Caesarstone Ltd (CSTE) Q2 2021 Earnings Call Transcript

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Caesarstone Ltd (CSTE -1.63%)
Q2 2021 Earnings Call
Aug 4, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Caesarstone Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Brad Cray, Investor Relations. Thank you. You may begin.

Brad Cray -- Vice President and Investor Relations

Thank you, operator, and good morning to everyone. I am joined by Yuval Dagim, Caesarstone's Chief Executive Officer; Ophir Yakovian, Caesarstone's Chief Financial Officer; and Nahum Trost, Director of Finance, who will succeed Ophir as Chief Financial Officer on September 1, 2021. Certain statements in today's conference call and responses to various questions may constitute forward-looking statements. We caution you that such statements reflect only the company's current expectations and that actual events or results may differ materially. For more information, please refer to the risk factors contained in the company's most recent annual report on Form 20-F and subsequent filings with the SEC.

In addition, on this call, the company will make reference to certain non-GAAP financial measures, including adjusted net income/loss, adjusted net income/loss per share, adjusted gross profit, adjusted EBITDA, and constant currency. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's second quarter 2021 earnings release, which is posted on the company's Investor Relations website.

Thank you, and I would now like to turn the call over to Yuval. Please go ahead.

Yuval Dagim -- Chief Executive Officer

Thank you, Brad, and good morning, everyone. As we move further into 2021, I'm very pleased with the pace of recovery we've seen across our business since the unprecedented year of 2020 as demonstrated by our robust financial results this quarter. During the second quarter, we achieved record quarterly revenue of $163 million, mainly driven by the focused execution of our Global Growth Acceleration Plan and our ability to capitalize on the continued recovery in the U.S., where we continue to see the greatest potential for growth. We also saw broad-based improvements in demand across our majority of our other global regions as economies around the world continue to recover from the pandemic.

We drove top line improvement in the U.S. through a combination of core business improvement, big box channel growth, and the encouraging contribution from our previously announced accretive acquisition of Omicron, a premier stone supplier in Florida and Ohio Valley. It is also important to remember that one of our main strategic pillars is the focus on improving customer experience and customer engagement, a theme that is managed under the several projects in the Global Growth Acceleration Plan. In relation to this pillar, and as we have previously discussed, CS Connect is a transformative digital platform that introduces a technological leap in the way we communicate and connect with our customers and consumers to effectively manage the consumer purchase journey.

We recently started implementing CS Connect in several of our key U.S. markets as planned, and we are happy with the initial feedback and progress we have made. This follows the successful pilot program in Australia during early 2021. In the coming quarters, we expect to expand the rollout of this platform across the U.S. and Canada. However, the initial U.S. launch is already opening new doors for our expanded U.S. sales force to establish new relationships and improve engagements. Additionally, our success continues to be bolstered by further penetration into the big box channel through sales of Caesarstone branded slabs at U.S. Home Depot stores.

I would also note that our relationship with IKEA remains very important to us, and we are encouraged to see the recovery in ourselves into this retailer. On the M&A side, our integration of both Omicron and Lioli continue to progress in line with our plan. Omicron is proving to be extremely complementary to our geographic footprint in the U.S., bringing us closer to our customers and allowing us to take a vertically integrated approach to capture strong countertop demand in attractive high-growth areas, most notably in Florida, where demand remains strong. Separately, our Lioli acquisition continues to be additive to ourselves, mainly in the APAC region.

And into the third quarter, we are excited to introduce pilot sales of Caesarstone-branded Lioli porcelain slabs in Israel. This is an initial step in the launch of a new and exciting porcelain collection under the Caesarstone brand across our global footprint. Looking at the cost side, we are pleased with our ability to flex capacity to meet demand, while we continuously evaluate additional opportunities to create efficiencies throughout our operations. So far, in 2021, our team has displayed unwavering commitment to effectively mitigate global supply chain and inflation challenges, impacting Caesarstone and our industry through careful cost management. In summary, we are highly encouraged by the execution of our strategy, which resulted in significant growth during the second quarter and the first half of 2021.

We are leveraging a world-class Caesarstone brand to capture recovering countertop demand across our global footprint. We are utilizing innovative technology-based go-to-market initiatives such as CS Connect to enhance customer experience and engagement. We are carefully monitoring raising material and shipping costs and are constantly evaluating opportunities to improve efficiencies in the operations. And we are focused on successfully developing, testing, and introducing premium multi-material offerings to grow our addressable market in the quarters and years to come. In July, we announced the promotion of Nahum Trost, our Director of Finance, to the position of Chief Financial Officer beginning on September 1, 2021, as Ophir embarks on his next career opportunity.

Nahum has demonstrated outstanding leadership and financial expertise during his seven years with Caesarstone. Nahum has been a key player with implementing our Global Growth Acceleration Plan over the past several years. I'm confident that Nahum will be an excellent addition to our executive team and we anticipate a seamless transition. Now before I hand the call over to Ophir to discuss our financial results and outlook, I would like to personally thank him for all his contributions. We have had great partnership together over the last three years. His leadership and achievements have helped us immensely to build strong foundations for the future of Caesarstone and I wish him the best of luck on his next journey.

I will now turn the call to Ophir.

Ophir Yakovian -- Chief Financial Officer

Thank you, Yuval, and good morning, everyone. It has been an exceptionally rewarding experience to work with Yuval and the entire team at Caesarstone. I am proud of the accomplishments and milestones we have achieved together, and I'm working closely with Nahum and the entire leadership team to ensure a smooth transition. I will now discuss our second quarter 2021 results. For the second quarter of 2021, global revenue increased to a record of $163.5 million, representing 65.1% growth compared to the prior year period. On a constant currency basis, second quarter revenue was higher by 55.5% compared to the same period last year, primarily due to improved demand in most of the regions across our global footprint as economies around the world continue to recover from the pandemic. Revenue for the period also included approximately $21 million in contribution from the acquisitions of Omicron and Lioli. Now looking at our regions. In the Americas, constant currency sales were up 74.2%, mainly due to growth in the U.S. In the U.S., sales were up 86.6% driven by the acquisition of Omicron, core business improvement, and solid growth in the big box channel.

Our sales in Home Depot stores more than doubled year-on-year for the second consecutive quarter, and we also experienced a benefit from a recovery in sales to IKEA stores in the U.S. In Canada, on a constant currency basis, sales were up 35.1%, driven by stronger core business performance, which was partially offset by a decline in our IKEA sales due to COVID-related restrictions. In the APAC region, constant currency sales grew 35.1%. In Australia, which accounts for the majority of our sales in the region, growth was driven by improved demand. Contributions from Lioli sales were also additive to the APAC region sales in the second quarter. In the EMEA region, constant currency sales grew 77.6% as we experienced strong demand in both the U.K. and our indirect markets. In Israel, on a constant currency basis, sales were down 20.5% in the second quarter, primarily related to more competitive market conditions. Looking at our second quarter P&L performance.

We improved our gross margin by 760 basis points on a year-over-year basis to 28%. Adjusted gross margin also expanded 760 basis points to 28.1% compared to 20.5% in the prior year quarter. The year-over-year improvement in gross margin primarily reflects better regional and product mix, more favorable currency exchange rates, enhanced productivity in our factories, and growing demand since the beginning of the pandemic which were partially offset by lower sales prices and raw material and shipping inflation. As we have discussed previously, raw material inflation has become an important dynamic for Caesarstone in light of the tight supply environment impacting our industry. We experienced some impact from rising inflation in the second quarter of 2021, particularly in polyester. And we expect that higher raw material and shipping costs will be more significant headwind to our margin in the second half of the year.

We expect to partially mitigate this impact through price increases and other cost-cutting initiatives. Operating expenses, excluding legal settlements and loss contingencies, were 22.3% of revenue compared to 21.6% in the prior year quarter. The increase was mainly due to higher marketing and selling expenses that we expect to remain elevated on a year-over-year basis as we continue to invest in sales and marketing at more normalized level to support our brand and future growth. Adjusted EBITDA in the second quarter increased 188% year-over-year to $18.8 million, representing a margin of 11.5% compared to $6.5 million, or a margin of 6.6% in the prior year quarter. The 490 basis point improvement primarily reflects the higher gross margin compared to last year. Adjusted diluted earnings per share in the quarter were $0.21 on 34.6 million shares compared to adjusted loss per share of $0.10 in the same period last year on 34.5 million shares.

Turning to our balance sheet. As of June 30, 2021, Caesarstone had cash, cash equivalent, and short-term bank deposit, and short and long-term marketable securities of $121.1 million, with total debt to financial institutions of $13.3 million, providing us with a strong net cash position of $107.8 million. We believe our strong balance sheet and cash position leaves us well situated to invest further in the initiatives under the Global Growth Acceleration Plan. Moving to our outlook. We are reiterating our expectation for revenue and adjusted EBITDA to be higher year-over-year in 2021 with the expectation that revenue will grow faster than EBITDA. This outlook assumes similar annual gross margin compared to 2020 with more favorable mix and higher revenue being offset by the higher raw material and shipping costs that I mentioned earlier in the call. We continue to invest in our sales and marketing at more normalized levels to support our brand and future growth.

As a reminder, these costs were temporarily reduced in 2020 in an effort to mitigate pandemic-related impacts and are, therefore, returning as we invest in growth initiatives. Our outlook continues to assume that pandemic-related business restrictions will continue to fade as the year progresses.

With that, let me turn the call back to Yuval for closing comments.

Yuval Dagim -- Chief Executive Officer

Thank you, Ophir. In conclusion, our second quarter results reflect positive momentum in our business, and we are encouraged by our performance in the first half of 2021. Caesarstone is becoming a more efficient and technology-oriented organization with a great brand and strong potential to transform the market.

I would like to express my sincere gratitude to our team members around the globe who continue to drive our progress and accomplishments. Thank you, and we are now ready to open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Stanley Elliott with Stifel.

Stanley Elliott -- Stifel -- Analyst

Hello everybody, I hope you're doing well. Congratulations on the nice quarter. Starting off on the top line, is there a way to break out kind of the revenue on a like-for-like basis kind of what you're doing on the core business versus what you're doing from additional product placements or additional slots at Home Depot and recovery in IKEA, etc?

Yuval Dagim -- Chief Executive Officer

Yeah, I believe that the background we can provide is mostly between the contribution from the M&A deals that we had, Omicron and Lioli, and the core business. And for the M&A contribution together, Omicron and Lioli, you can take something like $21 million as contribution for the second quarter revenue.

Ophir Yakovian -- Chief Financial Officer

But I think, Stanley, that if you look -- this is Ophir, compared to last year, we've seen a very strong recovery in all channels, both in the core business, IKEA, Home Depot. So it was an easy comp in Q2 last year. So the recovery was meaningful in all channels.

Stanley Elliott -- Stifel -- Analyst

And you mentioned higher cost in the back half of the year, but kind of full year expectations for gross margins really not changed. Help us with the pricing mechanisms here. How quickly can you get pricing into the market to offset this? Just curious how you're thinking about that.

Yuval Dagim -- Chief Executive Officer

I think it's quite obvious this year that with the fluctuation of shipping costs and raw material costs, we need to act with fast and to go to the market and see what we can improve, what it can do in the marketplace.

And this is -- it's going to be probably second price increase for the year that we are issuing. And at the moment, we are looking forward, we believe that we can offset most, if not all, the dollar impact of the inflation cost increase that we are experiencing in the second half.

Stanley Elliott -- Stifel -- Analyst

And then in terms of the commentary around Israel, you mentioned kind of down 20-ish percent, more competitive market conditions. Could you shed a little more color on what exactly -- what's happening in that market?

Yuval Dagim -- Chief Executive Officer

The Israeli market is going through a change in consumer flavor in a way, and the porcelain penetration to the Israeli market is happening quite fast. On that, I'm very happy to say that we are part of this penetration as well. As we move to the multi-material strategy two years ago, and last year with the acquisition of Lioli, we are now growing our porcelain business in Israel, in line with the market. Yes, it's still -- it's happening -- some happened years ago. So all in all, I believe that we do see a change in the Israeli market. We are now piloting in Israel, the first six colors coming from the Lioli plant of ours under the Caesarstone brand in Israel. And so far, with a very good feedbacks from customers and consumers.

Operator

Our next question comes from Reuben Garner with The Benchmark Company.

Reuben Garner -- The Benchmark Company -- Analyst

Thank you and good afternoon guy. So maybe just to start, can you quantify what the price/cost drag that you experienced in the second quarter was, whether it's in dollars or gross margin percentage? And then what your expectation is for the second half? I just want to clarify, Yuval I think you just said that the price -- you expect the price increases to offset the inflation that you're seeing. But if that's what you said, maybe it's after the second half. Is that the right way to think about it?

Yuval Dagim -- Chief Executive Officer

Yes. For the second quarter, we've started to experience the impact of inflation in raw material prices and in shipping costs. We expect to see a more impactful impact in the second -- in the third -- in the second half of the year as there is a lag between the time that you manufacture and the time that we sell. Having said that, we have implemented a price increase that, for example, in the U.S., it take place starting July 1. So we expect, as you well mentioned, to offset the inflation, at least partially or in full by increasing prices starting second half of the year.

Reuben Garner -- The Benchmark Company -- Analyst

So your full year guidance would imply a lower gross margin in the second half relative to the first and relative to a year ago. How much price/cost drag are you expecting in that outlook?

Yuval Dagim -- Chief Executive Officer

First, Reuben, we do expect -- we are expecting some decrease in gross margin in the second half. Although, year-on-year, for the full year impact, we mentioned at the beginning of the year, and it's still the case, that we are expecting a flat position between 2020 and 2021. So pretty much similar to last year, although we started in a higher position, higher place in gross margin, we believe that for the full year, it's going to be quite similar to a year ago.

Reuben Garner -- The Benchmark Company -- Analyst

Okay. And then seasonality-wise, Q2 revenue is normally the high point for the year. Is that something that might be different this year and revenue could be higher than Q2 as we move into Q3 and Q4 because you're kind of ramping and you've got a lot of initiatives going on? Or would that be too aggressive?

Yuval Dagim -- Chief Executive Officer

It could be the case. Normally, in terms of seasonality, both Q2 and Q3 have been recognized as the strong quarters in the year. But it's true that some of our growth engines are kicking in, and there might be a chance that we'll see some upside in Q3. All in all, similar quarters.

Reuben Garner -- The Benchmark Company -- Analyst

Okay. And then Home Depot, you mentioned a couple of times. I think you said that business has doubled. How big is it now as a percentage of your business in either overall or in the U.S.? And how big of an opportunity is that? Or how big do you think it can get in the next couple of years?

Yuval Dagim -- Chief Executive Officer

So the specific number, we are not providing. It's less -- not a practice that we are doing. Yes, it's true that the business is been doubled quarter-on-quarter. And indeed, we do see the big box and Home Depot as part of big box as a major player, is a great opportunity for us. And we will be focusing more and more on the big box channel in the U.S. with more sources, more attention. And we do believe that there is a great potential for Caesarstone in the big box channel.

Reuben Garner -- The Benchmark Company -- Analyst

Got it. And last one for me is the marketing and selling expense, I think it was about $23.6 million in the second quarter. I know you expect it to remain elevted.

Is that the kind of number we should look for as we move into the back half and into next year? Or was there anything sort of onetime or specific to the second quarter that made that number higher than it will be?

Yuval Dagim -- Chief Executive Officer

I think that number reflects the reality that we are facing. We mentioned at the beginning of the year that we'll be bringing our spend to a more normalized level, and it's happening in line with our plan. We are investing exactly -- or we're spending exactly in line with our plan. No deviation from the plan. And we think it will be contributing to an ongoing Caesarstone growth journey for this year and for the coming years.

Reuben Garner -- The Benchmark Company -- Analyst

Got it. And congrats on the results, and good luck Ophir moving forward.

Yuval Dagim -- Chief Executive Officer

Thank you very much, Reuben.

Ophir Yakovian -- Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I will now turn the call over to Yuval Dagim for closing remarks..

Yuval Dagim -- Chief Executive Officer

Thank you for your attention this morning. We look forward to updating you on our progress next quarter.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Brad Cray -- Vice President and Investor Relations

Yuval Dagim -- Chief Executive Officer

Ophir Yakovian -- Chief Financial Officer

Stanley Elliott -- Stifel -- Analyst

Reuben Garner -- The Benchmark Company -- Analyst

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