Behind Caesarstone’s drastic restructuring

Last year, despite the global macro-economic situation and the supply chain difficulties, it seemed that Caesarstone (Nasdaq: CSTE) of Kibbutz Sdot Yam was finally on the right road, after years of problems in its business. The company, which in 2018 went through turbulent times as with cuts in financial forecasts, frequent changes in management, and the loss of investors’ confidence, began to expand its activity in the production and sale of surfaces for kitchen benchtops and bathrooms to other materials besides quartz, carried out acquisitions, and even started to talk about reaching annual revenue of $1 billion in 2025.

In March this year, however, the company sprang a surprise when it announced an almost immediate change of CEO. Yuval Dagim, who had run the company since August 2018, was replaced by Yos (Yosef) Shiran, in his second stint in the post. Shiran headed Caesarstone between 2009 and 2016, a period that included the company’s IPO on Nasdaq in 2012. His predecessor Dagim replaced temporary CEO Yair Averbuch, who himself replaced Raanan Zilberman after the latter resigned suddenly after just a year.

Shiran did not wait long to take drastic steps. Last week, alongside the release of the company’s quarterly financials, he announced a global restructuring program, the most prominent feature of which was the closure of Caesarstone’s veteran factory at Sdot Yam where its business began thirty years ago. The program includes the layoff of 150 employees, this after Caesarstone parted from 200 employees in its previous streamlining program at the end of last year. This is the first downsizing measure in the current program, and it may be followed by more. At the end of 2022, Caesarstone employed 2,100 people, 655 of them in Israel. The company stresses that the closure of the factory will not impact its production, which will partly be transferred to a site in northern Israel, while a smaller part will go to the US and perhaps East Asia.

By way of explanation of the closure, Shiran said, “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,” adding that “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.”

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The company’s statement added that the closure of the factory was partly because of the need to meet new environmental regulations. “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,” it said.

A standard for emissions of styrene (a hazardous chemical emitted in the course of production of the company’s surfaces) that came into force in Israel a decade ago had already led to large investment in compliance by Caesarstone at the Sdot Yam factory, investment that weighed on the company. In February 2022, despite a campaign by the company, the standard was made stricter. In order to improve its financial results, and despite the attendant difficulties, Caesarstone decided to close the factory.

In the conference call with analysts after the release of the company’s financials, Shiran stressed its determination to improve in creating value for investors, and said that the restructuring plan would help the company return to profitability and to capture market share, as well as to improve cash flow, of which there were already signs, with positive operating cash flow of $7.9 million in the first quarter.

Threat in Australia

One of the things that apparently paved Shiran’s way back to Caesarstone as CEO was the situation of the company in Australia, one of its main markets, accounting, together with New Zealand, for 16.8% of sales in 2022. Other large markets for the company are the US (49.5%) and Canada (13.5%).

In the first quarter of this year, sales in Australia were unchanged from the corresponding quarter of 2022, and in local currency terms there was a rise, but the general trend there is not so positive. Earlier this year, headlines were made in Australia by silicosis, an untreatable lung condition that affects workers exposed to the dust created when they work on Caesarstone’s products.

In the past, a huge class action against the company brought by a worker with silicosis ended in a settlement. Now, after reports in the Australian press, the Australian government is examining regulation in this area, and a trade union has launched a campaign calling on the government to forbid the use of engineered stone from 2024, a call that has gained the support of government ministers in Australia.

In Australian states there are already changes restricting the use of this material or establishing safety requirements covering it. In its full report for 2022, Caesarstone mentions that regulatory initiatives in various countries are necessary in order to maintain health and safety, but that these changes are liable to disrupt the market or to impose burdens on manufacturers and distributors that will cause them to switch to other materials, which will be liable to harm the company’s business.

The company says that there are additional changes in regulations in Australia that are liable to affect its business there adversely. Caesarstone employs 124 people in Australia, and it would appear that its shaky position there had a connection to the change in CEO and possibly to the need to restructure. Meanwhile, the situation in the US is not wonderful either. In the conference call, Shiran was asked about the company’s growth strategy there, and he responded that it had a strong infrastructure and staff, and that it intended to take steps to improve its results.

Tene fund’s paper losses

Caesarstone was floated in 2012, and three years later it was traded at a peak price, giving it a market cap of $2.5 billion. Since then, the share price has plummeted 93%. The main losers, on paper, from the present situation are the largest shareholders in the company: Tene Investment Funds, headed by Dr. Ariel Halperin, and Kibbutz Sdot Yam, which together hold 40%. More than twenty of those being laid off are members of the kibbutz.

Tene Investment Funds, which largely focuses on kibbutz industry, invested in Caesarstone in 2006. Seven years later, it made an exit at a five-fold return on its investment when it sold shares for $186 million. In 2016, the firm came back for a further round of investment when it bought shares to tune of $43.5 million. Later on, after the share price fell, it bought shares for a further $30 million. Today, with the market cap at just $160 million, Tene is down tens of millions of dollars on paper. Caesarstone’s shareholders must certainly be hoping that Shiran’s comeback to the company will turn out better than that of Tene as it stands at present.

Published by Globes, Israel business news – en.globes.co.il – on May 15, 2023.

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