notice of cancellation● Under the land use agreement CSTE is not allowed to cease operation of production facilities as long as they are producing
anywhere within Israel● CSTE cannot decrease the amount of land they want to least without a 1 year notice● They have the option of sub-leasing the land if granted approval● Signed new 10 year manpower agreement with CSTE in 2011 in which Sdot Yam will provide CSTE with skilled labor as it needs● Signed services agreement in 2012 with an 8 year lease for utilities, land-scaping, etc.
● CSTE is located on Kibbutz Sdot Yam land● Along with the 67 employees that are from Sdot Yam,
roughly one third of the board of directors are also members of Sdot Yam
● Caesarstone leases land from the Kibbutz, along with paying them for labor and other services (utilities, landscaping, etc.)
Q&A
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Industry Overview
Q&A
Quartz vs. Granite
Quartz Granite
● Refers to countertops that are made from ground (powdered) quartz crystal and polymer resin glue
● Manufactured from raw ingredients ● Transport of materials is cheaper
(transportation of powder versus transportation of granite slabs)
● Customizable colors & designs● Slightly cheaper than granite● Less porous - harder but less heat-proof● Stain-proof & doesn’t need to be sealed; saves
time and money
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Cheaper & Convenient
● Natural stone - made up of 20% quartz and less than 65% alkali feldspar
● Sourced from a quarry, then cut down and polished into countertops
● The slabs come in one piece thus are hard to customize
● Costs of transportation are high ● Heat-proof but more porous● Stains easily and has to be resealed ~6 months
dependent on the quality of the granite (costs anywhere beginning at $150 and up)
Costly & High Maintenance
Q&A
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Industry Demand
Global Countertop Demand Demand for Quartz● Quartz becoming increasingly popular as prices are going
down, increased customizability (become you are building it yourself and you can add colors, designs, etc.) and harder, non-porous surface are desired for high-traffic, high impact uses. CAGR 15.7% vs. 4.4% for standard.
2014 Global Countertop Demand 2014 Global Demand by Material
● Dominant surface materials used by end-consumers include granite, laminate, marble, solid surface, concrete.
● Within engineered quartz, market is highly fragmented and served by many global competitors. Low-cost manufacturers in China and Europe. Consolidation after quartz market share increases.
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Competitors
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Global Competition
● Cambria holds a large portion of market share in Europe, CSTE holds less than 10%, but they also don’t have direct distribution channels
● There is limited competition in Australia, CSTE has a strong hold in Australia 55% of Market Share
● Canadian competition similar to US (which is analyzed on next slide, however CSTE is more established in Canada (36% market share)
International Markets Threat of New Entrants
Threat of Natural Stone Users Entering Market● Why this could be a problem:
○ Money and Brand Recognition = Loss of market share for Caesarstone. MS International has already done this and had some success
● Why this isn’t a problem:○ Time barrier to entry, we’d know about it way in advance, wouldn’t affect revenue in coming years○ A company would need to significantly pivot their operating focus, you can’t just produce 10 of these, you need a factory’s
worth○ Current market share of quartz doesn’t justify a transition
● High cost process○ Factory building takes over a year and can cost
over $100m● Distribution is difficult
○ Sourcing materials○ Shipping large countertops○ Testing, warranty, etc.
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Geographical Competitive Advantages
● CSTE has 84% of the quartz market share in Israel, which is 86% of the entire countertop market in Israel● Their name is basically synonymous with quartz countertops which is good and bad● The rise in Silicosis cases in Israel was literally called “The Caesarstone problem” before they sued the journalist for defamation● Kibbutz Sdot-Yam is the richest Kibbutz in Israel and is pretty well known, they basically have a stranglehold on the market● Not a big rev. contributor (8%), it’s a small country
Israel Competition
U.S. & Canada Competition
Cambria Dupont - Zodiaq Cosentino - Silestone
● An all in one countertop solutions company from production, to distribution, to installation
● 131 designs in 1 line
● Subsidiary of Dupont a large multinational, multifaceted corporation
● 54 designs, 1 line
● “The original” quartz countertop line
● 100 designs, many lines
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Chinese Competition
● Yes, Chinese slabs are getting imported more, but they are trying to penetrate a different parket
● Chinese Markets - Lower end distributors● CSTE - Premium products and also lower
end products, however CSTE is already the go-to lower end company for Lowes and IKEA
● Asian suppliers also have limited access to important machinery and higher quality polyester resin. Their durability and quality is highly questionable. The store we went to refused to deal with Chinese manufacturers because they’d had quality issues in the past
Threat of Chinese Producers Monthly U.S. Imports: Quartz Slabs from China
Top Exporters to the US of Quartz Slabs
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Variant Perception
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Variant Perception
Street’s Perception
CSTE can’t take advantage of US growth because they haven’t been able to in the last two years; U.S. growth defines the business.
The departure of CSTE’s CEO and weaknesses in their US management team will hurt their growth around the world.
The short report that Spruce Point Management put out in 2014 offers valid reasoning and concerns over the business
Variant PerceptionNew marketing strategy and improvements to factory are going to help CSTE capture US growth. CSTE’s international sales comprise 55% of their business and they are growing in double digits internationally. Their new CEO is super experienced, along with their new US manager. The Spruce Point report contains a number of fallacies and doesn’t offer material concern for the business.
RecommendationWe recommend an 8% long position at a price per share of $33.15
Target Price Upside
$41.21 24%
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
I. US Growth
Street View● The street believes there is no US growth for the quartz market and that CSTE is unable to gain market share● 2010-2014 Quartz Market share in US grew 60%, Caesarstone’s countertop market share in the US grew 117%, the street
believes this growth is stalling● The street is also misrepresenting Caesarstone’s contribution to industry growth by assuming all of their quartz slabs are
coming from Israel
Our View Incorrect Interpretation of Data
Opening of Richmond-Hill Facility
● The US had a surprisingly weak housing year considering the bull market
● New construction grew at 5% while analysts expected double digit growth
● Obviously, most construction companies were hit hard by this, but slow housing growth can’t last forever
● Even if housing growth continues to stall, both quartz and CSTE are increasing their market penetration
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
I. US Growth cont.
Aggressive Marketing Deals with Ikea & Lowes Improving US Distribution
Our View
● An increase of 1% (of revenue) spending on marketing & sales infrastructure in the US and UK
● Marketing Strategy - Contact & utilize contractors to aggressively market their product to consumers.
● Qualitative - store visited said they thought Caesarstone was the best marketer, people always come in asking for it
● New line Caesarstone Supernatural, looks more like granite, will appeal to US market which is apparently very focused on appearance
● Margins are lower, but a great opportunity to gain rapid market share. Exclusivity with Ikea (through 2017) and being the only “higher end” quartz producer at Lowes gives them an advantage there
● Deals with Ikea were the largest growth driver over last 2-3 years in both US and Canada
● Caesarstone’s name isn’t used for the Ikea countertops, but they are all manufactured by Caesarstone
● Factory contributed to 120 bps in weaker margins in Q4 of 2016
● Factory is also only operating two production lines fully they plan to open up a second facility and more lines over next two years to meet demand
● Supply can’t meet demand according to both management and the store we went to
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
I. US Growth cont.
Push Strategy Pull Strategy New Product LineMarketing Strategy
Home Makeover Ty Pennington
● Fabricators, Distributors and Contractors have a loyalty program w/ Caesarstone and they aggressively send out samples and promotional materials
● They promote to Architects and designers through special events, sales, and social media
● Promote to consumers through social media, their website, house magazines, tv ads
● HGTV ~60% of the quartz countertops they use are Caesarstone (based on sifting through all their countertop photos), 9.4 million viewers/ week
● Transformation that allows you to overlay your bad granite countertop with a new quartz countertop
● This product is being sold in Lowes● Targeted at low cost buyers
“You walk into a home and you see the kitchen has Caesarstone in it? It changes the way you look at the value of that house.”
- Ty Pennington, HGTV Extreme Home Makeover
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
I. US Growth cont.
IssuesUS Factory Optimization
● The company has had a lot of issues with scaling in the US. They were growing at about 40% CAGR between 2010 and 2015 and the company literally couldn’t handle the demand anymore
● In response they opened this US factory, but they managed that horribly. The management was terrible, they had major stalling in between countertops (so they were operating really slowly) and they still have issues since most of their quartz is being shipped across the Atlantic
● They also have issues with distribution in the US just because of the scale of the country and the diversity of products they’re trying to offer in the US. Their supply literally can’t meet demand
Our View● The company is starting to transition the US factory to being supplied from US quartz mines● Changes in administration (discussed on later slide)● Currently the factory isn’t operating efficiently, nor is it operating at full capacity● 2 Lines are operating out of a potential 4-5● Can expanded production another 40-45% - assume this correlates to an expanded 40-45% revenue over the next 3-4 years
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
II. International Growth
AustraliaInternational Growth Story
● Interest rates are at an all time low and are forecasted to go lower in 2017
● CSTE already has a huge market-penetration there (55%)
● 18.7% YoY growth
Canada Europe● Weak Canadian dollar is
deflating what should be much higher growth
● Actually grew at 21.2% YoY● New IKEA deal is helping
them penetrate market even further
● Expanding to direct dist. in the UK, will try to expand outwards from there after
● 10% quartz countertops market share
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
III. Management Transition
Street’s View● The street fears that the recent change in the CEO will result in a weakening of the company; the main concern
being that the new CEO lacks the same “vision” as the old management
Our View● New CEO Raanan Zilberman has worked on multiple companies of global scope
and in a competitive industry● A lot of Caesarstone’s issues are manufacturing/distribution and competition
issues, Zilberman has over 15 years of experience as a CEO dealing with these issues
● New head of US manufacturing Dan Clifford (place in position at start of 2016) worked for Whirlpool and was in charge of expanding their US distribution and improving its efficiency, he succeeded there
● Factory in US is already improving from a 250bps margin decrease in Q2 2016 to 150bps in Q3 to 120bps in Q4, marked margin improvement
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
IV. Spruce Point Report
Misconception #1● Spruce: Caesarstone has crappy product
quality● Our View:
○ Caesarstone claims to have UP TO 93% quartz, not false advertising
○ Most companies make this claim and don’t fulfill it because countertop would fall apart
○ Resin is actually more expensive than quartz, why would they put in less quartz than they could?
Misconception #2● Spruce: Misrepresentation of customer
satisfaction● Our View:
○ Caesarstone faces less than 0.5% warranty claims out of sold products annually
○ Caesarstone is constantly changing their make-up within product lines to meet demand, arguing that since they haven’t released many new lines they aren’t innovating is a clear falsehood
Spruce Point: Short Report 2015
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
IV. Spruce Point Report
Misconception #3● Spruce: Caesarstone is lying about financials● Our View:
○ Caesarstone wasn’t lying about quartz prices, SP picked one distributor, miscalculated the effect that distributor’s prices would have on margins and then didn’t account for
○ They weren’t manipulating their currency conversions to inflate margins in fact the conversions they do hurt margins (primarily a deflation of the australian dollar) SP also plugged in 2014 data for 2015, and gave completely wrong numbers
○ They did the same thing when accusing CSTE of lying about cash-flows
○ There’s actually a lawsuit going on about this nonsense○ Sell-side reports continuously cite SP’s report for their
risk-factors, while the report made basic calculation mistakes and statistical fallacies...
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Valuation & Risks
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Valuation Assumptions
● US and Canada are expected to be fastest growing regions
● Expansion into UK should drive revenue growth in Europe, however it’s unclear how quickly it will grow. We assumed they would grow at the current rate
● Australian growth could be very large in coming years based on a continuing housing bubble, however we assumed moderate growth
● COGS are expected to rise 2% next year temporarily due to factory and distribution expansion, we continue having them rise after that assuming moderate margin pressure
● M&S and G&A spike due to entrance into new market in the UK and shifting operations in the US
● Legal Settlements continue to rise in case of increased Silicosis Lawsuits, which is unlikely, but possible
● Spike in CapEx due to expansion of US factory by two lines in 2018/19 as mentioned by management. CapEx estimate mirrors 2014/15 factory building
● Increasing money set aside for legal expenses will continue to occur until all current legal disputes are settled
Model Assumptions
Revenue Build Income Statement Balance Sheet
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Valuation
Company valued using a DCF, EV/EBITDA, P/CF, and P/E . Each of the three multiple valuations were weighted at 27% apiece and the DCF at 19%. The DCF was weighted lower because it was a clear outlier.
Base Case$41.21
+24.3%
Bull Case$50.68
+52.9%
Bear Case$29.30-11.6%
Current Price: $33.15
Football Field Analysis
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Risk #1: KibbutzRisk Response
● Concern over some of the directors & executive officers of CSTE being part of the Kibbutz Sdot-Yam.
● May have “real or apparent conflicts of interest on matters affecting both us & Kibbutz Sdot-Yam &, in some circumstances, interests adverse to us.”
● In 2015 Sdot-Yam opposed the board nominations made by CSTE’s board & suggested alternatives.
● Sdot-Yam wanted more control over the company after having given up its majority control in 2014, leading to a proxy contest in which shareholders voted in favor of CSTE’s original nominees.
● The risk of future proxy contests is certainly viable, however at the end of the day Sdot-Yam is heavily reliant on CSTE for its income.
● Wealth of future generations of Kibbutz members is tied up in the success of CSTE. Their sell-off in 2014 made them the richest Kibbutz in Israel, & they didn’t even sell off half their position.
● They also generate significant income from CSTE’s land-use & services rendered.
● Members don’t personally gain from the wealth as it is all held by Sdot Yam. Sdot-Yam gave up majority control of the company in 2014 and now only have a 32.5% stake with a proportional number of BOD members.
Other Points About Kibbutz● 5% of the company’s workforce is from the kibbutz, whereas 10% of the Kibbutz works for CSTE, which makes the Kibbutz more
reliant on CSTE than visa versa from a labor perspective, the Kibbutz also generates other revenue from the land use agreement and services
● Under Israeli law, the company is audited every 3 years regarding unfair agreements with the kibbutz that disadvantage shareholders in favor of profit.. They have passed every audit, including the last one in 2015.
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Risk #2: Lawsuit ISilicosis Threat of Silicosis
● Silicosis is caused by the cutting of stone and the powders that are released.The molecules of crystalline silica are common in many stones including quartz.
● ~300 deaths attributed to silicosis yearly - In the US it’s difficult to raise Silicosis claims, however new OSHA regulations during the Obama administration increased the threat that a stone-cutting company could be sued. These regulations likely won’t be enforced by the Trump administration.
● Studies done over the last few years have found there’s been a recent uptick in Silicosis because of quartz countertop production and the popularity of “artificial stone” countertops.
● The company has up to 80 bodily injury lawsuits from employees claiming that they “contracted illnesses, including silicosis, through exposure to silica particles during cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting our products.”
● Even if they lose the cases, most of the damages will be payed by the company’s insurance.
Response● The company has also spent the last few quarters putting aside money in preparation to settle this case, so it won’t suddenly change
their EPS or their net cash when they settle - “if this settlement materializes, we will view it as a positive outcome”● CSTE has had a lot of negative media coverage about a number of specific Silicosis related lawsuits in Israel, as they are one of the
only quartz companies there● Most analysts expect them to lose these cases and settle as they have been doing periodically over the last few years (see their
increased legal settlement costs) - CSTE sets aside money for these cases every year, it’s an unavoidable part of the industry
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Risk #3: Lawsuit IIKfar Giladi & Microgil Lawsuit
● In November 2011, Kfar Giladi and Microgil, an entity CSTE believes is controlled by Kfar Giladi, initiated arbitration proceedings against the Caesarstone. On April 15, 2012, Kfar Giladi Quarries filed a complaint CSTE seeking damages of ($67M) for breach of an agreement between the parties in 2006.
● CSTE filed a legal claim against Microgil and Kfar Giladi Quarries for ($22M) when they found out that Kfar took illegal actions in order to obtain evidence. CSTE considered these actions to be a breach of the arbitration clause.
● Under the agreement Kfar committed to establish a production facility at its own expense within 21 months of the date of the processing agreement to process quartz for CSTE
● Pursuant to the terms of the agreement, CSTE committed to pay fixed prices for quartz at agreed upon quantities over a period of ten years from the date set for Kfar Giladi to commence operating the production facility.
● CSTE estimated that the total amount of such payments would have been approximately $55M.
● CSTE claims that the production facility was not operational until approximately two years after the date required.
● As a result, CSTE was unable to purchase the minimum quantities set forth in the Processing Agreement and therefore acquired the quantities of ground quartz that it needed from other quartz suppliers.
Response● The company states the the proceedings are much too early to estimate the associated risks. It appears that CSTE has a strong case.● CSTE also made a loan to Kfar Giladi in 2006 which was to be repaid in 4 years. This loan was never paid off. CSTE has already taken an impairment
loss for the entire amount of the loan (2011) believing that it would never get repaid.● Even if the company doesn’t win, it is likely they will settle, offsetting the loss on the case. The company has a ton of cash on the balance sheet
which will easily cover even a loss in the case.
Business Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Risk #4: Political Instability in TurkeyPolitical Instability
Response● The political conflicts are in the east and south-east along the border with Syria, but the mines in which CSTE’s 4 main quartz suppliers are located
are all in the west, meaning they aren’t impacted by the violence● Turkey has been a main supplier of minerals and mineral exploration forever and we don’t see this changing anytime soon● Quartz is made of Silicon Dioxide, one of the most abundant minerals found on earth’s surface
Geography● Turkey's main population centres of Ankara and Istanbul have
endured a wave of deadly bomb and gun attacks, as well as a failed coup that saw tanks on the streets and fighter jets targeting parliament.
● In a matter of months, Istanbul has seen rebel soldiers take over the bridges across the Bosphorus, a double bombing outside Besiktas football stadium, and a gun attack blamed on jihadist group Islamic State (IS) targeting New Year revellers at an exclusive nightclub on the waterfront.
● The bloodshed has been largely confined to the mainly Kurdish areas of the east and south-east and along the borders where there is conflict
Q&ABusiness Overview
Industry Overview
Competitors Variant Perception
Valuation & Risks
Q&A
Appendix
Revenue Build
Income Statement I
Income Statement II
Income Statement Assumptions
Balance Sheet I
Balance Sheet II
Balance Sheet Assumptions
Cash-Flow Statement I
Cash-Flow Statement II
DCF and Sensitivity Table
Football Field Analysis
Correlation Analysis - Powershares DB Base Metals Fund
Correlation Analysis - US Oil Fund
Correlation Analysis - S&P Homebuilders
Spruce Point Report Highlights
