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CaesarStone Sdot-Yam Ltd. (NASDAQ:CSTE)

Q2 2013 Earnings Conference Call

August 7, 2013 8:30 AM ET

Executives

James Palczynski – Senior Managing Director- ICR, Inc.

Yosef Shiran – Chief Executive Officer

Yair Averbuch – Chief Financial Officer

Analysts

Stephen S. Kim – Barclays Capital, Inc.

Michael J. Rehaut – JPMorgan Securities LLC

Dan M. Oppenheim – Credit Suisse Securities, LLC

John A. Baugh – Stifel, Nicolaus & Co., Inc.

Peter Lisnic – Robert W. Baird & Co. Equity Capital Markets

Lars G. Dollman – Adelphi Capital LLP

Operator

Good day, everyone, and welcome to the Caesarstone Second Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. James Palczynski of ICR. You may begin sir.

James Palczynski

Thank you, operator, and good morning to everyone. I just like to remind you all of the company’s Safe Harbor language. Certain statements in today's conference call in responses to various questions may constitute forward-looking statements. We wish to caution you that such statements reflect only the company's current expectations and that the actual events or results may differ materially. For more information, please refer to the Risk Factors contained in the company's final prospectus for its IPO, and in periodic filings with the Securities and Exchange Commission, including our recent 20-F filing.

In addition, the company will make reference to certain non-GAAP financial measures on the call today, including adjusted gross margins, adjusted operating expenses, adjusted net income and adjusted income per share, adjusted EBITDA and various metrics that maybe presented on a pro forma basis. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's second quarter earnings release, which is posted on the company's website.

And with that, I’d like to now turn the call over to Yos Shiran, Caesarstone’s Chief Executive Officer.

Yosef Shiran

Good day and thank you for joining us to discuss our second quarter results. This was another record for any quarter for both sales and profitability.

I would like to start with some highlights for the quarter. Sales in the second quarter increased by 17.9% year-over-year, rising to $89 million, our rate of growth accelerated from the first quarter level of 13.5%. The U.S. and Canada continues to be our strongest growth regions. We are also pleased with our profitability in the second quarter. Adjusted EBITDA was $24.6 million, up 36.9% compared to last year. Adjusted EBITDA margin improved to 27.7%, up 3.9 percentage points compared to last year. This increase was driven by several factors, especially Super-Natural success and regional mix.

Adjusted net income for the second quarter was $18.6 million, up 55.2% versus last year. Reported adjusted earnings per diluted share of $0.53 in the quarter versus $0.35 in the same quarter last year. We believe that our growth is coming from our strong brand supported by our innovation. It is demonstrated by the success we have seen with Super-Natural in our key regions. Our growth is also coming from the continued material conversion to quartz, especially in North America.

Here is an update on each of our major markets. I’ll start with the United States, which was our largest market in the quarter. Sales grew by 33.6% to $30.9 million, compared to $23.9 million in the second quarter last year. We are benefiting from our improved product offering, the investments we made to increase the availability of our products and elevate our sales and marketing capabilities. We are successfully positioning Caesarstone as the leading quartz brand in the market with the highest level of service.

Canada was our third largest country by sales in the quarter and grew the fastest. Sales in Canada were up 35.3% to $13.1 million. Sales were up 37% on a constant currency basis. Similar to the U.S., quartz is becoming a much more important part of the market. We are positioned well in Canada and lead the markets by brand and size. We expect to see continued long-term growth there.

Australia at $23.6 million was our second largest market. We grew 9% compared to last year and 10.8% on a constant currency basis. As you know, we have been outperforming the market for the past few quarter, based on good execution and new product introductions. Speaking about the economy, I will note that housing starts in Australia are forecasted to increase by 7% in fiscal 2015, though renovation activity continues to weaken.

Israel also grew nicely in the quarter and was up 14.9% to $10 million. On a constant currency basis, growth was 8.9%. We were pleased to see this growth in our most mature markets. In Europe, our smallest territory, St. Hubert was down 17.4% to $4.5 million and down 19.5% on a constant currency basis. This is mainly due to issues related to delivery, execution of small volume orders under our new ERP system. We expect to resolve this issue toward the end of Q3.

As expected, the market remains challenging and we are managing the business carefully to eliminate the impact on our profitability. Revenue in the rest of the world was up 1.6% to $6.9 million in the second quarter, basically flat on a constant currency basis. These markets were also affected by delivery challenges similar to those experienced in Europe.

We continue to ramp towards the full capacity. In the second quarter, we leveraged some inventory we built up in the first quarter to drive the growth. Until we bring our new line into operation late this year, sequential revenue growth in the second half compared to the first half will be more challenging. We are on track to increase our capacity in Bar-Lev, our production site in Israel, which will enable us to pursue growth more aggressively starting in 2014.

We also continue to target December 2014, for the completion of the first of two lines in a new U.S. facility. We’ve increased our capital expenditure estimate for this project to $100 million from $75 million or 60% of the cost in Phase I. This is primarily to incorporate additional capabilities, which are expected to improve our efficiency and reduce our ongoing costs.

Thank you and I will now turn the call to Yair.

Yair Averbuch

Thank you, Yos, and good morning to everyone. I will start with our income statement for the second quarter. Sales in the second quarter increased by 17.9% to $89 million compared to $75.4 million in the second quarter last year. This is a record level of revenue for any quarter in our history. On a constant currency basis, sales increased by 17.7% versus last year. Gross margin in the quarter of 49.8% was unusually strong because of a one-time benefit of $3.5 million. This relates to a change in the estimate for the value of inventory following the implementation of our new ERP system in April.

Excluding the non-recurring adjustment, adjusted gross margin in the quarter was 45.9%, up 290 basis points versus the same quarter last year. This is due to the benefit of scale, regional mix, and product mix related mostly to the growth in our Super-Natural line.

Operating expenses in the second quarter were $22.1 million or 24.8% of sale versus last year’s $18.6 million, which was 24.6% of sale. I would like to note that this year expenses included $1.4 million of expenses associated with our recent secondary offering and last year included $1 million of credit for the reversal of a litigation reserve. Excluding those non-recurring items from both quarter, adjusted expenses were $20.6 million this year or 23.2% of sale, compared to $19.6 million or 25.9% of sales in the same quarter of last year.

Operating income adjusted for the one-time items I just mentioned, grow by 56.9% to $20.3 million compared to $12.9 million in the second quarter of last year. Our adjusted operating margin grew to 22.8% of our revenue from 17.1% last year. Adjusted EBITDA in the second quarter, which eliminate share-based compensation, the excess cost of acquired inventory and other non-recurring items increased by 36.9% over prior year to $24.6 million, a margin of 27.7% versus last year 23.8% margin, an increase of 390 basis points.

Finance income in the second quarter was $0.4 million, the same level as in the year ago quarter. Our taxes in the second were $2.5 million, 11% of the income before taxes, compared to last year rate of 18%. This lower rate reflects mainly the reduction in Israeli tax rate related to our Preferred Enterprise status that became effective January 1, 2013.

Adjusted net income attributable to controlling interest in the second quarter increased by 55.2% to $18.6 million from $12 million last year. Adjusted earnings per share in the quarter were $0.53 on 35.1 million shares. Last year earning per share was $0.35 on 34.4 million shares.

Turning to our June 30 balance sheet, we grew our cash and bank deposits balance by $6.3 million from the end of the first quarter to $79.6 million, while repaying $1.9 million of loans. Receivables at the end of the quarter were $65.3 million. DSO was 53 days in this quarter in line with recent levels.

Inventory at the end of the quarter was $53.3 million. This is down $0.9 million, compared to the end of the first quarter despite valuation adjustments we made of $3.5 million. As we discussed previously, we had built up some inventory in the first quarter, the delta serves second quarter demand. In general, our capital position remains strong and we continue to believe we have the necessary funds and cash flow to finance our growth and planned capital expenditures.

Now, with respect to 2013 guidance, we delivered two strong quarters in the first half of 2013, especially with respect to profitability. Therefore, despite a significant negative shift in currency, especially the Australian dollar, we are increasing our 2013 adjusted EBITDA guidance from $76 million to $80 million range to a new range of $82 million to $85 million. Revenues are also expected to be affected by currency and sequential growth is limited by capacity until year-end. Therefore, we are reiterating our revenue guidance for the year in the range of $330 million to $340 million.

Thank you. We are now ready to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take your first question from Stephen Kim from Barclays.

Stephen S. Kim – Barclays Capital, Inc.

Thanks very much. Guys, congratulations, really good to see the story of emerged, continuing to evolve; it’s really great to see, good job. I guess my first question relates to the margins that we saw in the quarter and seem to be implying going forward, you had talked about three factors that were driving that and I was curious if you could give us a sense for how much mix shift, and I guess, particularly, we’re talking about the Super-Natural and how much mix shift you think contributed either to what you saw in the quarter margin improvement or in terms of what you’re forecasting for the back half of the year? Thanks.

Yosef Shiran

So of the three factors we mentioned, the Super-Natural mix and the regional mix were the main items that grow our margins, and the volume impact was slightly lower impact than those two.

Stephen S. Kim – Barclays Capital, Inc.

Okay, great. Thanks very much. And when you talk about the regional mix, I guess, essentially, what you’re talking about there is, you’re not just talking about the product mix in those regions, you are talking about the fact that some of your regions are more profitable than others. Can you give us a sense for the product mix specifically whether, how that contrasted versus the regional mix?

Yosef Shiran

So it was almost equivalent in impact.

Stephen S. Kim – Barclays Capital, Inc.

Okay.

Yosef Shiran

And in the regional mix, our direct markets carry the higher margin.

Stephen S. Kim – Barclays Capital, Inc.

Sure.

Yosef Shiran

And we were (inaudible) in our direct markets.

Stephen S. Kim – Barclays Capital, Inc.

Right. Great. Okay, that’s very helpful.

Yosef Shiran

(Inaudible)

Stephen S. Kim – Barclays Capital, Inc.

Okay, great. That’s very helpful. And then if you could just give us a sense for going forward, obviously capacity is the name of the game here for you guys, demand does not seem to be the problem. Can you talk about your expectation for Bar-Lev, what we should be thinking in terms of costs associated with that, running through the P&L, not the capital investment, which you’ve already described, and thanks for that, but in terms of what we might see in terms of incremental cost that will be coming through the income statement over the next couple of quarters?

Yosef Shiran

So in the second half, what we will say is some expenses ahead of generating revenue from this line. So the result of some of that in the second half, we’re probably delaying a start to produce that. And that somewhat impacts the second half and then we believe that once the line is up and running, it will be a very efficient line, like Bar-Lev line and probably even more.

Operator

We’ll take your next question from Michael Rehaut from JPMorgan.

Michael J. Rehaut – JPMorgan Securities LLC

Hi, thanks, good morning, it’s Mike Rehaut. Congratulations also on a great quarter, guys. If we could just go into the great performance in the U.S. for a little bit, you’ve had now actually three quarters in a row of accelerating year-over-year growth in the U.S. and I was hoping to get a sense of what IKEA contributed this quarter, if anything, I know that’s just the beginning of a relationship, if Super-Natural helps and maybe by channel, also residential versus commercial, what were some of the big drivers there?

Yosef Shiran

Hi, Mike. So I think first of all, regarding to IKEA, it’s going well and progressing according to plan, but given that this information related also to IKEA, we prefer not to provide specific details, but it’s not something that which is material yet. As to the rest of the business or the product mix, and of course, headed by the Super-Natural has a very positive impact. Our product availability all over the country and all what we have invested in the last two years, bearing fruits and you see the results, and in terms of channels, I think nothing new. We continue to work hard in all of our channels. Of course, we benefit from both, the new home starts and the material conversion story. The new home starts supports additional growth to the business and the renovation is still soft in the space, as you are aware of course. So I think this is more or less what we see there.

Michael J. Rehaut – JPMorgan Securities LLC

Okay. Also in terms of the starting up of the additional line in Bar-Lev later this year, just wanted to get a sense if there is any, I think this question was maybe alluded to before, asked before, but just get a sense if there’s any expected incremental costs associated with that start up costs. If those would be broken out in the upcoming quarter or two and I think on a bigger picture question is well, kind of working two questions in here, so I apologize. The number one, any start up costs with the Bar-Lev? Number two, as you think about the capacity that you expect to come online at the end of next year, are you running any actual incremental costs that might be alleviated once that comes on line? I mean, certainly you’ve referred to extra freight that’s kind of a normal expected savings, but as you look into your cost structure down the road, if you kind of give us an updated view on pluses and minuses about how the U.S. line or U.S. facility would change your cost structure on the positive side and perhaps from a tax perspective?

Yosef Shiran

Okay. So on the Bar-Lev, we are not probably going to break this out separately, the running cost and I hope that it will quick and we will start manufacturing and deliver goods from this line. As for the U.S. and I’m sure you saw that we updated our CapEx estimate and this ones along we’re updating our estimates for the running cost, which are actually looking pretty good now, because a lot of the CapEx estimate adjustment has to do with improvement in the ongoing cost that will come after that. When I try to compare it to Israel on big bulk, it seems that energy and freight would be, seems that we will gain savings and labor and tax are down favorably in general when I compare those two sides.

Operator

We’ll move to your next question that will come from Dan Oppenheim from Credit Suisse.

Dan M. Oppenheim – Credit Suisse Securities, LLC

Thanks very much. I was wondering if you could talk about the increase in terms of the – the increase in terms of new construction in the States with some of the remodeling, certainly a bit sluggish. I guess so to see some others; some better signs in terms of bigger to get remodeling starting to come through, it certainly would be a tremendous opportunity in this new construction. What are you thinking about with that, are you seeing any signs in terms of that? Is that going to be more of a focus for you obviously, the capacity is limited that to a different issue, but as the capacity comes online, how do you think about that?

Yosef Shiran

So I think that you derived that we see, we feel some better momentum in the renovation has compelled to what was before, but it’s not significant yet. so looking together, looking at the whole picture in the markets, 2013 for us is that the quartz is being embraced to higher levels in the North American markets, and then of course, the new home starts, renovation, getting better, but very slightly.

Dan M. Oppenheim – Credit Suisse Securities, LLC

Thanks. And then in terms of the capacity coming online in the States, what is your thought in terms of just as you’d look at the sales and accept this material that in terms of just when you would bring on additional capacity. Are you sort of evaluating plans that you will be able to have sufficient capacities you’d look over, think about sales and opportunities for 2015 and beyond?

Yosef Shiran

So, again, then what is the question exactly, I’m not sure what you’re asking?

Dan M. Oppenheim – Credit Suisse Securities, LLC

Just more thinking about, as you’d think about capacity with the provisional states and anything about sales growth. Do you think about sort of enlarging sort of there is sort of the limited capacity from 2015 and beyond?

Yosef Shiran

Yeah. so we bring all that into account and this is why, we build the infrastructure for two lines, of course, we are starting with one line, because we want to control also our expenses. but if investments will serve or so the second line, and we will see what is happening in the market and start to build the second line when we believe the demand is there, and to of course, predict our capacity situation in the future.

Dan M. Oppenheim – Credit Suisse Securities, LLC

Thank you.

Operator

Your next question will come from John Baugh from Stifel.

John A. Baugh – Stifel, Nicolaus & Co., Inc.

Yes, good afternoon. Yosef, Yair and James, great quarter. A couple of things, curious on Canada, there is a macro market that’s slowing and your sales are not. so I was curious if you could talk about the penetration rate there that you’re seeing and whether there is any correlation long-term to the U.S. opportunity? and the second question would be relating to roughly how much inventory you were able to ship or put another way, how much you produced in the second quarter versus what you shipped and that being a guideline for the second half of the year? Thank you.

Yosef Shiran

So, John, first of all, as to Canada, as you are aware, we are also the biggest player in Canada. And we have a very strong position there, brand wise and also in trends progressing in the market. We see that quartz penetration in Canada is higher than in the States, both of them are going up, but in Canada, it’s higher. and as expected from our side, this compensated by the slowdown, which is not huge, but there is a slowdown in the Canadian economy.

So we continue to grow there. And we expect this trend to continue. We don’t say that it will be in the same percentage whether it could be higher or lower, but we expect this, the overall growth trend to continue. So this is as to Canada. as to the inventory level, so we did produce more in Q1 to help us in Q2. I can’t get into the specific details, how much exactly Q2 was supported by Q1, but it has an impact and this is why we say that the sequential growth is limited somehow by capacity.

John A. Baugh – Stifel, Nicolaus & Co., Inc.

And as we think about 2014 refreshes, again, on the exact Bar-Lev capacity expansion, maybe more in the volume, one would presume perhaps produce a little more Super-Natural design, which would give you a little bit more revenue opportunity?

Yosef Shiran

Okay. First of all, about the Super-Natural, I think that’s what you see that we are building here and edge, which is not to be undermined in terms of technology wise. and of course, Bar-Lev line will help us to increase capacity and to increase the production of the quantity of Super-Natural. and this is what we see looking forward. Just one, maybe one thing about Bar-Lev, the increase of capacity will be in less than two installments.

so the first one will be in the fourth quarter, second one will be in the second quarter, because we are adding also collision line. I don’t know if you remember what we updated that we increased the investment there. So we’ll have some addition capacity in Q4, and then additional capacity to the full expense of the line will be – we will get there by the end of Q1. So this is just to have the good picture of the Bar-Lev projects.

John A. Baugh – Stifel, Nicolaus & Co., Inc.

Thank you.

Operator

Up next is Peter Lisnic from Robert W. Baird.

Peter Lisnic – Robert W. Baird & Co. Equity Capital Markets

Good morning, gentlemen.

Yosef Shiran

Good morning.

Yair Averbuch

Good morning.

Peter Lisnic – Robert W. Baird & Co. Equity Capital Markets

The first question just on capacity with it being approximately, I guess theoretical maximums. Are you seeing any shortages or service inefficiencies, and then maybe comment on how you feel about your market share, if you’ve got competitors out there, they can perhaps temporarily take advantage of, you being at your cost of the peak in terms of capacity?

Yosef Shiran

I think that we look at the business from – first of all, from a long-term perspective. And with that regard, we feel that we are taking the right measurements. and we have a lot of success with the product development and understanding what the market is looking for. I don’t think that market share is derived from specific quarters or two. And basically, of course, there is competition, it may be that in some occasion somebody with available capacity can take an opportunity, but we assume that those will be small and will not impact our overall leadership position.

Peter Lisnic – Robert W. Baird & Co. Equity Capital Markets

Okay, perfect. And then just given again, where you’re at from a capacity perspective. Can you maybe give us a little bit of color on what that means for pricing trends? Do you have a bit more pricing power, because you’re at this point where capacity is near its peak, and just maybe, give us a feel for what’s happening from an industry pricing perspective?

Yosef Shiran

So again, as far as we’re concerned, we don’t, we look at what we do and also it’s our customers for long-term and we wouldn’t like to make any changes, because of capacity shortage. So we don’t have any changes in pricing, because of this situation. Of course, we charged according to the value that we believe that we’ll bring to the customers, but this is nothing to do with capacity, but with the value of design quality of our products. So nothing, but expected to be on that front, a part of, of course, of what we reported. So this is to that point. In terms of your or what was your second one please exactly, I forgot?

Peter Lisnic – Robert W. Baird & Co. Equity Capital Markets

I actually think you’ve answered it in terms of pricing.

Yosef Shiran

Okay.

Peter Lisnic – Robert W. Baird & Co. Equity Capital Markets

Again, at market share trends, but if I could just ask one follow-up on Bar-Lev, maybe, ask it a bit differently. When you look at that line that you’re adding there, as a percentage of your total capacity today, what is the actual increment?

Yair Averbuch

The incremental from Bar-Lev additional lines?

Peter Lisnic – Robert W. Baird & Co. Equity Capital Markets

Yeah. We’re adding effectively 20% more capacity, 30%, how should we think about that number?

Yosef Shiran

Yeah. I think about it is additional 25% as of the end of Q1.

Peter Lisnic – Robert W. Baird & Co. Equity Capital Markets

Okay, okay. Perfect, thank you very much for your time. Nice quarter. Thank you very much.

Yosef Shiran

Thank you.

Operator

Lars Dollman from Adelphi, your line is open.

Lars G. Dollman – Adelphi Capital LLP

Hi, gentlemen. Great quarter, thanks for taking the question. Can you elaborate as you did for Bar-Lev also the capacity expansion plan in the U.S. What milestones you have to reach to really be online by the end of 2014? Thanks.

Yosef Shiran

So as of Bar-Lev, I think the picture is clear and we are closing to the starting point and we are on track with Bar-Lev, as to the U.S. in terms of milestones. So from now, to the end of 2014, we’ll have to finalize all the process relating to the site locations starting the construction buildings, or there be the lines and buildings onsite, it seems that the time that we had until the end of 2014, is okay. And again, we feel that we’re on track with this project.

Lars G. Dollman – Adelphi Capital LLP

So would that mean that by, in 2015, we should have another line and then in the U.S. running?

Yosef Shiran

Yeah. It will not run in full capacity from day one, but…

Lars G. Dollman – Adelphi Capital LLP

Sure, building up.

Yosef Shiran

Yeah.

Lars G. Dollman – Adelphi Capital LLP

Okay, thanks.

Yosef Shiran

Thank you.

Operator

At this time, we’ll go to a follow-up from Michael Rehaut from JPMorgan.

Michael J. Rehaut – JPMorgan Securities, LLC

Thanks, I think most of this has been hit on, but I just want to make sure, I understand fully in terms of any incremental costs coming in, in the back-half of the year from running a full capacity. The view is, that is actually not too material, is that correct?

Yair Averbuch

In the second half, there will some upfront expenses related to bringing up the employees, training them, running all of the manufacturing on decline, and all of that until it’s up and running. It is based into our guidance, it’s within our guidance.

Michael J. Rehaut – JPMorgan Securities LLC

Okay.

Yosef Shiran

But as a cost structure, it could be, it’s not used. But it could be material, when you don’t get it, but it’s built into our guidance. So it’s there.

Michael J. Rehaut – JPMorgan Securities LLC

Okay. And just going back to Super-Natural for a moment, could you just give us a sense of maybe within the U.S. and also on an overall consolidated basis, how much that contributed to the sales growth?

Yosef Shiran

So, this is rapidly sensitive information in light of, in the competitive sensitive information. What we can say that it’s becoming significant, however we have also other successful product. So we have also to remember that, and as I said what is important is that this is a new technology that we built and we believe that this technology provides an edge as far as these type of products regards and it seems that the market likes it.

Operator

We’ll go to your next follow-up from Stephen Kim from Barclays.

Stephen S. Kim – Barclays Capital, Inc.

Thanks very much guys, I was curious if you could shed a little bit more light on how you assess the relative value-add of the products, particularly I would say the Super-Natural, which is a new, very innovative product that doesn’t have a peer in the marketplace. I would assume as an outsider that looking at the results over the course of the few quarters that you would probably conclude, that the value brought to the customers from this product is probably greater than what you might have considerably assumed initially and that’s certainly you would be adjusting that assessment based on customer response that actually is realized once it’s introduced in the marketplace. But I was curious if you could tell us just directionally, are you – is that an appropriate way to be thinking about how you look at pricing your products that as a Super-Natural has come into the marketplace, the warm reception it’s gotten, has caused you to feel more confident that the value offered by the product is perhaps greater than you had once thought?

Yosef Shiran

Yeah. I think basically, in the general description, you’re right, the way that we look at products or first of all, what is their contribution to the customers and to our brands and then of course, the costs and the price of the products. And the price if you’re right from what I mentioned in the beginning of my sentence. So I think in general, you’re quite right in description that you gave here. We did think according to focus group that we did and according to expectations of our teams that this is going to be a very successful product, but it’s going faster than we thought.

Stephen S. Kim – Barclays Capital, Inc.

That’s really great. The second question that I had relates to a little bit more color around IKEA and I understand you’re not wanting to be overly specific about it, but could you give us some sense for the kind, you would indicate that you didn’t think it was material in the quarter, but of course, its early days. And I guess, my question would be is your expectation, but the ramp up in the number of stores in which you are offering quartz countertops in IKEA. So that the number of stores would reach a level that is potentially going to be measurable and worth thinking about from a modeling perspective, by the end of the year or do you think it maybe more late next year or give us some sense for what kind of a ramp up maybe, in terms of number of stores or something like that, that you are thinking about for the IKEA relationship?

Yosef Shiran

So I think, in terms of the numbers of stores with the IKEA for the Bar-Lev, all these stores of IKEA, and by the end of the year, probably, we will be in all of them. So this is something that we of course, can’t share with you. But as to this specific progress and what is happening there, as I said, this information is also a key information. I wouldn’t like to provide too much details there or it may be sensitive for them. And we still need to see what will be the results and the impact of this product. As I said, we have highest durations, but time will tell, it’s too early now.

Stephen S. Kim – Barclays Capital, Inc.

Great. Okay, well, we’ll certainly look forward to seeing in the stores. Thanks very much guys.

Yosef Shiran

Thank you.

Operator

(Operator Instructions) We’ll move next to [Dhaval Shah] from Esha Securities Limited.

Unidentified Analyst

Hi sir, and good morning. Sir, my question is, can you please give me the raw material break up, if you don’t mind?

Yosef Shiran

Raw material breakup?

Unidentified Analyst

Yeah, in percentage wise.

Yair Averbuch

Well, we have highlighted in our 20-F for 2012 and it didn’t change much from that. Our raw material breakout is around 40% of which is polyester, around 30% is quartz and the rest is on the rust, it didn’t change much from then.

Unidentified Analyst

Okay, 14% polyester and 70% quartz.

Yair Averbuch

40%, 40 is polyester of the content in terms of the dollar cost, and 30% is, approximately 30% is quartz.

Unidentified Analyst

30%, 30?

Yair Averbuch

30, yes.

Unidentified Analyst

Okay boss. Thank you so much sir.

Yair Averbuch

Thank you.

Operator

And at this time, there are no further questions in the queue. I’d like to turn the conference back to Yos Shiran for closing comments.

Yosef Shiran

Thank you. We are very pleased with the year’s strong sales and the improvement in profitability. We are building our brand, our infrastructure and therefore, our capabilities to deliver this kind of performance consistently and over the long-term. We are very confident in our path, but watching each step carefully.

In the second half, we have some challenges, currency is moving (inaudible) and we are awaiting new capacity at a time when demand is intense. Nevertheless, we are experiencing strong momentum in the business and we are confident about the future. Thank you for joining us today.

Operator

And, that does conclude today's teleconference. We thank you all for your participation.

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